“Having been in franchising for over 30 years, I have seen the

franchise business model enable countless people get into business

for themselves but not by themselves. This textbook is an excellent
deep dive into franchising and will bring knowledge and value to
students, others wanting to learn about franchising, and those who
are considering becoming a franchisor or franchisee.”
—Catherine Monson, President of Propelled Brands, Past
President of the International Franchise Association

“Ed Teixeira and Richard Chan’s book on franchising is a gateway

to an expansive professional career. As a franchisee, franchisor,
franchise company board member, professor teaching franchising
and having written my dissertation on franchising, I say, hallelujah!
Indeed, I believe franchising is the business genesis of economic
networking.This book provides the underpinning of knowledge
commensurate with a concentrated MBA. You will discover a
wide spectrum of entrepreneurial opportunities in franchising.”
—Steve Stephen Spinelli Jr, PhD, President, Babson College

“This book is a must for prospective and current franchisees who

want to understand all facets of the franchise business model. The
authors convey their deep expertise in a highly readable way. They
cover the gamut from understanding the key elements and value of
the franchise model, including its evolution, to its continued promise
for today and the future. Franchisees will refer to the book often as a
guide to all the key elements of a franchise including intellectual
property, financing, marketing, operations, and human resources.”
—Manuel London, PhD, Dean, College of Business, SUNY
Distinguished Professor, State University of
New York at Stony Brook
Franchising Strategies

A comprehensive and accessible companion to a proven business model, this

book shows how to franchise an existing business, supported by case studies,
data, and research reports on the franchise industry.
From small- to medium-sized businesses, franchising can lead to successful
and profitable growth, and plays an important role within the U.S. economy.
Utilizing a proprietary dataset with the most up-to-date statistics regarding a
range of franchising trends, this analytical guide is based on management
research frameworks that will lead to better understanding of a range of
franchising strategies. Issues covered include the following:

• The franchising business model, including its history, economic impact, and
regulations.
• Critical factors that significantly influence franchising success, enabling a com-
prehensive feasibility analysis of franchising potential or existing business ideas.
• Implementation components of franchising strategies, such as different
franchise structures, regional development plans, and future trends.

With its clear focus and practical orientation, this book will be a valuable resource
for entrepreneurs, as well as undergraduate and postgraduate students, interested
in acquiring the knowledge, skills, and abilities to succeed in franchising.

Ed Teixeira is the VP of Franchise Development for FranchiseGrade.com and has 40

years of experience in the franchise industry including the retail, manufacturing, home
health care, and medical staffing industries. He has done franchising in Asia, Europe,
and South America. Ed has a Master’s in Economics, Northeastern University. He is a
member of the Advisory Board at Pace University Lubin School of Business and
Industry Partner with Stony Brook University.

Richard Chan is an Associate Professor in the College of Business and has founded
the Center of Entrepreneurial Finance at Stony Brook University, U.S.A. His
research situates at the intersection of technology and entrepreneurship.
Specifically, he investigates how entrepreneurs finance their ventures using emer-
ging platforms, such as crowdfunding and blockchain-based cryptocurrency. His
work has appeared in leading entrepreneurship journals.
Franchising Strategies

The Entrepreneur’s Guide to Success

Ed Teixeira and Richard Chan

Cover image: © Parradee Kietsirikul
First published 2023
by Routledge
605 Third Avenue, New York, NY 10158
and by Routledge
4 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2023 Ed Teixeira and Richard Chan
The right of Ed Teixeira and Richard Chan to be identified as authors
of this work has been asserted in accordance with sections 77 and 78
of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or
reproduced or utilised in any form or by any electronic, mechanical, or
other means, now known or hereafter invented, including
photocopying and recording, or in any information storage or retrieval
system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and
explanation without intent to infringe.
Library of Congress Cataloguing-in-Publication Data
Names: Teixeira, Ed, author. | Chan, Richard (Professor of Business)
author.
Title: Franchising strategies : the entrepreneur’s guide to success / Ed
Teixeira and Richard Chan.
Description: New York, NY : Routledge, 2022. | Includes
bibliographical references and index. |
Identifiers: LCCN 2021061730 | ISBN 9780367472351 (hardback) |
ISBN 9780367458423 (paperback) | ISBN 9781003034285 (ebook)
Subjects: LCSH: Franchises (Retail trade) | Small business--
Management. | Strategic planning.
Classification: LCC HF5429.23 .T45 2022 | DDC 658.8/708--dc23/eng/
20211220
LC record available at https://lccn.loc.gov/2021061730
ISBN: 978-0-367-47235-1 (hbk)
ISBN: 978-0-367-45842-3 (pbk)
ISBN: 978-1-003-03428-5 (ebk)

DOI: 10.4324/9781003034285

Typeset in Sabon
by MPS Limited, Dehradun
To my wife Carol who has provided encouragement, inspiration,
and support throughout my entire business career and during
the writing of this book and to my son Eddie and daughter
Denise who provided me with her Word skills. To Richard my
coauthor, who helped me to apply my business knowledge to
educate students and future entrepreneurs. Also, to the
countless franchisees, franchisors, and professionals who have
striven and continue to strive to uphold and adhere to ethical
standards of franchising.
—Ed Teixeira

To my parents C.H. and M.J., and my brothers Eric and Victor

who have provided a nurturing environment that made me who I
am. To my wife Amanda and my children Alexis, Terence, and
Leo who have encouraged me to be who I could be. To my
coauthor Ed who have generously shared his insights and
experiences and patiently gone through the long writing process.
To generations of courageous entrepreneurs, who have inspired
me to tackle the financing piece of the startup puzzle.
— Richard Chan
Contents

Acknowledgments x

1 Introduction to Franchising 1

2 Fundamentals of Franchising 21

3 The Relevancy of Emerging Franchise Performance 43

4 Evaluating the Franchise Venture 53

5 Preparing for New Franchise Launch 69

6 Developing Franchisor Organizational Capabilities 86

7 Franchise System Development 103

8 Franchisor Support and Services 121

9 Franchise Relationship Management 140

10 Franchise Trends 155

Index 165
Acknowledgments

The authors gratefully acknowledge the contributions made by the

following individuals to the content and information in this book.

Individual Contributors

Alicia Miller, Co-Founder and Managing Director of Catalyst Insight

Group
Barry Knepper, The Franchise CPA
Carl Zwisler, Senior Counsel at Lathrop GPM LLP
Colin Gaffney, President and COO, Fran Start, LLC
Craig Slavin, Author, Speaker, Certified Navigator Coach, Values-based
Advisor
Craig Tractenberg, Co-Chair-Franchise and Distribution Practice and
Co-Chair International Arbitration Practice at Fox Rothschild LLP
Doug Kushell, President Franchise Search, Inc.
Eddy Goldberg, Managing Editor at Franchise Update Media
Eleanor Vaida Gerhards, National Co-Chair of Franchising and
Distribution Group Fox Rothchild, LLP
Elizabeth Dillon, Chair of Franchise & Distribution Group at
Lathrop GPM
Eric Stites, CEO and Managing Director, Franchise Business Review
Gary Occhiogrosso, Managing Partner at Franchise Growth Solutions
Harold Kestenbaum, President at HLK P.C. Law Firm Partner at Spadea
Lignana
Jeff Bevis, Servant Leader | Business Builder | Franchising Expertise |
Post-Acute Care Visionary | Domestic and International | Forbes
Contributor
Jeff Lefler, CEO at Franchise Grade
Jeffrey Goldstein, Nationally Recognized Franchise Lawyer & Antitrust
Attorney
 Acknowledgments xi

Jimma Bennett, Uni Shippers

John Cunningham, Founder and CEO Vehicle Tracking Solutions
John Gordon, Principal at Pacific Management Consulting Group
Julie Lusthaus, Franchise & Business Attorney Lusthaus Law P.C.
Keith Gerson, President of Franchise Operations for FranConnect
Mark Jameson, Chief Propelled Brands
Mary Ann O’Connell Franwise
Michael Einbinder, Einbinder & Dunn LLP
Michael Moccia, Graphic Designs, Inc.
Mitch Cohen, Franchisee at Sola Salon Studios and Jersey Mike’s
Mitch Pickney, The Franchise Consultant Company
Paul Pickett, Chief Development Officer at Wild Birds Unlimited, Inc.
Paulo Mauro, President Global Franchise Network
Richard Rosen, Richard L. Rosen Law Firm. NYC, NY
Steve Begelman, Founder SMB Franchise Advisors
Tom Spadea, Spadea Lignana Franchise Attorneys
Chapter 1

Introduction to Franchising

From small- to medium-sized businesses, franchising has evolved into a

proven business model that can lead to successful and profitable growth.
An economic forecast conducted by FRANdata for the International
Franchise Association (IFA) in February of 2021 projects that franchis-
ing’s contribution to the U.S. economy is forecast to grow by 7% in
2021. More than 26,000 new franchised businesses will open in 2021,
recovering most of the losses felt in the previous year due to COVID-19.
Franchises will employ some 8.3 million people, adding nearly 800,000
new jobs.1 Much of this employment will be in the retail, food, and
services industries. Franchising creates many jobs, and some will be
entry-level jobs for lower-skilled workers. Franchising offers these entry-
level workers skills and job training and helps them to develop, leading
to career advancement. The growth of franchise businesses is robust,
making franchising an important economic development strategy on the
national level.
The franchise business model plays an important role within the U.S.
economy. In 2019, the economic output of franchise establishments in
the United States was about $787.5 billion and represented 3% of the
country’s GDP. In a 2021 report called The Value of Franchising,
Oxford Economics found that franchise businesses provide better pay
and benefits than nonfranchised businesses, are diverse in industry and
ownership, and offer entrepreneurial opportunities especially to women,
people of color, and veterans. The report found that franchise businesses
drive 1.8 times higher sales than comparable nonfranchise establish-
ments, provide 2.3 times as many jobs than their nonfranchise coun-
terparts, and provide a path to entrepreneurship that one-third of
franchisees reported was critical to their chance to own a business at all.2
The complexity and potential benefits of franchising highlight the
importance of understanding how it works. Although scholars have
studied franchising along with its antecedents and consequences for over
five decades,3 their findings have circulated mostly among academics and
are generally not available to those entrepreneurs who might benefit
DOI: 10.4324/9781003034285-1
2 Introduction to Franchising

from such knowledge, a finding that prompted us to organize and pre-

sent the information contained in this book.
In this chapter, we define what franchising is and what it is not and go
on to discuss the major theoretical frameworks in management research
that are relevant to understanding franchising strategies. We illustrate
franchising history by describing how the franchise industry has evolved
and grown into a dynamic business model exported throughout the world.
We also highlight its corresponding advantages and disadvantages. We
conclude by presenting the economic impact of franchising, the various
franchise sectors and categories, and relevant data pertaining to these
franchises.

Definition of Franchising
Franchising is a business model that comprises contractual agreements
between two groups of entrepreneurs: a franchisor who created a venture
to advance an entrepreneurial opportunity, and a group of franchisees
who purchase the right to use the brand name, operating process, and
marketing system of that venture in new geographic markets.4 In such a
relationship, the franchisor not only grants a license to a third party in
order to conduct business under their trademark, and specify the products
and services to be offered by franchisees, but provide them with an op-
erating system, brand, training, and marketing and logistic support.
Although franchising often involves the use of a license, it is distinct from
licensing, another entrepreneurial growth strategy. Licensing refers to an
agreement whereby a company (the licenser) grants the right to utilize in-
tangible assets as a brand, such as intellectual property or an operation
process, in exchange for buying and selling the company’s products or
services. Franchising is more than just the use of licensing, however: it is a
contractual arrangement in which the franchisor allows the franchisee to
conduct business using the brand or intellectual property as an in-
dependently operated entity within its franchise network. Licensees usually
make a significant capital investment in designing and implementing their
business operations. They may receive operational and marketing support
from the franchisor in exchange for royalty fees. Table 1.1 below sum-
marizes the comparison between franchising and licensing.

Major Theoretical Frameworks

Scholars have utilized several theoretical frameworks to explain the
nature, antecedents, and consequences of franchising strategies. Two main
examples are resource scarcity and agency theory.5 Early researchers
proposed resource scarcity to explain why firms would exchange firm
ownership with financial capital to grow their business and increase
 Introduction to Franchising 3

Table 1.1 Franchising versus Licensing

Franchising Licensing

Trademark and Uses a common trademark or They are identified by the

Branding brand which can develop business name of the
strong brand recognition. Licensee. Challenging to
promote strong branding.
Support Franchisors supply Minimal or no training,
trademarks, training, typically no ongoing
marketing, and ongoing support.
support.
Standards Franchisors require Limited guidelines that
franchisees to meet licensee must follow.
performance standards and
adhere to operational
guidelines.
Noncompete Franchise agreements have Little or no noncompete
strong in-term and post- provisions.
term noncompete
provisions.
Start-Up Costs May be more costly to startup Usually less costly to start and
and run. operate.
Fees Franchisees pay initial fees and Most licensing agreements do
royalty fees based on not have an initial startup,
revenues. royalty, or continuing fees.
There may be product
purchase expenses.
Network Growth A stronger brand image As licensees use their
through the franchise model company names, lack of
and familiar brand name. typical brand name, which
may diminish brand
recognition.

market shares. However, this framework fell out of favor when increasing
studies illustrated the lack of empirical support for the resource scarcity
perspective.6 Indeed, firms do not need to limit ownership for business
growth to result from franchising, as there are alternative funding sources
that could be less costly and more efficiently acquired.
Eventually, agency theory became the dominant framework that ex-
plains the usage of franchising strategy. It was originally developed to
explain the interplay between two stakeholders, the principal and the
agent. In a typical setup, the agent makes decisions on behalf of the
principal, but such decisions may favor the interests of the agent rather
than the principal. Franchising provides a powerful incentive to align the
interests of the principal (franchisor) and the agent (franchisee). It can
ensure that franchisees invest their own resources to build and operate
outlets, reducing the need to monitor franchisees’ efforts.7
4 Introduction to Franchising

This cost-reduction advantage of franchising strategy does not fully

limit the incentives for franchisees which might damage a brand’s re-
putation, keeping many firms small or growing mainly through company
ownership. This point recently prompted researchers to advocate for a
symbiotic perspective,8 suggesting that many franchisors adopt a “plural
form” of ownership strategy. This strategy describes how many fran-
chisors not only delegate authority to franchisees but also maintain
ownership of their own outlets to deter free-riding by franchisees and
foster system standardization to protect the franchise’s reputation.
Recent research has applied other frameworks, such as relational con-
tracts literature and franchise performance data, in order to explain
franchising.9 Such frameworks and related findings will be discussed
throughout this book when relevant.

History of Franchising
While the word franchise is derived from the old French, meaning
“privilege” or “freedom,” franchising is not a new or recent concept; its
origins can be traced back thousands of years across different continents.
For example, in the Zhou (Chou) dynasty, the kings set up the Feng-
Jiang system, giving large domains of land to warriors and relatives in
exchange for homage and resources.10 Similar practices occurred during
the Middle Ages in Europe, where kings and lords granted specific in-
dividuals (fiefdoms) the right to hunt or conduct business on their
lands.11 Just like today’s franchises, these landowners set up mutual
agreements with tax collectors who would keep a percentage in exchange
for their services.
Franchising became a formal business model in the United States
around the 19th century. The Singer Company was the first occurrence
of franchising in the United States when it used franchising to distribute
its sewing machines.12 Although the machines sold well, Singer did not
earn enough because its dealers had exclusive rights to their territories,
which took most of the profits from the franchise operation.
The more traditional form of franchising began in the 1920s when
industry trailblazers such as A&W Root Beer and Howard Johnson
appeared on the scene. A&W remains in business today while Howard
Johnson operates a chain of hotels and motels. Both companies im-
plemented franchise models that seemed simple but had fundamental
components that included an initial franchise fee, royalty fees, a standard
location design, and similar products. Thus began the structural form of
franchising that’s evolved into today’s franchise companies.
In the 1950s and 1960s, the popularity of franchising ballooned, due
in part to the expansion of the U.S. economy and the growth of the
interstate highway system. Notable franchises that emerged during this
 Introduction to Franchising 5

period included familiar brands such as Holiday Inn, Dunkin’ Donuts,

McDonald’s, Burger King, Midas Muffler, 7-Eleven, Wendy’s, Dairy
Queen, Tastee Freeze, and Sheraton hotels. From 1966 to 1969, ap-
proximately 100,000 new franchises commenced operations. These
newly emerged franchises were often in the quick-serve and hospitality
sectors, based on their ability to package business operations and
branding into systems that could be duplicated in multiple locations.
The evolution of the McDonald’s and Kentucky Fried Chicken fran-
chises are the most iconic stories in the growth of franchising. Ray Kroc
was a salesman for Hamilton Beach appliances. In 1954, when he
learned that a restaurant had purchased eight multi-Mixers, he decided
to visit the McDonald brothers’ hamburger stand in San Bernardino,
California. Kroc was so impressed with the McDonald’s operation, its
cleanliness and the process for preparing and serving food, he believed
that the restaurant model could be replicated throughout the United
States. The first franchise was opened in Des Plaines, Illinois, in 1955,
and eventually led to 36,000 locations worldwide. Kroc’s vision for
McDonald’s grew into reality. To this day, people who visit a
McDonald’s anywhere in the world expect quality food, cleanliness, and
excellent service. No franchise has epitomized the principles of fran-
chising quite like McDonald’s.13
Founded by Colonel Harland Sanders, Kentucky Fried Chicken began
as a roadside restaurant in Corbin, Kentucky. The first franchise opened
in 1952 in Utah. KFC became the pioneer of serving chicken in the fast-
food industry, with Colonel Sanders a larger-than-life figure in television
commercials. The Colonel Sanders image is still prevalent in KFC ad-
vertising, especially on television. In 1964, as KFC continued its growth,
the Colonel decided to sell to a group of investors led by John Y. Brown
and Jack C. Massey. Beginning in the 1960s, KFC was one of the first
U.S. fast-food franchises to expand to other countries, opening restau-
rants in England, Canada, and Mexico. Today KFC has 19,000 locations
worldwide. The story of McDonald’s and KFC has become synonymous
with the history and growth of franchising.14
As we enter the 21st century, the franchising model continues to be an
essential growth strategy for entrepreneurs. The diffusion of the fran-
chising business model has spread across a variety of industries.
According to a recent study, 72% of emerging franchise systems cover a
wide range of industries, including personal services, quick-service res-
taurants, commercial and residential real estate, along with automotive,
and retail food.15 The franchising business model has proven to be re-
silient. Even in a challenging economic climate, franchise outlets con-
tinue to grow.16
Over the past few years, multi-unit franchisee companies owned and
operated by a parent company have become large enough to become
6 Introduction to Franchising

publicly traded companies. Publicly traded mega-franchise companies

have the advantage of achieving economies of scale when negotiating
with suppliers and other vendors. In addition, they can expand their
holdings by acquiring additional franchise rights or other multi-unit
franchisee brands. For franchisors, a publicly traded multi-unit fran-
chisee company can provide rapid growth, stability, and high-level
management expertise for new units.
The following list of publicly traded franchises is more substantial
than most would expect of franchisee owned franchises.

• Carrols Restaurant Group trades on NASDAQ. It owns and

operates approximately 675 Burger King franchises. Burger King,
the franchisor, has an ownership interest of about 28% in the
company.
• Diversified Restaurant Holdings is a NASDAQ company. It owns
and operates Buffalo Wild Wings franchises as well as the Bagger
Dave’s Burger Tavern restaurants.
• Arcos Dorados Holdings trades on the NYSE. It is an Argentinian
company that owns and operates more than 1,800 McDonald’s
restaurants in 20 Latin American countries.
• Meritage Hospitality Group trades over the counter. It owns and
operates more than 120 Wendy’s and Twisted Rooster restaurants.
• HMS Host operates franchises and affiliate-owned brands in air-
ports and highway rest stops. It is owned by Autogril SpA, a public
company in Italy with worldwide operations.

In recent years, private equity firms have become more active investors
and majority owners in franchise companies. Private equity (PE) in-
vestment can provide the capital needed to grow a franchise system faster
than either multi-unit franchisees or franchisors. A PE firm can add
earnings to its portfolio by investing in franchise brands that have sta-
bility and steady revenue and earnings flow. Private equity firms desire
earnings because they are obligated to provide acceptable financial re-
turns to their investors. Their primary goal is a return on investment that
will surpass the stock market. Because of their desire for earnings, PE
firms can receive negative feedback from unit franchisees who fear that a
PE firm will reduce franchise services to increase overall earnings.
PE firms also have multi-unit franchisee holdings:

• Roark Capital Group is one of the largest PE firms that specialize in

the franchise industry. Its $19 billion assets under management
include large franchise brands that include Anytime Fitness, CKE
Restaurants (Carl’s Jr., Hardee’s, Green Burrito & Red Burritos),
Culver’s (minority investment), Maaco and Meineke.
 Introduction to Franchising 7

• Sun Capital, which owns Heartland Automotive Services, the largest

Jiffy Lube franchisee.
• Sentinel Capital owns Border Foods, a Taco Bell franchisee, Sterling
Investment Partners owns Southern California Pizza Company, a
Pizza Hut franchisee with more than 220 locations.
• NPC International operates more than 1,250 Pizza Hut franchises and
140 Wendy’s franchises. NPC was acquired by an entity controlled by
Olympus Growth Fund V, LP and certain affiliates in December 2011.
At the time of the acquisition, NPC obtained debt financing.
• Morgan’s Foods, Inc., the owner of 68 KFC, Taco Bell, and Pizza
Hut Express franchises, was a public company until it was acquired
in May 2014 by Apex Restaurant Management for roughly $20
million. Apex is one of the largest franchisees of Yum! Brands (KFC,
Pizza Hut, and Taco Bell) and Long John Silver restaurants.
• Falcon Holdings LLC operates approximately 100 Church’s
Chicken restaurants.17

As PE and publicly held franchisee entities grow, their access to capital

and marketing power enables them to be formidable competitors for unit
and multi-unit franchisees. Despite these systemic changes in the fran-
chise industry, the individual or unit franchisee remains the dominant
player in franchise operations.

Franchising Regulations and Associations

The rapid growth of franchises in the 1950s led to some instances of
franchise abuse and ultimately regulation of the franchise industry, in-
cluding franchise fairness provisions in federal legislation. In 1956 the
federal government established the Automobile Dealer Franchise Act and
in 1968 the Federal Petroleum Marketing Practice Act. Both statutes led
to the implementation of freestanding franchise legislation in federal and
state laws. In the 1970s, many states enacted franchise relationship laws
to prevent franchisor abuses such as encroachment, renewal of franchise
agreements, discrimination, and wrongful termination of a franchise.
In 1978, the Federal Trade Commission (FTC) enacted the FTC
Franchise Rule requiring every franchise to disclose specific information
about its business operation model. This information consisted of 23
items, including the history of the franchise, business experience of
franchise leadership, franchise litigation, estimated franchise investment,
and obligations of the franchisor and franchisee. Because of its im-
portance, this FTC Rule has been amended several times to address
emerging issues and clarify specific provisions such as the difference
between a protected and exclusive franchise territory and requiring
franchisors to show expense data to prospective franchisees.18
8 Introduction to Franchising

In addition to the FTC, 15 states (known as the Registration States)

have pre-franchise disclosure laws that regulate the offer and sale of a
franchise: California, Hawaii, Illinois, Indiana, Maryland, Michigan,
Minnesota, New York, North Dakota, Oregon, Rhode Island, South
Dakota, Virginia, Washington, and Wisconsin. Such state regulations
require the same disclosure as the FTC Rule, utilizing the Franchise
Disclosure Document (FDD) format and items. There may be slight
differences among the Registration States regarding franchise default and
termination notification and noncompete limitations, which reflect in-
dividual state statutes and business practices. Ten states require a fran-
chisor to file its FDD with the state before offering a franchise. A filing is
a more straightforward process compared with registering an FDD with
a Registration State. Those states with a filing requirement usually have
regulations covering various business opportunities. These are Connecticut,
Florida, Kentucky, Maine, Nebraska, North Carolina, South Carolina,
South Dakota, Texas, and Utah.
In addition to federal and state regulations, two franchise trade as-
sociations monitor and prevent fraudulent franchising activities in the
United States, representing the perspective of franchisors or franchisees:
In 1960, the IFA was founded by a group of franchisors. Its objective
was to remove fraudulent franchisors from the industry and reduce
unsavory sales practices by salespeople. The founder of Dunkin’
Donuts, William Rosenberg, was the leading force behind the forma-
tion of the IFA. Today the IFA’s mission is to protect, promote, and
enhance franchising. It has a strict code of standards for members and
serves as an advocate for the growth of the franchise industry and
lobbies on behalf of the franchise industry, representing franchisors,
franchisees, and suppliers to franchising. It educates prospective fran-
chisees and publishes research articles on franchising. The IFA reports
1,100 franchisor members, 20,000 franchisee members, and 600 sup-
plier members.19
The Coalition of Franchisee Associates (CFA) founded in 2007 is
comprised of franchisee association leaders dedicated to the develop-
ment and growth of their own organizations. The CFA provides a
forum for its members to share best practices, knowledge, and re-
sources for the benefit of the entire franchisee population. The CFA’s
mission is to leverage the collective strengths of franchisee associations
for the benefit of the franchisee community through involvement in
government advocacy via representation on Capitol Hill, key legisla-
tion monitoring, participation in grassroots campaigns, CFA Political
Action Committee, and access to the CFA legislative web site. The CFA
brings together some of the largest and most reputable independent
franchisee associations.20
 Introduction to Franchising 9

International Franchising
Many franchise companies in the United States have expanded to other
countries. Successful franchisors generally receive inquiries from inter-
national prospects. An IFA survey conducted in 2015 found that 74% of
their members wanted to start or accelerate global operations, and 72%
believed that worldwide growth would be significant for future suc-
cess.21 International expansion has become quite prevalent, with many
of the largest franchise systems expanding to more international loca-
tions than U.S. locations. Table 1.2 lists the fifteen largest U.S.-owned
international brands.
In addition to traditional franchise countries such as France, Japan,
Australia, Germany, and the United Kingdom, such countries as Brazil,
China, and Mexico have achieved extraordinary growth in franchise
systems, importing and launching U.S. franchise brands. An example of
how franchising has expanded wide is the 7-Eleven chain of convenience
stores, which operates over 68,000 franchises and company stores
worldwide. The company is majority-owned by a Japanese company,
Seven & I Holdings Co., Ltd., which acquired ownership from its U.S.
founders in 1991.
International Franchise Association, members view overseas expan-
sion as a vehicle for growing and diversifying franchise portfolios. A
survey of IFA members showed that 61% of respondents currently
franchised or operated in international locations, and 16% generated

Table 1.2 List of the 15 Largest U.S. International Brands a

Rank Franchise Company System Sales U.S. Locations Total Locations

(in 1000s)

1 McDonalds’s $90,910,000 14,029 37,421

2 7-Eleven $85,000,000 8,357 64,600
3 KFC $24,515,000 4,109 21,487
4 Burger King $20,075,100 7,226 16,767
5 Subway $17,300,000 25,908 43,912
6 Ace Hardware $15,989,000 4,526 5,229
7 Domino’s $12,252,100 5,587 14,856
8 Pizza Hut $12,034,000 7,497 16,748
9 Marriott $11,500,000 373 647
10 Re/Max $10,910,330 3,725 7,841
11 Wendy’s $10,300,000 5,769 6,634
12 Taco Bell $10,145,000 6,446 6,849
13 Hilton $9,650,000 244 578
14 Dunkin Donuts $9,192,000 9,141 12,538
15 Hyatt $8,750,000 527 719

a Top 200 US Franchisors (2020). Franchise Times. http://www.franchisetimes.com/Top200

10 Introduction to Franchising

between 25% and 30% of revenue from international activities. Almost

three-fourths of respondents said they planned to start or accelerate in-
ternational ventures.22

Franchising Business Models

Over the years, the franchising business model has continued to develop
but remains dynamic. The International Franchise Association describes
two types of franchising business models that are standard within the
franchise industry: Business Format franchises and Product Distribution
franchises.23 Because each type has unique characteristics, it is vital to
understand the differences between them.
Business Format franchising is the most common and recognizable
form of franchising. In a business format franchise, the franchisor sup-
plies the franchisee with a trade name, products, and services. A business
format franchisee can expect to receive site selection support, operating
manuals, training, operating standards, marketing, and support services
from the franchisor. Brands such as KFC, McDonald’s, Marriott, LA
Fitness, Dunkin, and Burger King are examples of such franchises.
A major strength of a business format franchise is the comparative
ease in starting up a franchise brand compared to a product distribution
franchise. Because of this, the business format franchise model pre-
dominates in terms of franchise brands. There are typically many dif-
ferent franchisors in each business category. Each of these franchisors
works to distinguish itself from the others in the same business category.
For example, there are over 65 home care franchise companies vying for
the same candidates; one of the diligence items prospective franchisees
need to investigate is how one brand differs from another.
Less common and more complex is the traditional or product dis-
tribution franchise, though it covers more total sales than business
format franchising, the method and focus of doing business are primarily
products manufactured or supplied by the franchisor. This business
model is more complex and requires franchisees to have access to sub-
stantial capital compared to most business format franchises. The fran-
chisee’s investment in a Coca-Cola bottling plant or a Honda dealership
will dwarf the amount of investment required for a typical business
format franchise. In most but not all situations, the manufactured pro-
ducts require presale and postsale services, such as those in the auto-
motive industry. Examples of traditional or product distribution
franchising include beverage bottling, gasoline, automotive, and other
manufacturing businesses.
One disadvantage of this type of franchise is the amount of investment
required, a fact that limits the pool of potential franchisees. Conversely,
this type of franchise attracts well-capitalized and more astute business
 Introduction to Franchising 11

people who have the wherewithal to operate these businesses which tend
to generate a greater return.

Impact of Franchising in the United States

Franchising contributes to the economic growth of the United States by
shaping its gross domestic product (GDP) and job markets. According to
the International Franchise Association, 3,000 franchise brands and its
733,000 franchise establishments support nearly 7.6 million direct jobs,
$674.3 billion of economic output for the U.S. economy, and 2.5% of
the GDP.24
Franchising indirectly influences our daily activities. Each day we buy
food and services from franchise businesses, stay at franchise hotels, or
use a franchisor to supply senior services to our aging parents. For many
people, franchising remains a reasonable business opportunity. Some
have the capital to invest millions of dollars in franchise restaurants or
hotels, while others buy a franchise that supplies children’s or handyman
services.

Advantages and Disadvantages of Franchising

for Franchisors
Although franchising is a significant growth strategy for entrepreneurs, it
is not free of drawbacks. Its strengths, if poorly managed, can quickly
turn into disadvantages. Indeed, for many companies that decide to
expand via franchising, growth comes slowly. A recent study of emerging
franchisors found that a number of new brands had difficulty growing
past the early stages and ceased operations altogether. It can take time
for many franchisor startups to achieve even modest growth. For ex-
ample, 30.6% of franchisors had only one franchise location after 4
years of operation, and after 10 years, 52.4% of that group had 50 or
fewer locations.25 These results suggest that entrepreneurs carefully
consider the pros and cons of franchising before taking the plunge.
There are two primary advantages to franchising that academic
scholars want to investigate.26 Franchising allows franchisors to achieve
faster growth by franchisees utilizing their capital, managerial skills, and
local knowledge, allowing franchisors to build faster growth in loca-
tions, resulting in brand recognition and improving the efficiency of their
business operations.
The other advantage is that franchising enables motivated and qualified
entrepreneurs to administer multiple units more effectively. Franchisees
are responsible for recruiting, hiring, and managing their staff. Because of
the reduced cost of direct monitoring, a franchisor can maintain a more
straightforward, less costly, and smaller management team.27
12 Introduction to Franchising

Other advantages of franchising include the following:

• Strong brand recognition: With few exceptions, a franchise network is

the fastest method of building strong brand recognition. Franchisee
funding enables a franchisor and its franchisees to maximize the use
and effectiveness of advertising dollars. Franchisees are generally
established in the community, either on a personal level or because of
business activities that can provide a significant advantage in gaining
local business for the franchise. Living within the franchise territory
and making a permanent commitment are attributes of enormous
value in helping franchisees penetrate their local markets.
• Commitment: By investing in and owning a franchise, a franchise is
committed to the operation and success of its business. As fran-
chisees invest their own capital, they do not require the supervision
needed for company employees.

However, these advantages may quickly dissipate if franchisors do not

carefully manage the franchising process. Franchising expertise is needed
to effectively and lawfully sell franchises, train franchisees, get fran-
chisees to ramp quickly, and focus on franchisee profitability. Without
franchising guidance and qualified staff, it is easy for the franchisor to
sell to the wrong franchisees, have franchisees fail, or end up with ne-
gative franchisee–franchisor relationships.
Franchising may result in a loss of control for franchisors. Despite con-
tracts and incentive structures designed to govern the management of their
units, franchisees are independent business owners who have unique local
knowledge and their own views about running a business. Some franchisees
may resist potential changes or oversight by franchisors, making it chal-
lenging to introduce new products, services, or marketing programs.
The state of franchise relations (which refers to the trust and mutual
success between a franchisor and a franchisee) is essential for both parties.
History has proven that a successful franchise program is based on en-
abling and supporting franchisees in realizing financial goals. If franchisees
do not achieve their financial expectations, they may hold the franchisor
responsible. They will look to the franchisor for answers and expect help.
A poor franchisee relationship is thus one of the primary reasons for
problems down the road. Unlike a corporate employee, a franchisee
cannot be fired; an explicit process must be followed to terminate a
franchise, one that can result in acrimony between franchisees and nega-
tive publicity for the franchisor. Other problems can include the following:

• The threat of litigation: A franchisee can threaten litigation that

places a franchisor in an awkward position, making their decisions
more difficult.
 Introduction to Franchising 13

• Limited ability to motivate: A highly successful franchisee may

become complacent and challenging to motivate, especially in
mature and highly successful franchise systems. In such cases, a
franchisor’s options are limited but include reacquiring the franchise
rights or employing various tactics to motivate the franchise.
• Limit new development: Some franchisees are concerned about
threats from new franchisees within the same system. When a new
franchise appears near an existing territory, a bad relationship can
develop between franchises.

Advantages and Disadvantages of Franchising

for Franchisees
For franchisees, there are advantages and disadvantages of owning one
or multiple franchise units. One advantage lies in avoiding the risks and
costs that accompany building a business from scratch. Many small
startups have problems launching a brand, managing a business, creating
an efficient operational structure, and finding adequate capital to fund a
company. Buying franchise units is often a safer alternative.28 Next, we
have listed some advantages of buying franchise units.

• Brand recognition: In most cases, depending on the age and size of

the franchise, a franchise is a recognized brand. An independent
startup begins with no brand recognition.
• Marketing and sales programs: A franchise offer marketing techni-
ques, promotional plans, and advertising materials that the fran-
chisee does not have to create.
• Management and leadership experience: A sound franchise system
will supply its franchisees with leadership and management experi-
ence, unlike an independent business where entrepreneurs must rely
on their own management experience.
• Opportunity for expansion: For franchises that are successful and
capable, there is the potential to expand their franchise holdings.
• Resale potential: A franchise that’s part of a successful franchise
system has more resale potential than many independent businesses.
• Proven operating system: A franchise does not have to set up a new
operating system because the franchise will already have one. There
is the added benefit of not having to invent the wheel, i.e., repeat the
mistakes a franchisor has already made.
• Training and support: A franchise will supply training and, in most
cases, ongoing support.
• Low overhead: Compared to an independent business, a franchise
will generally have lower operating expenses.
14 Introduction to Franchising

• Cooperation from the franchise system: When franchisees create and

suggest new products or services, these can benefit the entire franchise
network (most new product ideas introduced by McDonald’s came
from its franchisees).

Still, there are potential disadvantages to buying a franchise business. An

individual who invests in a franchise is putting his or her capital at risk,
just like any business venture. The most significant disadvantage is the
fact that a franchisee is dependent on the growth and performance of the
whole network. If a franchise network does not grow, the brand may
become weak. A poorly performing franchise system can have negative
consequences for individual franchisees. Next, we have listed the po-
tential disadvantages of owning a franchise.

• Buying a flawed franchise: Some franchises have flaws that can lead
to failure. Like any business venture, there is a risk to franchising.
• Lack of franchisor support: As a franchise depends on support and
guidance from the franchisor, a lack of these services can negatively
affect the franchise.
• An unproven franchise: Investing in a startup that lacks a history of
performance can be a risky proposition. A franchisor that lacks
experience may have trouble deciding which way to turn.
• The franchisor focuses on selling more franchises: Some franchisors
are more concerned with selling new franchises than supporting and
developing existing franchisees. Whether this is driven by the need
for more fees or the desire to be the most extensive system in their
category, such a strategy can hurt existing franchisees.
• A franchise may be restrictive and confining. Individuals who are
naturally creative and ambitious may find the requirements of
a franchise stifling. Because a franchise rests upon a known
operating model, such limits can frustrate independent-minded
individuals.

Investing in a franchise requires thorough due diligence: Failure to

carefully evaluate a franchise opportunity may place franchise invest-
ment at risk. Because some franchisors aggressively market and sell their
franchises, prospective franchisees need to exercise comprehensive due
diligence or suffer the consequences.

Franchise Industry Statistics

For students of franchising, it is essential to understand the types of
businesses that comprise the franchise industry, system size, growth, and
 Introduction to Franchising 15

investment. A methodology is needed to analyze and identify the po-

pularity and growth of franchise businesses based upon the products and
services they provide. The IFA categorizes types of franchise businesses
by establishing ten major franchise sectors. This classification system
may be used to track business performance and growth by the type of
franchise business. Currently, other entities and franchise trade pub-
lications, including Entrepreneur magazine and research firms Franchise
Grade and Frandata, categorize franchises into sectors, with each sector
covering individual franchise businesses. For example, the Quick-Serve
Restaurant Sector is broken into fast food or takeout food franchises and
includes such categories as Hamburger, Chicken, and Pizza. The Retail
Products Sector includes retail franchises that sell products such as
electronics, garden equipment, flowers, and gift stores, while franchises
such as automobile dealerships, soft drink distributorships, and similar
product-based formats are excluded from the franchise sectors by the
IFA and the other franchise market research firms. The ten franchise
sectors and the bases for including franchises categories into each sector
are discussed next.

Automotive
This sector includes franchise categories that provide services pertaining
to automobiles, trucks, and other motor vehicles. Notable brands in-
clude Christian Brothers Automotive, MAACO, Midas, and Jiffy Lube.

Commercial and Residential Services

This sector includes various franchise categories that include services for
office buildings and homeowners. Examples include Service Master,
California Closets, Mr. Rooter, Paul Davis Restoration, and Rainbow
International LLC.

Quick-Service Restaurants
This is the largest franchise sector and includes locations where custo-
mers order food for takeout or sit-down dining. QSR franchises require
customers to order directly without table service. Well-known franchise
brands include McDonald’s, Subway, Burger King, Dairy Queen, and
Taco Bell.

Full-Service Restaurants
This sector includes restaurants and other establishments primarily en-
gaged in providing food services to patrons who order and are served by
16 Introduction to Franchising

waiters/waitresses. Brands include Fridays, Captain D’s, Potbelly

Franchising, Buffalo Wild Wings, and Hooters.

Retail Food
This sector includes retail food and beverage stores. Recognized brands
include 7-Eleven, Circle-K, and AM/PM.

Lodging
This sector is sometimes referred to as the Hospitality Sector and in-
cludes hotels, motels, and other accommodations. Examples of well-
known franchise brands include Marriott, Holiday Inn, Red Roof Inns,
and Hilton Hotels.

Real Estate
This sector includes real estate, real estate agents, and brokers. Franchises
include Century 21 Real Estate, Re/Max, and Coldwell Banker.

Retail Products and Services

This sector includes a variety of products used by customers. These
products can also be found in nonfranchised businesses such as depart-
ment and small retail businesses. Franchise brands include Ace
Hardware, GNC, Merle Norman Cosmetics, and Hobby Town.

Business Services
This sector provides a variety of services that businesses utilize in the
operation of their business. Franchise examples include FASTSIGNS, The
UPS Store, Pop-A-Lock, Murphy Business, NerdsToGo, and Financial
Services and Action Coach.

Personal Services
This sector has emerged as one of the fastest-growing franchise sectors
and consists of services that are provided to individuals. Personal services
include 24-Hour Fitness, Visiting Angels, Great Clips, Sylvan Learning
Centers, and Planet Fitness.
Within these ten sectors, franchise growth and investment are domi-
nated by different types of franchise systems.29 An industry report
analyzing FDDs of 2,154 franchise systems from 2010 to 2016 indicated
that only 4% of franchise systems have 1,000 locations or more, 3% of
 Introduction to Franchising 17

Table 1.3 Franchise Systems by Number of Locations a

Franchise Locations Percent of Total

1,001+ 4%
501–1,000 3%
101–500 21%
51–100 13%
26–50 13%
6–25 20%
0–5 25%

a Lefler, J. (2017). Diamonds in the Rough Emerging Brands

with Potential. Franchisegrade.com

franchise systems have 501–1,000 locations, while 71% of franchise

systems have 100 or fewer locations. This observation echoes the sym-
biosis perspective30 we mentioned earlier, illustrating why many firms
choose to stay small and grow through company-operated outlets so they
can maintain ownership while deterring the free-riding of franchisees
and protecting franchise reputation.
Such size disparity does not mean that only the large franchise systems
receive all the attention of franchisees. Indeed, there is a significant
amount of money invested in small franchise systems: over $10.7 billion
was invested in franchises with 25 outlets or less, and franchises with five
or fewer outlets received $3.8 billion in franchise investments. For the
entrepreneur considering franchising their business, these data indicate a
pool of prospective investors for smaller franchise systems (Table 1.3).
The franchise businesses that have had the most impact on franchising
are seen in the following table. The rank of ten franchise sectors by the
percent of franchises. The data are from 2020.
From the early stages of the modern franchise era up to the current time,
Quick-Serve Restaurants, commonly referred to as fast food, has domi-
nated the franchise industry. Over the past decade Personal Services,
which include personal fitness, home care services, and children’s services,
has risen to the number one position in number of franchisees (Table 1.4).

Summary
We have defined franchising and delineated its history and development.
We have also highlighted the economic impact of franchising and the
corresponding advantages and disadvantages for both franchisors and
franchisees. We presented data on the types of franchise businesses by
sector and category, and the degree of franchise investment over a 6-year
period.
18 Introduction to Franchising

Table 1.4 The Percent of Franchises by Franchise Sector as

of 2020 a

Personal services 27.4%

Quick-service restaurants 20.2%
Commercial and residential services 13.6%
Business services 9.0%
Retail products and services 8.3%
Full-service restaurants 7%
Automotive 4%
Retail food 4%
Lodging 3.5%
Real estate 2.9%
Total 100%

a Franchise Grade (2021). The State of Emerging Franchises. https://

assets.franchisegrade.com/files/reports/analysis-emerging-
franchises_3.pdf

Franchising strategy has grown into a dynamic business model and

continues to generate growth and interest for individual franchisees, pri-
vate equity firms, and independent business owners who see franchising as
a vehicle for propelling their small business experience into a highly suc-
cessful system. Such strategy has been studied by management scholars
going back to the late 1960s, when Oxenfeldt and Kelly first proposed
how franchising might serve as an essential growth strategy to address
resource scarcity issues for new ventures in the early stages.31 Since then,
an increasing amount of research has examined franchising strategy and its
antecedents and consequences.32 This body of research has yet to be in-
troduced to general audiences, particularly entrepreneurs who wish to
adopt a franchising strategy or purchase franchise units. To fill this gap,
the following chapters delineate vital aspects of franchising that are data-
driven, research-backed, and experience-tested.

Notes
1 Franchise Business Outlook (February 18, 2021).
https://www.franchise.org/franchise-information/franchise-business-outlook/
franchise-business-economic-outlook-2021
2 The Value of Franchising (2019). Oxford Economics.
https://www.oxfordeconomics.com/recent-releases/The-value-of-franchising
3 Oxenfeldt, A. R., & Kelly, A. O. (1969). Will successful franchise systems
ultimately become wholly owned chains? Journal of Retailing, 44(4), 69–83.
4 Combs, J. G., Ketchen Jr., D. J., & Short, J. C. (2011). Franchising research:
Major milestones, new directions, and its future within entrepreneurship.
Entrepreneurship Theory and Practice, 35(3), 413–425. Dant, R. P.,
Grünhagen, M., & Windsperger, J. (2011). Franchising research frontiers for
the twenty-first century. Journal of Retailing, 87(3), 253–268.
 Introduction to Franchising 19

5 Combs, J. G., & Ketchen Jr., D. J. (1999). Can capital scarcity help agency
theory explain franchising? Revisiting the capital scarcity hypothesis.
Academy of Management Journal, 42(2), 196–207. Falbe, C. M., & Welsh,
D. H. (1998). NAFTA and franchising: A comparison of franchisor percep-
tions of characteristics associated with franchisee success and failure in
Canada, Mexico, and the United States. Journal of Business Venturing, 13
(2), 151–171.
6 Norton, S. W. (1988). An empirical look at franchising as an organizational
form. Journal of Business, 61(2), 197. Shane, S. A. (1998). Making new
franchise systems work. Strategic Management Journal, 19(7), 697–707.
Combs, J. G., & Ketchen Jr., D. J. (2003). Why do firms use franchising as an
entrepreneurial strategy? A meta-analysis. Journal of Management, 29(3),
443–465.
7 Shane, S. A. (1996). Why franchise companies expand overseas. Journal of
Business Venturing, 11(2), 73–88. Lafontaine, F. (1992). Agency theory and
franchising: Some empirical results. RAND Journal of Economics, 23(2),
263–283.
8 Bradach, J. L., & Eccles, R. G. (1989). Price, authority, and trust: From ideal
types to plural forms. Annual Review of Sociology, 97–118. Perryman, A. A.,
& Combs, J. G. (2012). Who should own it? An agency‐based explanation for
multi‐outlet ownership and co‐location in plural form franchising. Strategic
Management Journal, 33(4), 368–386.
9 Hendrikse, G., Hippmann, P., & Windsperger, J. (2015). Trust, transaction
costs and contractual incompleteness in franchising. Small Business
Economics, 44(4), 867–888. Kosová, R., & Sertsios, G. (2016). An empirical
analysis of self-enforcement mechanisms: Evidence from hotel franchising.
Management Science, 64(1), 43–63.
10 Levenson, S., & Joseph, F. (1969). China – An Interpretive History: From the
Beginnings to the Fall of Han. Regents of the University of California,
London, England.
11 Hisrich, R., Peters, M., & Shepherd, D. (2016). Entrepreneurship. McGraw-
Hill Education.
12 Seid, M.H. Where It All Began. The Evolution of Franchising. http://www.
franchise-chat.com/resources/where_it_all_began_the_evolution_of_
franchising.htm
13 Love, J. F., & Miller, A. W. (1986). McDonald’s: Behind the Arches. Bantam
Books, New York.
14 Feloni, R. (2015). KFC founder Colonel Sanders didn’t achieve his re-
markable rise to success until his 60s. Business Insider. https://amp.
businessinsider.com/how-kfc-founder-colonel-sanders-achieved-success-in-
his-60s-2015-6
15 Teixeira, E. (2018). The enigma of the emerging franchise. Forbes. https://
www.forbes.com/sites/edteixeira/2018/04/11/the-enigma-of-the-emerging-
franchise/#171c04d61268
16 7-Year Longitudinal Study of Franchise Industry (2017). FranchiseGrade.
https://www.franchisegrade.com/reports/article/7-year-longitudinal-study
17 Pitegoff, T. (2015). Some multi-unit franchisees are public companies.
Franchise Alchemy. https://franchisealchemy.com/some-multi-unit-
franchisees-are-public-companies/
18 Franchise Rule (1978). Federal Trade Commission. https://www.ftc.gov/
enforcement/rules/rulemaking-regulatory-reform-proceedings/franchise-rule
20 Introduction to Franchising

19 The international franchise association – Celebrating 50 years of dedicated

service to franchising (2010). International Franchise Association. https://
www.franchise.org/the-international-franchise-association%E2%80%94-
celebrating-50-years-of-dedicated-service-to-franchising
20 The Coalition of Franchisee Associations (2016).
https://thecfainc.com/about-us/cfa-history/
21 Boll, R. (2016). Top markets report franchising a market assessment tool
for U.S. exporters. U.S. Department of Commerce – International Trade
Administration. https://www.trade.gov/topmarkets/pdf/Franchising_Top_
Markets_Report.pdf
22 U.S. Commercial Service Franchising. https://2016.export.gov/industry/
franchising/index.asp
23 International Franchise Association (2016). https://www.franchise.org/what-
is-a-franchise
24 International Franchise Association (2020). https://franchiseeconomy.com/
about/
25 Teixeira, E., & Olson, S. (2017). The State of Emerging Franchise Systems
Part 1. https://assets.franchisegrade.com/files/reports/analysis_of_emerging_
franchises.pdf
26 Combs, J. G., Ketchen Jr., D. J., & Short, J. C. (2011). Franchising research:
Major milestones, new directions, and its future within entrepreneurship.
Entrepreneurship Theory and Practice, 35(3), 413–425.
27 Combs, J. G., & Ketchen Jr., D. J. (2003). Why do firms use franchising as an
entrepreneurial strategy? A meta-analysis. Journal of Management, 29(3),
443–465.
28 Hisrich, R., Peters, M., & Shepherd, D. (2016). Entrepreneurship. McGraw-
Hill Education.
29 Lefler, J. (2017). Diamonds in the Rough Emerging Brands with Potential.
Franchisegrade.com
30 Bradach, J. L., & Eccles, R. G. (1989). Price, authority, and trust: From ideal
types to plural forms. Annual Review of Sociology, 97–118. Perryman, A. A., &
Combs, J. G. (2012). Who should own it? An agency‐based explanation for
multi‐outlet ownership and co‐location in plural form franchising. Strategic
Management Journal, 33(4), 368–386.
31 Oxenfeldt, A. R., & Kelly, A. O. (1968). Will successful franchise systems
ultimately become wholly owned chains? Journal of Retailing, 44, 69–83.
32 Rosado-Serrano, A., Paul, J., & Dikova, D. (2018). International franchising:
A literature review and research agenda. Journal of Business Research,85,
238–257.
Chapter 2

Fundamentals of Franchising

In the previous chapter, we introduced the concept of franchising

strategy, delineated its key rhetorical framework and history, and pre-
sented economic impacts and relevant data. In this chapter, we delve
deeper into the fundamentals of franchising, focusing on essential com-
ponents of the franchise model.

The Components of the Franchise Business Model

In its purest form, the franchise business model consists of a franchisee
acquiring the rights to use the trademarks and operating system of the
franchiser by paying an initial franchise fee and remitting a continuous
fee or royalty based on a percentage of the operating revenue or profit. A
franchise consists of specific components that make the franchise busi-
ness model unique. Many of these components are critical for all fran-
chise systems and may significantly determine the performance of
franchise systems spanning several market spaces. While all of these
aspects are valuable, we will discuss the most critical next.

Franchise Intellectual Property

Franchise Intellectual Property (IP) refers to the property category of
creations by humans that underlie the operation of a franchise business.1
IP may be separated from individual entrepreneurs and traded in the open
market,2 making it an effective tool to protect and transfer the value of a
franchiser’s intangible assets, which represent the investment that fran-
chisers make in designing and building a franchise and its operating
system. The primary forms of IP are copyright, trademark, patents, and
trade secrets. Franchisers have IP rights in the areas of brands, copyrights
for training and promotional materials, and patents for proprietary in-
ventions. The protection of IP rights is essential to all franchise businesses.
Franchisers use tools such as nondisclosure and noncompete agreements,
and when necessary, litigation to protect their IP.
DOI: 10.4324/9781003034285-2
22 Fundamentals of Franchising

IP is an important component of the franchise business model because

it contributes to the success of the franchise system by defining the
brands, logos, and other aspects that customers associate with that
franchise.3 It also delineates a franchise system’system to determine if the
operating system is properly integrated and to make necessary adjust-
ment key strategic assets, particularly those related to its business op-
eration and technology capability. It may be used to connect the
franchise brand to the customer (i.e., McDonald’s Golden Arches). The
franchise operations manual is an important example of IP as it describes
and contains key information pertaining to the operation of that fran-
chise. For these reasons, it’s important for a franchise system to maintain
a competitive advantage by protecting its IP from other companies,
franchisers, and franchisees.
Franchisers need to ensure that key operating ingredients and pro-
prietary knowledge remain confidential in order to prevent others from
utilizing it, as well as avoid confusion on the part of customers.
Examples of IP protections include the secret Coca-Cola formula and
KFC’s recipe for fried chicken. Franchisers protect their IP by relying on
nondisclosure, confidentiality, and noncompete agreements.
Other IP protection steps include using a watch service, companies
that notify a client if it receives trademark information from the gov-
ernment, misuse on the internet that match or could infringe on the
trademark, and the use of IP by another company. However, dispersion
of a franchiser’s IP in manuals, online and in other locations, may leave it
vulnerable to misuse or theft by unscrupulous individuals or disgruntled
franchisees. Protecting IP requires constant policing by the franchiser,
which includes having their legal counsel continually take steps to
strengthen a franchiser’s rights to IP, as contained in their franchise
agreements and ancillary documents.

The Franchise Trade/Service

The Franchise Trade/Service represents a major part of a franchiser’s IP.
These consist of recognizable words, phrases, names, slogans, or logos that
distinguish products or services of a franchise from its competitors.4
Trademarks represent the foundation of a franchise system since they
identify and differentiate the brand, its products, and services from other
franchises and independent businesses. A franchise trademark is so im-
portant that it is considered its most asset; because of the importance of
trademarks to businesses, federal and state governments have procedures
and regulations for registering and protecting trademark rights.
The value and use of a franchise trademark may be enhanced by ef-
fective marketing strategies, including the use of a catchy or attractive
slogan and price promotions. Some of the most memorable franchise
 Fundamentals of Franchising 23

slogans include KFC (It’s finger lickin’ good), Coca-Cola (Open

Happiness), Dunkin’ Donuts (America runs on Dunkin’), and McDonald’s
(I’m lovin’ it).
Another strategy is to tie a trademark to the decor and design of a
franchise location. The colors and design of a franchise trademark and
logo should relate to the components of a franchise’s products or ser-
vices. Businesses invest considerable resources in developing their brands
so that consumers recognize and distinguish their products and services
from others. Federal and state trademark protections are intended to
stop infringement of the rights of trademark owners and their authorized
users (such as franchisees) and to serve the public interest by preventing
consumer confusion.5
All trademarks are brands but not all brands are trademarks. The
franchise brand is what the public sees, while a trademark is a distinct
aspect of the brand that signals not only a particular standardization of
the franchise system but carries legal protection because it is a unique
identifier for the franchise.6 A franchise trademark is a valuable tool to
promote and advertise a franchise system. These identifiers should result
in customer expectations of product/service quality with their use in
marketing, advertising, and promotional programs. If customers receive
quality products and services, they will relate that positive experience to
franchise trade and service marks. Conversely, a negative customer ex-
perience will result in a poor association with trade and service marks.
The impact of a franchise trademark is maximized when it is asso-
ciated with a quality franchise system. A strong franchise trademark can
deliver loyalty, stability, and recurring revenue for the franchiser and
franchisees. A study using data from the restaurant and motel industries
found empirical evidence showing that franchising offsets the problems
that nonfranchise companies face when their outlets are widely dispersed
among markets with brand name capital.7 Franchising can increase
brand name capital and the development of larger local outlets compared
to nonfranchised operations.
Registration of the franchise trademark is an important process that
should be done by a qualified trademark attorney who can do a trade-
mark search and properly register the trademark, slogans, and logos.
When registering a trademark, it’s important to consider future products
and services that might be offered under the trademark. Avoid cost-
cutting by using so-called inexpensive online legal services.
It is essential that franchisers protect their brand and trademark by
constantly enforcing franchise standards among their franchisees.8 When
franchisers fail to uphold system standards, the result can be irreparable
harm to the brand and the franchisees. If a franchiser fails to take ap-
propriate steps to protect its brand, lax enforcement of franchise standards
may lead to damaging outcomes for the franchiser, franchises and, most
24 Fundamentals of Franchising

importantly, the value of the franchise brand. The brand is so crucial to the
operation of a franchise system that most franchisers do not hesitate to
take legal action in order to protect it.

The Franchise Operating System

The Franchise Operating System refers to standardized processes and
policies which the franchisee must follow in order to manage, market,
and operate a franchise. The franchise operating system is another part
of franchise IP and is what sets the franchising business model apart from
other businesses.9 It prescribes the formula for how a franchisee should
operate their franchise units in a consistent manner, and represents a
compilation of processes which, in combination, can result in a suc-
cessful franchise operation. The operating system includes such details as
opening hours, store appearance, sanitation requirements, suggested
retail pricing, authorized products and services, employee job descrip-
tions, financial obligations, compliance with regulatory authorities, food
menus, recipes and ingredients, and other activities that are integral to
the daily operation of a franchise. When properly designed and suc-
cessfully executed, the operating system provides a franchise with the
ingredients to achieve franchise profitability. Startup and emerging
franchisers should measure performance in order to identify the effec-
tiveness of their operating system to determine if the operating system is
properly integrated and to make necessary adjustments.
The elements of a franchise operating system are essential to the
success of a franchise because when properly followed, franchisees can
deliver the franchise products/services with consistent quality that meet
consumer expectations regardless of the franchise location.10 Chick-Fil-
a, McDonald’s, Burger King, and Marriott Hotels are notable franchises
with operating systems that result in a consistent consumer experience
across various locations.
By being documented in training manuals, written procedures, and
franchiser bulletins, the operating system can be used to enforce fran-
chise system compliance. Without an operating system, the essence of a
franchise system is diminished since it will fail to prescribe the guidelines
for operating the business.
If franchisees believe that the franchise operating system is flawed, this
may negatively affect feedback that existing franchisees provide to can-
didates and slow system growth. Examples of a flawed franchise operating
system can include the types of products or services that franchises must
offer, unnecessary staffing requirements that increase operating expenses,
and lengthy hours of operation.
Adherence to the operating system is essential in order to protect the
franchise brand. When the operating system is not followed, it may
 Fundamentals of Franchising 25

damage the reputation of the franchise brand. Franchisers try to effect

compliance by auditing locations, using mystery shoppers who visit as
customers, and requiring franchisees to follow all franchise systems and
procedures. Another way to achieve compliance is to use legal safeguards
for franchise operating standards as cited in the franchise agreement.
Litigation can be an effective way to make franchisees aware of why it is
vital that all franchisees follow the operating system, and encourage
franchisees to police franchise compliance whenever possible.
Franchisers can improve and enhance the quality and effectiveness of
their operating systems through feedback obtained from franchisees on a
regular basis. The use of franchise advisory committees is another
method to gain input from franchisees on how to improve a franchise
operating system.

Franchise Training
Franchise Training refers to educational and instructive programs de-
signed to teach and improve the efficiency and effectiveness of fran-
chisees and their employees in operating a franchise system.11 Franchisee
training may consist of a franchisee classroom and onsite training,
franchiser bulletins, newsletters, webinars, conferences, and annual
conventions. The initial training that a new franchisee receives is critical
to prepare them to set up and operate a franchise for the first time. This
means it’s essential that new franchisees receive quality training before
they open their franchise. Without quality training, it can be costly and
time-consuming for a franchisee to be retrained and may require the
franchiser to frequently respond to questions and requests for assistance.
A franchise training program reflects the commitment of a franchiser to
build a successful operation of its franchise and signals the quality of
knowledge transfer between franchiser and its franchisees.
Given its vital role in transferring operating knowledge to franchisees,
the Federal Trade Commission requires that a detailed description of the
initial franchisee training program is included in the Franchise Disclosure
Document. This description must include what the training represents in
terms of topics, number of training hours, manuals, and the title of the
person teaching each subject.
Franchisee training curriculums may vary, depending upon the age
and size of the franchise system and its location.12 Some startup fran-
chises begin with a modest training staff that includes the franchise
founder as a key presenter. More mature franchisers will provide a more
comprehensive training presentation that can include more specialized
franchise staff. The quality of an initial franchisee training program will
depend upon what franchiser resources are applied to the training.
Franchise training is an iterative process, and franchisers should be willing
26 Fundamentals of Franchising

to commit sufficient resources based on feedback from new and existing

franchisees regarding the quality and effectiveness of training. The more
franchisee training programs, the greater will be the opportunity to gain
feedback on the effectiveness of the training. Post franchisee interviews,
training evaluations completed at the end of each day, and a Q&A from
the presenter regarding training sessions are ways to help provide timely
and quality feedback on training subjects and presentations. An example
of a comprehensive franchisee training is that provided by Paul Pickett,
Chief Development Officer for Wild Birds Unlimited, a franchise brand
recognized for its successful program, who says, “At Wild Birds Unlimited,
we provide 18 hours of online training focusing on financial management,
customer service and product knowledge prior to the full week of class-
room training at our Franchise Support Center. Franchisees then spend a
week of in-store training at a Certified Training Store to learn how to
implement those operational best practices.”
One of the most important requirements of an initial franchisee
training program is scheduled training. If training is done too early, a
new franchisee may not retain much of what they learned. Conversely, if
the training is too late, a franchisee may make important decisions re-
garding staffing, equipment, vendor relationships, and marketing pro-
grams before they are fully trained.
Home-based franchises require no site location process or major
equipment, so the franchise launch can be done quickly. Training should
be done first and the franchisee should be ready to launch.
A franchise that is not complex may still require a separate site loca-
tion. Training should be scheduled right before the franchisee has signed
for the location lease. Franchise agreements usually include a rarely in-
voked clause, where a franchiser may fail a franchisee for not success-
fully completing training; thus, a franchisee who is obligated to lease
before training may create a difficult situation for both parties.
Complex franchise concepts such as food, retail or lodging franchises
should schedule training in stages. The first stage should include the
basics of the franchise operation such as staffing, site location require-
ments, and vendor arrangements. After completion, the franchisee may
find an acceptable site and recruit staff and vendors. Once the site is
accepted by the franchiser, the next stage of training is a combination of
classroom and onsite at a franchise or company location.
Franchise training is an important tool for teaching and reinforcing
franchise policies, products, services, and operating procedures, and
preparing franchises to implement the franchise operating system.
Changes in the operating system should be preceded by proper training;
otherwise, it can lead to problems in execution. When a new product or
important operating policy is introduced with proper training, this will
result in effective franchisee implementation. Training should include the
 Fundamentals of Franchising 27

reason for introduction of a change, the new procedure or marketing

information, and a list of FAQs regarding the specific training subject.
The role of quality franchisee training in the success of franchise op-
erations is exemplified by top-performing franchise systems. Franchise
performance and franchisee satisfaction levels are directly influenced by
the overall quality of franchiser training.

The Franchise Operations Manual

The Franchise Operations Manual is a critical depositary of training and
franchise operating information that includes how to start and prepare a
franchise to open for business. It sets forth essential components of the
operating system, key franchisee obligations, and serves as a policy and
training guide for franchisees. While it may not effectively prevent the
disruption of a franchise system, the Manual is a pivotal component of
the franchise operating system since it fulfills several essential functions,
from serving as a training guide to how to recruit and hire the most
qualified franchise staff.13
The entire Franchise Operations Manual can consist of several sepa-
rate manuals including a Franchise Startup Manual, Franchise
Operations Manual, and Franchise Marketing Manual. In most cases,
the term Manual is used in the singular form in franchise FDDs but still
refers collectively to more than one Manual. Mary Ann McConnell,
President of Franwise a franchise consulting firm states that the Manuals
serve four main purposes: 1. Faster and better franchise development and
performance, 2. Definition and detailed compliance processes for all
brand standards and contractual obligations, so franchisees know what
is expected, what resources are available and how they can measure their
progress, 3 Reduced strain and need for franchisor staff and 4.
Franchisors can rely on the manual for legal compliance and defense.
While no Manual can save a bad franchise system, one that is well
documented should be able to use its Manuals as one of the tools to stave
off unfavorable rulings. A detailed Manual will also help ensure that you
and your franchisees comply with all the promises and obligations of the
Franchise Disclosure Document (FDD) and Franchise Agreement (FA).
Marketing the detail and depth of information shown in the Table of
Contents of your Operations Manual (as provided in the Franchise
Disclosure Document) is a valuable marketing tool for the Franchise
Development Department.
The Manual should be available in digital format for ease of delivery
and to facilitate updates and important changes.
The Manual includes the standards and procedures that franchisees
follow to operate their franchise and meet the expectations of the fran-
chise brand. The Manual can include such individual manuals as
28 Fundamentals of Franchising

Preopening, Startup, and marketing. It provides guidance by doc-

umenting franchise policy on human resources, financial reporting,
marketing, and accounting policies. It serves as a training guide, re-
ference, and resource for franchisees. Due to its importance, the FTC
requires that the table of contents from the Manual be included as an
exhibit to a Franchise Disclosure Document.
Manuals may be intricate in the case of fast food and restaurant
franchises, which involve unique décor and equipment standards, pro-
duct ingredients, and recipes. Operations manuals can be more
straightforward as in the case of personal service franchises. The less
complicated a franchise operating system is, the less complex the manual
will be. A Manual is an important component in franchise system
compliance. If a dispute or issue arises between a franchiser and fran-
chisee, the Manual is an important tool to settle it, since the franchiser’s
copy is defined as the controlling document.
Franchisers may allow prospective franchisees to view the Operations
Manual before purchasing a franchise. However, since the information
in an Operations Manual is deemed confidential by the franchiser, it will
require that the prospect sign confidentiality and nondisclosure agree-
ments before viewing the Manual.14
The contents of an Operations Manual will vary depending on the
type of business, but typical issues addressed include the following:

1 The history, goal, or vision of the franchisor

2 Procedures for finding and developing a franchise location
3 Preopening procedures
4 Equipment and inventory requirements
5 Daily operating procedures
6 Administrative and reporting obligations
7 Payroll, accounting, and computer systems
8 Marketing and advertising guidelines
9 Customer service
10 Management procedures

Franchise Marketing
Franchise Marketing refers to activities and resources devoted to com-
municating, delivering, and exchanging goods or services with potential
customers. Given that one of the most important factors in shaping the
financial performance of franchise units is brand reputation, it is not
surprising that marketing is a critical part of the strategy for a successful
franchise. Marketing activities enable franchisees to promote and pub-
licize a franchise brand in a consistent manner to existing and potential
customers.15 When designed and executed correctly, marketing activities
 Fundamentals of Franchising 29

can maximize franchiser productivity and franchisee advertising dollars.

One of the most important objectives of franchise marketing is to build
and enhance franchise brand recognition. This objective is so critical to
building a successful franchise system, it can impact the development of
new franchise locations, so that closely situated franchises will maximize
brand recognition.
Franchise marketing includes promotional advertising, grand opening
programs, creation, and production of marketing materials, public re-
lations campaigns, and customer research. Startups and emerging fran-
chisers should monitor the performance of a franchisee to determine
whether their marketing system is coordinated. Franchise revenues can
depend on the right mix of products or services, effective marketing
programs, and favorable vendor arrangements. In combination, these
components can deliver positive results. However, when out of sync,
results can fall short of expectations.
Most franchisers require that franchisees contribute to an advertising or
marketing fund in addition to franchise royalty payments. Such contribu-
tions can be fixed dollar amounts or, more commonly, a fixed percentage of
franchise revenues. Some franchise agreements require the franchisee to
contribute to both local and national advertising or marketing funds.
Accumulated funds can be administered by the franchiser, or in the case of
larger and mature franchise systems, an advertising committee. Franchise
advertising committees are normally governed by franchise representatives
who collectively determine and structure marketing strategies and the funds
allotted. The amount of money in funds and decisions for dispensing them
can become so adversarial that some large franchise systems such as Burger
King and KFC have waged major litigation with franchisees. When fran-
chisers include franchisee representatives in the marketing process, it’s im-
portant that a franchiser establishes a consensus among members rather than
make a unilateral major marketing decision. It’s quite common for startup
franchisers to forego advertising fund contributions by franchisees until they
have reached a minimum number of franchisees, for example, five or ten.
A popular strategy that some franchisers employ is complementary
branding, which is when an established franchise brand offers a high-
quality product in order to attract customers. An established brand can
capitalize on brand recognition and quality.16 An example of com-
plementary branding is when McDonald’s added soft-serve ice cream to
its menu in 1995. Soon after, quick-service restaurants such as Wendy’s,
Chick-fil-A and Burger King put soft-serve on their own menus. Dairy
Queen used a similar strategy when it added the Brazier concept fea-
turing hamburgers in addition to a soft-serve menu.
Despite its significant impact on the financial performance of franchise
units, marketing activities can be difficult for a franchise chain to co-
ordinate.17 While franchisers try to gain the full participation of franchisees
30 Fundamentals of Franchising

in an advertising program, federal antitrust statutes prevent them from

mandating franchise pricing. Thus, promotional advertisements often in-
clude the disclaimer “available at participating locations only.”
Franchisers strive to achieve full participation in several ways. They
can educate franchisees about the need to participate in price promotions
by stressing the importance of presenting a consistent experience to
customers, regardless of location. Alternatively, they may engage fran-
chisee participation via marketing committees or other means. Some
franchisers use advertising to obtain pricing compliance by making
customers aware of advertised prices, which can cause a franchise to
follow them. As an example, national advertising programs have been
shown to significantly improve the performance of franchisee units.18
Marketing strategies are often based on the creative contributions of
an advertising or public relations firm. Because of the creative nature of
certain marketing tactics, it is not unusual for those involved in the
process to have an opinion. To avoid confrontation and gain support for
certain marketing and price promotion programs, franchisers should first
test the strategy in several franchise locations. This process serves two
functions: to test the efficacy of the marketing program; and if successful,
gain the advocacy of the franchisees who participated in the test or pilot
program.

Franchise Development
Franchise Development refers to the recruitment of qualified franchisee
candidates and the sale of new franchises. It includes activities required
to build and grow the franchise system. The development of new fran-
chise units is the engine that powers a franchise system to achieve rapid
revenue growth, brand recognition, and market acquisition. For a
franchise startup, it’s important that development activities commence as
quickly as possible. Selling a first franchise can be a challenge for some
startups, requiring that franchise development be properly organized and
staffed. Franchise development provides the assets necessary to support
the business model, research and develop new products and services, and
strengthen the foundation of the franchise system. Failure to develop a
franchise system may impair the financial health of the franchiser and
prevent the support and assistance that franchisees require.
To achieve franchise system growth requires the execution of certain
activities including advertising to prospective franchisees, processing
franchise inquiries, qualifying franchise candidates, and completing a
franchise transaction.19
Successful franchise development requires the formation of a Franchise
Disclosure Model appropriate for the franchise business model. In most
cases, the single or unit franchise model is most appropriate for emerging
 Fundamentals of Franchising 31

franchises; in other cases, the multi-unit franchise may be a more effective

option. This issue will be explored in subsequent chapters.
The franchise development process begins with an initial contact be-
tween the candidate and the franchise representative. Franchise candi-
dates should be profiled, recruited, qualified, and guided through the
franchising process. Whether the initial contact is by email, social media,
or telephone, it’s important that the representative respond as quickly as
possible. The person communicating with the franchisee should have a
sales personality, be familiar with the basics of the franchise program,
and careful to gather key information from prospective franchisees. Since
many franchisers utilize an automated telephone response and directory
system, it is critical that prospective franchisees speak directly to a re-
presentative, or receive a return call as soon as possible. Franchise staff
should present the advantages of a franchise program and respond to any
concerns and questions from prospective franchisees.
In addition to recruitment, in order to properly develop a successful
franchise network, the franchise must have a competent staff that can
effectively screen and pre-qualify candidates. The selection process is
vital to the success of a franchise system20 and should start with a careful
understanding of the knowledge, skills, and abilities that enable fran-
chisees to successfully duplicate a business model. Further, the selection
process should ensure a value alignment between potential franchisees
and franchisers, which can not only reduce relationship conflicts but also
boost the performance of the franchise system.21
Franchise staff should present the advantages of the program and re-
spond to the concerns and questions of prospective franchisees. A suc-
cessful franchise development program depends on franchisees giving it a
positive evaluation so it is important to maintain a satisfying and mu-
tually beneficial relationship with existing franchisees since a dissatisfied
franchisee can spread negative feedback among prospective franchisees.
When obtaining the feedback of existing franchisees, a franchisee
training program is a significant part of the evaluation process. If fran-
chise training is evaluated poorly by existing franchisees, a prospective
franchisee may decide not to invest in that franchise.

Franchiser Support
Franchiser Support is defined as the collective help, resources, advice, lea-
dership, and operational support that a franchiser supplies to franchisees.
Franchise support is vital because it enables a franchisee to improve its
operation. A lack of franchiser support is one of the major issues that hinder
a franchisee’s chance of success.22 Franchise support is critical, especially
when franchisees encounter operating problems or experience a shortfall in
revenue. It is important that franchisers respond to a franchisee’s earnest
32 Fundamentals of Franchising

request for help, regardless of how much help a franchiser is contractually

bound to provide. When a franchiser does not respond to a legitimate re-
quest for help or support, this may lead to franchisee dissatisfaction, dis-
putes, and possibly litigation. Franchise support is especially important for
franchisees who have less experience as looking for resources to help them
navigate unfamiliar business environments.23 Franchise field consultants
are the most common source of support. They often make site visits to
assigned locations, audit the performance of franchisees, and recommend
approaches to improve a franchise’s success. The amount of franchiser
support, including number and frequency of visits, is defined in the fran-
chise agreement so that obligations of the franchiser and expectations of
franchisees are clearly understood.
Franchiser support will vary, depending upon the type of franchise
system, something that is often industry specific. Hotel, motel, and food
franchises are often complex by virtue of the number and type of services
they provide. They are among the most needy franchise systems in terms
of franchiser support. Medical staffing franchises, children’s educational
services, and residential services require less oversight because their
business models are less complex.24
Because a significant benefit of the franchise model is providing
franchisees an established and proven operating system, it is incumbent
upon franchisers to diagnose the causes of poor performance, in order to
identify those franchisees in need of support and assistance to correct
their problems. A franchiser should survey franchisees on a regular basis
to determine if they are satisfied with the level of franchiser support and
services they are receiving. A franchiser should carefully manage the
relationship with current franchisees, as active communication between
franchisor and franchisee will help strengthen trust and satisfaction with
the franchise system.25 Some franchisers provide franchisees with a
troubleshooting guide or list of FAQs to assist them when they encounter
a problem that requires franchiser assistance. FAQs should include a list
of franchiser staff to contact for reporting specific problems and issues.
Mitch Cohen, a principal in Perfomax Franchise Advisors and a multi-
unit franchisee, states that proper franchiser assistance is determined by
franchiser leadership, a trait common to great franchise brands.
Franchisees expect a franchiser to exercise leadership, have a vision for
the future, and share their brand strategy with franchisees. These attri-
butes are ingredients of effective franchiser support.

Vendor Purchasing Programs

Vendor Purchasing Programs refer to arrangements made by franchisers
with vendors for the procurement of marketing materials, menu in-
gredients, products for resale, equipment, fixtures, point of sale equipment,
 Fundamentals of Franchising 33

and certain services used by a franchisee in the operation of their business.

An effective vendor purchasing program enables franchisees to purchase
equipment, products, services, and supplies at discounted prices.
Franchisers use vendor purchasing programs to control and enforce the
standards that franchisees must follow, which is particularly relevant to
concepts such as fast food, restaurant, and lodging franchises.
Some vendor purchase programs include services such as insurance
brokers, advertising firms, printing services, and real estate brokers used
by children’s tutoring services, real estate, homecare franchises, and
other nonproduct franchises. Favorable franchiser vendor purchasing
programs are an asset that can attract and sell new franchises when
viewed as another advantage that franchise ownership provides. The
financial benefits franchisees receive from vendor purchasing programs
contribute to the ability of a franchise to generate profits and aggres-
sively market and promote products and services. Franchisees may ex-
pect that one benefit of a franchise system is collective buying power on
behalf of franchises. If a franchiser fails to deliver it can lead to dis-
satisfaction. As a franchise system grows, it’s not unusual for a vendor to
offer the franchiser rebates based on franchisee purchases. The dollar
amount of rebates received by a franchiser must be disclosed in the FDD.
Some franchisers share a portion of the rebates with their franchisees by
placing the funds in an advertising or marketing fund.
The relationship between franchiser and vendor may be contractual in
nature, or a vendor recommendation may be provided to franchisees. These
are a significant part and benefit of the franchise model which enables the
franchiser to carefully select vendors and boost its bargaining power.26 A
startup franchise with few locations will not generally attract vendors. The
larger a franchise system grows, the more attractive it will be to vendors.
Vendors can be classified into two groups. The first group, Required
Vendors, includes vendors a franchisee must buy from under the terms of
the franchise agreement. By using Required Vendors, the franchiser can
set up a reputable franchise model that supplies franchise customers with
a consistent experience, regardless of which franchise they visit.
Required vendor programs help both parties because franchisees can buy
at lower prices and the franchiser can uphold franchise standards and
more easily control the production and sale of franchise products and
services. Before naming a Required Vendor, franchisers should make
sure that their products meet quality standards, best pricing is available,
and the vendor has a warranty or return policy.
The other group of vendors is the Recommended or Approved
Vendor. These are vendors that a franchisee doesn’t have to use, but if
franchises do use them, they can take advantage of favorable pricing and
the vendor’s familiarity with the franchise program. It’s rare for a
34 Fundamentals of Franchising

franchiser in the food franchise sector, for example, to allow franchisees

to purchase menu ingredients from just any vendor.
Purchasing cooperatives are one method that franchisers use to maximize
the power of the franchise supply chain. Purchasing supply analysts found
that a buying system can save 2%–5% in purchase savings. Franchisers and
franchisees may realize a cost savings of up to 8% through a purchasing
cooperative.27 A franchiser and franchisees from the same franchise system
own the purchasing cooperative which is run by a board of directors. Each
member is entitled to one share ownership and any rebates or monies earned
by the cooperative must be distributed to the shareholders. The franchiser
keeps the right to approve or disapprove vendors and require that fran-
chisees buy specific and proprietary products.28
Effective and productive franchiser supplier purchasing programs can
be an asset to attract and sell new franchise locations; this is seen as
another advantage that franchise ownership provides. In addition, the
financial benefits that franchisees receive from supplier purchasing pro-
grams contribute to their ability to aggressively market and promote
products and services.
A franchiser that has launched a new franchise should solicit input
from potential vendors at the outset so that the franchiser can identify
which vendors provide the best purchasing opportunities for new fran-
chisees. This is critical for a franchise startup as new franchisees will rely
on the franchiser to provide them with a list of vendors. Eventually,
franchisees may utilize a vendor seeking to supply products or services to
the entire franchise network, in which case the vendor’s familiarity with
the franchise program can be an advantage.

Competitive Intelligence
Competitive Intelligence (CI) refers to the collection, analysis, and dis-
tribution of information related to the products, customers, competitors,
and environmental factors that enable franchisees to make strategic de-
cisions. It includes competitive product and pricing knowledge, site loca-
tion expertise, new product introduction, and competitive marketing
practices. This is a valuable part of the franchise model that a franchiser
can gather from its franchise network CI since it supplies useful in-
formation in the design and construction of the new franchise. Important
components include the territory, initial franchise fee, continuing franchise
fees, and initial and renewal terms to be considered when designing and
constructing a new franchise program. Franchise marketing and promo-
tional programs are enhanced and more effective when CI is available to
complement the creation and execution of these programs. However, it is
more difficult for franchise systems with a large number of franchised
outlets to enjoy the benefits of competitive knowledge because it is costly
 Fundamentals of Franchising 35

to convince franchisees to attend to and utilize such knowledge. Systems

can resolve these obstacles by promoting franchisee motivation and their
ability to share, absorb, and utilize such knowledge.29
Since franchise system marketing can be readily accessed by compe-
titors, lack of ongoing CI may expose a franchise system to unanticipated
interruptions in revenue flows. Because franchises under the same brand
can exist in multiple markets, ongoing CI can be gathered more often
rather than limiting CI research to once a year. Franchisers and their
franchises can capitalize on data gathering by casting a wider net that
includes competitive job postings, local and regional press releases, and
regional and local product promotions. By sharing among its franchise
network and limiting gathering CI to a few people and departments,
franchisers and franchisees can include CI as part of the agenda for
marketing committees and franchise advisory councils.30
The collective creativity and knowledge available from a franchisee
should be used to enable the gathering and flow of information between
franchiser and franchisees by sharing feedback, suggestions, and ideas
through webinars, conferences, and meetings where both groups can
contribute. Mitch Pinckney, an accomplished franchise executive who
has built a highly successful multi-unit B2B personnel/staffing company
as a franchisee, spent the past 15 years as a franchise development coach
and consultant. In his appraisal of CI, quality franchise companies
should offer tools for marketing or run national marketing campaigns
themselves. Gaining national attention is easier when a central entity (the
franchiser) handles most of the promotions. It keeps the message con-
sistent and allows brand building and integrity. Even franchises that have
neither the size nor the capital to run a national marketing campaign can
usually provide local franchise owners with the tools and marketing
guidelines to promote their business. Together, CI and marketing re-
search provide the necessary framework to efficiently position a fran-
chise’s products/services and establish pricing strategies based on current
and projected market realities.
CI can also be a source of information regarding franchise vendors. If
another franchiser utilizes certain vendors, they may meet franchise vendor
specifications and as a result enhance the vendor evaluation process.

The Franchise Territory

When a franchisee signs the franchise agreement, they are granted a
designated territory for the term of the franchise. Franchisers can define a
franchise territory by boundaries using geographical terms such as zip
code, street, city, county, or geographical features such as a highway or
river, while others might use demographic data such as people over the
age of 65 for a homecare franchise territory. A franchise agreement can
36 Fundamentals of Franchising

include a sales quota or similar performance clause to protect the fran-

chiser from a franchise not fully developing its territory.
A franchise territory may be Exclusive, Protected, or Open. Sometimes
used interchangeably, such terms have different meanings in fran-
chising.31 When a franchise territory is Exclusive, the franchise should be
the only source of products or services in the territory, but if the territory
is Protected, the franchiser may be allowed to sell through channels of
distribution such as the internet and certain retail outlets. In both cases,
the franchiser is not allowed to franchise or open a company-run loca-
tion within the designated territory.
Some franchise systems do not supply territorial protection. Under an
Open Territory, the franchiser is free to open both franchise and company-
owned outlets near an existing franchise location. The franchiser can use
alternative channels of distribution whenever it wants. Studies have shown
that Open Territory models may not always lead to poor performance of
franchised units. When franchisers approve new units in the vicinity of
existing units, this may reduce the incumbent’s profits; however, when
company-owned units open nearby, incumbents may experience an in-
crease in their revenue,32 perhaps because company-owned units must
adhere to franchise rules and regulations and are thus less likely to can-
nibalize incumbents’ revenue, while franchised units are more flexible, and
willing to pursue strategies for local adaptation and value maximization.33
Richard Rosen, a prominent franchise attorney, believes that franchise
companies should disclose whether there is a protected territory, but that’s
not the only territorial issue that a prospective franchisee may challenge.
Rosen considers the territory one of the most important agreement terms
to negotiate, a provision that many franchisers are willing to adjust.
Franchisers need to be cautious concerning the size of the territory they
grant to a franchise. A territory that is too small can limit the efforts of an
aggressive franchisee, while a territory that is too big may become un-
derdeveloped. It is easier to add territory to a franchise than to reduce it.
The importance of franchise territory and its quality and size is one of
the determining factors when a prospective franchise compares one
franchise opportunity to another. The design and granting of a franchise
territory are key parts of a franchise strategy to promote and maximize
the brand. When a franchiser grants disjointed franchise territories in
regions or markets, it may stifle brand awareness, increase costs to ser-
vice and support franchisees, and diminish the productivity of marketing
and advertising expenditures.

Franchise Site Selection

For franchises in the retail, restaurant, personal services, and hospitality
franchise sectors, the selection and terms of a franchise location are one
 Fundamentals of Franchising 37

of the most critical components of the business model. Site selection

should carefully include a number of factors, such as general location,
demographics, traffic information, competition, and cost considera-
tion.34 The usage of CI, demographic data, and franchisee research can
help franchisees to identify the most desirable franchise location for
targeting potential customers. Franchise site location is a significant as-
pect of retail and food franchise concepts, as both parties have a vested
interest in identifying the best possible franchise location.35 Because of
its importance, franchisers often outsource site location services to firms
specializing in that business. A potentially lucrative franchise territory
may be severely diminished by the wrong location.
In some service and business-to-business franchises, site location may
not be as critical because customers do not go to the location to obtain
products or services. However, some franchises that are non-retail or
food brands are located in light industrial areas. For example, children’s
recreational franchises that require large facilities such as indoor play-
grounds and swimming franchises.
The importance of site selection is a high priority because it will have a
direct impact on the performance of a franchisee who invests in a rental lease
or building purchase, along with remodeling, fixtures, and equipment. The
wrong site can be costly to correct since franchisees usually execute leases
that run several years or longer. Good site location is essential to customer
accessibility, convenience, and the ability of the franchisee to effectively
compete against both franchised and nonfranchised businesses. Exposure to
main roads is an important consideration for site location. Other businesses
or shopping in the same area is another factor that can draw customers to
the franchise. Important factors to consider are as follows:

• The demographics of the market and surrounding area

• Ease of customer access to the location and easy access and exit.
• Proximity to competitors
• Noncompetitive attraction to the site
• Rental and site development costs relative to projected franchise
cash flow and pro forma income statements
• Proposed future development adjacent to the proposed site, which
could be positive or negative factors, such as new proposed
commercial that could change traffic flow

To identify locations, the franchiser and franchisee should collaborate

to maximize their results. Several site selection companies provide
software that can be used by the franchiser to identify the best possible
locations. Using the resources of a site selection company may be ob-
tained at a reasonable cost, depending on how much responsibility the
company assumes.
38 Fundamentals of Franchising

The franchise site selection process may extend to vendor purchasing

programs. Quality site selection is advantageous to prospective vendors,
while disjointed franchise locations may be an obstacle to the best
vendor arrangement.

The Initial Franchise Fee and Continuing Payments

The Initial Franchise Fee and Continuing Payments refers to the financial
resources that franchisees are obligated to transfer to the franchiser in
exchange for franchise rights and support. Studies have shown there is a
positive relationship between these types of fee, supporting the view that
the initial franchise fee can enable the franchise system to build its brand
and programs to support franchisees.36 The initial franchise fee pays the
franchiser for the rights to the trademark license, training, support, and
the Franchise Operations Manual. Continuing fees are franchise royalty
payments for ongoing rights to market products or services under the
franchise brand, and to reimburse the franchiser for marketing and op-
erational support. Continuing payments include contributions to an
advertising fund for promotional and advertising programs on a local,
regional, or national level. The average initial franchise fee for a fran-
chise is $37,000, according to a study by Franchise Grade. The average
franchise royalty rate was 6.8% in 2016, while average advertising fees
increased to 2.5% in the same period.37 Using agency theory, scholars
have shown that continuing payments, specifically royalties, strengthen
franchiser incentives to support franchises.38 However, because con-
tinuing fees are a recurring operating expense, a franchiser should care-
fully examine whether these fees are competitive with comparable
franchise systems, especially critical in the case of a startup. Franchisers
employ various strategies to determine how royalty fees are calculated and
structured. Royalty rates may vary, and franchisers use various methods
for setting their royalty payments. Kona Ice, a successful franchiser,
charges its franchisees a fixed royalty dollar amount which converts the
royalty payment to a fixed expense. This approach differs from the tra-
ditional method where royalty dollars serve as a variable expense that rises
when sales or profits increase. Some franchisers reduce royalty payments
when a franchise reaches certain revenue tiers. Despite variations on how
royalties are calculated and paid, most franchisers use the traditional
method where royalties are calculated as a percentage of revenue.
The continuing fees paid by franchisees are the lifeblood of a franchise
since these payments enable the franchiser to promote, support, and
administer the franchise system. Still, it’s important that continuing fees
are equitable for both the franchisers and franchisees. Too few fees can
prevent the franchiser from fulfilling its obligations to its franchisees.
Continuing fees that are inequitable in terms of franchiser services and
 Fundamentals of Franchising 39

support can prevent franchisees from achieving their financial goals and
result in dissatisfaction and poor system growth.
A part of continuing fees includes payments into an advertising fund
that may be administered by the franchiser, or a committee of franchisers
and franchisee representatives. Advertising funds are an effective way to
leverage the collective financial and creative resources of franchises.

Franchise Term
Franchise Term refers to the length in years that a franchisee can run the
franchise, which can range from 5 to 20 years. In addition to this initial
term, most franchises have a renewal term of 5 years or more. This is
important to franchisees who value a longer contract term since it pro-
vides more security. Favorable franchisee terms can be a competitive
advantage and a longer franchise term can result in more earning power.
The average initial franchise term is 10.4 years and the average renewal
term is 8.6 years.39 A few franchisers will grant an initial franchise term
without renewals. For example, McDonald’s grants a 20-year franchise
term with no renewals. The reasoning is based on the amount of the initial
franchise investment and the expectation that knowing their franchise will
terminate after 20 years, the franchisee will strive to maximize ROI. Given
the success of McDonald’s, it is hard to dismiss this policy, even though
few others use this approach. In general, franchises that require a sig-
nificant investment, such as hotel–motel franchises, grant longer terms
than the typical franchise. Because the franchise term can be a factor in
determining which franchise a prospective franchisee may choose, fran-
chisers rarely differ when it comes to the franchise term.
Startup franchisers should exercise caution when establishing a fran-
chise term lest they be considered an outlier. It is common for a startup
to grant more favorable franchise terms to a first group of franchisees in
order to be competitive. As the franchise system matures, the initial
franchise fee and continuing fees paid by franchisees may increase.
Before the franchise term is due to expire, a franchisee must decide if
they want to exercise their renewal option which requires the franchisee
to provide the franchiser 6 months’ notice, execute the current franchise
agreement, remodel their franchise location to bring it up to current
standards, and be in good standing under the terms of the franchise
agreement. When a franchise does not exercise their renewal option, they
risk losing the equity in their franchise since their options are to sell the
franchise or allow the agreement to end.
Some franchisees choose to sell. In order to do so, they must meet
certain conditions including approval of the franchiser and follow a
procedure outlined in their franchise agreement. The terms that spell out
40 Fundamentals of Franchising

how a franchise may be sold are relatively consistent among franchisers.

They include the following:

• Supplying the franchiser 3 months’ notice about their intent to sell

the franchise.
• Sending the franchiser a franchise application and other pertinent
information such as a letter of intent including terms of sale from the
prospective buyer.
• The franchiser may have 60–90 days to approve the transaction. The
franchiser retains right of first refusal which enables them to acquire
the franchise for the same terms offered by the prospective buyer.

When franchise agreements approach the renewal stage, franchisees have

three choices: renew their franchise agreement, sell their franchise or
allow the agreement to expire, the least desirable option. When fran-
chisers monitor franchisee satisfaction on a regular basis, there should be
few surprises when franchise renewal time comes up. A healthy franchise
system will encourage franchise renewals and establish an active fran-
chise resale market, which is attractive to franchisee candidates when
they establish an exit strategy.

Summary
This chapter presented key components of the franchise business model
and provided definitions, explained their importance, and elaborated on
key aspects. We started with the franchise IP and trademark which re-
present the foundation of all franchise systems. Using the examples of
notable franchise brands, we explained the importance of the franchise
operating system and why franchisers require franchisees to follow system
standards. The importance of providing franchisees with the proper
training before starting their new franchise operation is emphasized.
We continue our presentation of the fundamentals of franchising by
illustrating the requirement that franchisers provide marketing, adver-
tising, and ongoing support to enable franchisees to be successful. Vendor
purchasing programs include a list of Approved Vendors, which requires
franchisees to purchase certain products only from specific vendors.
Approved vendor programs ensure that franchises use specific products
that meet franchiser quality standards. Other important fundamentals
include franchise territory, CI, the franchise term, fees, royalties, and
contributions to advertising funds.

Notes
1 Bently, L., & Sherman, B. (2014). Intellectual Property Law. Oxford
University Press, USA.
 Fundamentals of Franchising 41

2 Autio, E., & Acs, Z. (2010). Intellectual property protection and the for-
mation of entrepreneurial growth aspirations. Strategic Entrepreneurship
Journal, 4(3), 234–251.
3 Windsperger, J., & Dant, R. P. (2006). Contractibility and ownership re-
direction in franchising: A property rights view. Journal of Retailing, 82(3),
259–272.
4 Terril, B., & Gotaskie, J. (2019). Protecting Intellectual Property Rights, Fox
Rothchild LLP.
Rubin, P. H. (1978). The theory of the firm and the structure of the
franchise contract. The Journal of Law and Economics, 21(1), 223–233.
5 Kelly, C., & Frantz, V. (2019). Franchisor’s intellectual property and how to
protect it. IFA 52nd Anuual Legal Symposium,Washington, D.C.
6 Spinelli, S., & Birley, S. (1996). Toward a theory of conflict in the franchise
system. Journal of Business Venturing, 11(5), 329–342. Michael, S. C.
(1996). To franchise or not to franchise: An analysis of decision rights and
organizational form shares. Journal of Business Venturing, 11(1), 57–71.
7 Norton, S. W. (1988). Franchising, brand name capital, and the entrepreneurial
capacity problem. Strategic Management Journal, 9(S1), 105–114.
8 Zisk, R. (2019). The Case for Effective Standard Enforcement. International
Franchise Association.
https://www.franchise.org/franchise-information/legal/case-effective-
standards-enforcement
9 Falbe, C. M., & Welsh, D. H. (1998). NAFTA and franchising: A compar-
ison of franchisor perceptions of characteristics associated with franchisee
success and failure in Canada, Mexico, and the United States. Journal of
Business Venturing, 13(2), 151–171.
10 Paswan, A. K., & Wittmann, C. M. (2009). Knowledge management and
franchise systems. Industrial Marketing Management, 38(2), 173–180.
11 Justis, R. T., & Chan, P. S. (1991). Training for franchise management.
Journal of Small Business Management, 29(3), 87.
12 Valerio, A., Parton, B., & Robb, A. (2014). Entrepreneurship Education
and Training Programs Around the World: Dimensions for Success. The
World Bank.
13 Frazer, L. (2001). Causes of disruption to franchise operations. Journal of
Business Research, 54(3), 227–234.
14 Lusthaus, J. (2019). What Should be Included in the Franchise Operations
Manual, Lusthaus Law Blog.
https://lusthausfranchiselaw.com/blog/what-should-be-included-in-the-
franchise-operations-manual/
15 Dant, R. P., Grünhagen, M., & Windsperger, J. (2011). Franchising research
frontiers for the twenty-first century. Journal of Retailing, 87(3), 253–268.
16 Sausaman, G. A. (2018). Inside the Box: The Power of Complementary
Branding. Topper’s Creamery (pp. 38–50).
17 Michael, S. C. (2002). Can a franchise chain coordinate? Journal of Business
Venturing, 17(4), 325–341.
18 Ater, I., & Rigbi, O. (2015). Price control and advertising in franchising
chains. Strategic Management Journal, 36(1), 148–158.
19 Brookes, M., & Altinay, L. (2011). Franchise partner selection: Perspectives
of franchisors and franchisees. Journal of Services Marketing, 25, 336–348.
20 Watson, A. (2008). Small business growth through franchising: A qualitative
investigation. Journal of Marketing Channels, 15(1), 3–21.
42 Fundamentals of Franchising

21 Watson, A., Dada, O. L., Grünhagen, M., & Wollan, M. L. (2016). When do
franchisors select entrepreneurial franchisees? An organizational identity
perspective. Journal of Business Research, 69(12), 5934–5945.
22 Knight, R. M. (1986). Franchising from the franchisor and franchisee points
of view. Journal of Small Business Management, 24, 8–15.
23 Nyadzayo, M. W., Matanda, M. J., & Ewing, M. T. (2015). The impact of
franchisor support, brand commitment, brand citizenship behavior, and
franchisee experience on franchisee-perceived brand image. Journal of
Business Research, 68(9), 1886–1894.
24 Seid, M. (2020). What Support Can You Expect from the Franchisor. MSA
Worldwide Blog.
https://www.msaworldwide.com/blog/what-support-can-you-expect-
from-the-franchisor/#:~:text=Franchise%20systems%20are%20not
%20fungible,factors%20unique%20to%20each%20franchise
25 Chiou, J. S., Hsieh, C. H., & Yang, C. H. (2004). The effect of franchisors’
communication, service assistance, and competitive advantage on fran-
chisees’ intentions to remain in the franchise system. Journal of Small
Business Management, 42(1), 19–36.
26 Michael, S. C. (2000). Investments to create bargaining power: The case of
franchising. Strategic Management Journal, 21(4), 497–514.
27 Mazero, J., & Loonam, S. (2010). Purchasing cooperatives: Leveraging a
supply chain for competitive advantage.Franchise Law Journal, 29, 148–163.
28 Loonan Triggs, S. (2010) Purchasing Cooperatives: A Second Look.
Franchising.com
29 Butt, M. N., Antia, K. D., Murtha, B. R., & Kashyap, V. (2018). Clustering,
knowledge sharing, and Interbrand competition: A multiyear analysis of an
evolving franchise system. Journal of Marketing, 82(1), 74–92.
30 Mirmam, E. (2018). You’re Probably Keeping Tabs on Your Competitors All
Wrong. Entrepreneur.com. https://www.entrepreneur.com/article/310145
31 Goldstein, J. (2016). Is your Franchise Territory Exclusive, Protected or non-
Existant? Goldstein Law Group.
32 Kalnins, A. (2004). An empirical analysis of territorial encroachment within
franchised and company-owned branded chains. Marketing Science, 23(4),
476–489.
33 Yin, X., & Zajac, E. J. (2004). The strategy/governance structure fit re-
lationship: Theory and evidence in franchising arrangements. Strategic
Management Journal, 25(4), 365–383.
34 Park, K., & Khan, M. A. (2006). An exploratory study to identify the site
selection factors for US franchise restaurants. Journal of Foodservice
Business Research, 8(1), 97–114.
35 Chen, L. F., & Tsai, C. T. (2016). Data mining framework based on rough
set theory to improve location selection decisions: A case study of a restau-
rant chain. Tourism Management, 53, 197–206.
36 Kaufmann, P. J., & Dant, R. P. (2001). The pricing of franchise rights.
Journal of Retailing, 77(4), 537–545.
37 Franchise Grade (2017). Facts and Figures, Historical Trends of Key
Franchise Metrics, July Issue.
38 Maruyama, M., & Yamashita, Y. (2012). Franchise fees and royalties: Theory
and empirical results. Review of Industrial Organization, 40(3), 167–189.
39 Franchise Grade (2017). Historical Trends of Key Franchise Metrics.
Chapter 3

The Relevancy of Emerging

Franchise Performance

After delineating the history, development, and fundamental compo-

nents of the franchise business model, we will define emerging franchise
performance and illustrate the related data that pertains to emerging
franchise performance. On an annual basis, there are 300 or more new
franchise brands being launched in the United States and their perfor-
mance, growth, and development vary dramatically. Like other types of
companies, the performance differences of franchise systems are often
shaped by industry-level factors.1 A better understanding of franchise
performance differences would enable potential franchisors and fran-
chisees to gain a greater understanding of emerging franchise perfor-
mance. This can provide a clearer understanding of effective system
growth based upon the type of franchise products or services provided by
various franchise categories.
In the following section, we first discuss the nature of franchise per-
formance and the corresponding performance measures. We then depict
the performance data and characteristics of emerging franchises which
are new franchise brands in their early growth stage.
Although the amount of franchise investment for emerging franchisors
is not related to franchise performance, we included the data because the
amount of investment has an impact on the number of franchise pro-
spects an emerging franchisor can recruit.

Emerging Franchise Performance and Category

Differences
Like capturing organizational performance,2 franchise performance can
be conceptualized as the outcomes of a franchise system measured
against a particular set of goals or objectives. The evaluation can be how
an existing franchise system effectively executes its franchise program
financially, using specific measures of financial profitability, such as re-
turn on sales and return on assets.3 It could also be broadly analyzed
with a mix of financial, product market, or non-financial indicators of
DOI: 10.4324/9781003034285-3
44 Emerging Franchise Performance

firm-level outcomes, such as sales growth, customer satisfaction, pro-

duct/service quality, and market share.4 According to a recent meta-
analysis study,5 different aspects of franchise performance have been
found to be influenced by distinct sets of antecedents. For example,
geographic dispersion is strongly associated with the proportion of
outlets franchised and brand reputation while the outlet growth rate is
associated with firm age and proportion of outlets franchised. Further,
the number of new outlets is positively related to franchise size. These
relationships often vary across different industries.
However, since emerging franchise systems are in various stages of
growth with some having from 0 to 5 franchise locations, they lack the
performance measures that established franchise brands have. As a re-
sult, the primary measure of emerging franchise performance is franchise
system growth. Franchise system growth is one of the most significant
measures of emerging franchise performance because positive franchise
system growth is reflective of a healthy and vibrant franchise brand with
features that attract qualified franchise candidates. An emerging fran-
chise brand with strong growth has certain features that can attract and
cause individuals to invest in the franchise.
Differentiating emerging franchise growth by specific attributes such
as franchise category, franchisee investment, and how long it took
emerging franchises to reach various growth stages is important for
existing and potential franchisors. It can provide guidance on existing
and future strategies based upon collective and specific emerging fran-
chise performance. The performance of emerging franchises can provide
an important indicator of whether entrepreneurs should utilize the
franchise business model and can provide insight into the risk and po-
tential success of implementing a franchising strategy.

Emerging Franchise Performance Data

Because of the systemic differences of emerging franchise performance
across franchise categories, such as franchise locations, products, fran-
chisee revenues, and required franchise investment, it is imperative for
potential franchisors and franchisees to be aware of such differences and
develop an in-depth knowledge of these variations. This knowledge will
enable them to better understand the various benchmarks they can use to
monitor the performance of their franchise systems. Franchise data are
becoming more valuable because emerging franchisors will vie with
mature franchises for qualified franchise candidates as it provides specific
intelligence pertaining to the performance of their future competitors
such as system growth, franchisee investment, franchise fees, size of
franchise territories, and their outlet locations. With such information,
potential franchisors may have a higher probability of success.
 Emerging Franchise Performance 45

As Craig Tractenberg, franchise attorney with Fox Rothchild, states,

emerging franchises’ performance data are relevant and essential because
it enables a business to measure and predict whether it is on course and
will flourish. These data on emerging franchises debunk the preconceived
notions of how franchise systems ought to grow and how to define
success and what tends to work and what does not. Reviewing the data
of opened and operating emerging franchise locations can help to predict
how well the franchise program will thrive compared to company-
operated units which deliver in real-time and provide feedback on cus-
tomer preferences and product or service issues.
This knowledge can enable potential franchisors and franchisees to
better gauge the likelihood on how they will plan their franchise strategy
for a particular franchise category. For example, by better understanding
the typical growth rates in a particular franchise category, they could
better anticipate when growth would be expected and orchestrate the
needed resources correspondingly.
For analysis and presentation, franchise brands are separated into
franchise categories. The Entrepreneur 500, published by Entrepreneur
Magazine, which ranks franchise brands based upon various criteria has
published its Top 500 for 42 years. It ranks 100 different franchise ca-
tegories. For example, one category is Childcare, Children’s Enrichment
programs, Children’s Fitness, Children’s Retail, and Tutoring.
The following analysis of franchise category growth in number of
franchisees from 2010 to 2019 performed by Franchise Grade revealed
that the top five franchise categories and their increase percent of growth
were Property Management at 62%, Education, Entertainment, Sports
Training at 53%, Pest Control at 51%, and Technology and Pharmacy
at 48% (Figure 3.1).
This is essential information for potential franchisors who are con-
sidering launching a franchise in one of these categories or a related cate-
gory because they’ve achieved strong growth for the past 5 years. Potential
franchisors focused on a specific franchise category should first focus on
the growth that category is achieving because it should demonstrate po-
sitive performance and a willingness for individuals to invest in that
franchise category. Specific franchise data can be found in the Franchise
Disclosure Document and franchise website. A franchise category that
lacks growth may not be universally recognized nor an attractive franchise
opportunity which can represent a major challenge for a new franchisor to
attract franchisees and grow.
The importance of data and franchise category growth is exemplified by
the history of the franchised frozen yogurt industry which was a popular
franchise category several years ago exhibiting fast growth. This straight-
forward franchise concept had an advantage by being uncomplicated,
however, it became a disadvantage because other franchise concepts chose
46 Emerging Franchise Performance

Children’s Services

Appearance Care

Specialty Store
Franchise Category

Grocery Facility

Security

Pharmacy

Pest Control

Property Management
0% 10% 20% 30% 40% 50% 60% 70%
Percent Increase

Figure 3.1 Top Category Growth from 2015 to 2019.

Note: Thompson, A. O. C. (2021). Emerging Franchisee Data. Franchise Grade.

to add frozen yogurt to their product line after witnessing the growth of
yogurt franchises. This tactic by a number of fast-food franchise brands
reduced the interest by franchise prospects in several yogurt franchise
opportunities. There may be other examples of franchise concepts that can
be easily replicated by an existing franchise brand. This possibility requires
the potential franchisor to diligently analyze the performance and cus-
tomer appeal of select fast growth franchise to determine whether they can
sustain long-term growth or are a fad.

The Top Five Franchises in Five Franchise Categories

The following chart shows the top five franchises in five different fran-
chise categories. This information can be used to compare and analyze
those franchise brands that were leaders in their category. A potential
franchisor can then refer to those franchised brands that most closely
compares to the business that is being considered for franchising. As
there are over 3,000 franchise brands, a reference such as the annual
Entrepreneur 500 or Franchise Grade website can be referred to in order
to identify specific franchise categories (Table 3.1).

Emerging Franchises System Growth

The rate of emerging franchise system growth refers to the growth and
development of new and emerging franchises, which can have 0–100
franchise units. Emerging franchise data differs from franchise industry
Table 3.1 The Fastest Growing Franchise Categories from 2015 to 2020 6

Fitness and Gyms Children’s Services Wellness/Nutrition Ethnic Coffee and Bakery

Orange Theory Fitness Code Ninjas Massage Envy Spa Hissho, Oumi Sushi Kung Fu Tea
Club Pilates Best Brains Seva Beauty Sushibox Bambu Desserts & Drinks
F45 Training Urban Air Trampoline & OsteoStrong BonChon Vitality Bowls
Adventure Park
ilovekickboxing.com Apex Fun Run The camp Transformation The Halal Guys Ben’s Soft Pretzels
Center
Gracie Barra British Swim School Stretch Zone Taziki’s Mediterranean La Madeleine Country
Café French Cafe
Emerging Franchise Performance
47
48 Emerging Franchise Performance

data, which includes all franchises regardless of age or system size while
emerging franchises could include startup franchise brands without any
franchisees. For the potential franchisor, emerging franchise perfor-
mance data are important because it provides information on how long it
took for those franchises to reach a certain system size. This statistic can
be used to identify the effectiveness of those emerging franchisors to
recruit and sell franchises. When a new franchise brand has growth, it
indicates that individuals are attracted to that business concept. In ad-
dition to generating franchise fees and royalties, each new franchisee
helps to create interest in the franchise and instill confidence on the part
of the franchisor employees and its existing franchisees.
When considering franchising an existing business, the data on the
growth of emerging franchise systems across categories can be helpful for
the decision-making process. To identify system growth for a category of
franchise brands, such as home care franchises, an analysis of those
franchises can be done by analyzing the websites and FDDs of several
home care franchises that have been in operation for a minimum of 5
years. The other option is to utilize the services of a franchise consulting
or market research firm.
Some franchise categories can be difficult to compete with like fran-
chise brands which have multiunit operated franchisees. Lodging and
auto service franchises comprise 40%–50% of the entire lodging and
automotive service revenues. For example, lodging franchises such as
Hilton, Holiday Inns, Hotel 6, and Days Inn and automotive franchises
such as AAMCO, Meineke, Midas, and Jiffy Lube when combined with
independents would represent formidable competitors for potential
franchisors who may be considering launching a franchise in these ca-
tegories. The appropriate franchise intelligence into these franchise ca-
tegories could prevent a potential franchisor from failure by competing
against highly competitive franchise brands.7
Poor franchise growth can negatively influence the ability to attract
new franchisees, cause a drain on franchisor capital, and can create
apprehension on the part of potential franchisees. Some franchise can-
didates are apprehensive about investing in a franchise system with few
franchisees coupled with slow system growth. A frequent question on the
part of franchise candidates is how long has the franchise been in op-
eration and how many franchises are there? The type of response to this
question can determine whether a candidate will continue to pursue that
franchise or seek a different franchise opportunity.
Emerging franchises grow at various stages, with some franchises
growing at a faster rate, with others growing slowly or not at all. As First
Author, I was an executive with several emerging franchise brands and
when we wrote our business plan, we established our franchise devel-
opment goals to begin 3 months after launching the new franchise
 Emerging Franchise Performance 49

program. For the first full year of operations, we set 3–5 franchise sales,
and for the second full year 6–8 franchise sales as the goal.
When there are few or no comparable franchise businesses, potential
franchisors could enjoy the first-mover advantage. However, this situa-
tion can be a disadvantage because they would have to demonstrate to
franchisee candidates the benefit and potential of their franchise system
and business model. Educating potential franchises in such an environ-
ment could be quite costly, making it time-consuming to grow a fran-
chise system in such a unique franchise business. Thus, the fact that most
businesses of a particular industry have not been franchised should be an
important warning sign for a potential franchisor.
The following statistics from a recent Franchise Grade study of
Emerging franchises from 2010 to 2020 reveals the potential and the
consequences of launching an emerging franchise program:
A 10-year review of over 1,119 Emerging franchises from 2010 to
2020 showed that the top five categories were represented by franchises
that provided services such as home care, children’s educational services,
and beauty and hair grooming which represented 34% (Figure 3.2). The
next highest percent at 21% consisted of fast-food franchises including
chicken, hamburgers, sandwiches, coffee, and breakfast franchises.
These results are pertinent for potential franchisors because they provide
emerging franchise performance for various franchise categories.
The analysis also found that of those that started four years prior,
27.4% had 0–1 franchise locations, 50% that operated for ten years had
50 or fewer franchise locations and 15.6% of the franchises reached

Retail Products & Services

Retail Food
Real Estate
Franchise Sector

Quick-Service Restaurants
Personal Services
Lodging
Full-Service Restaurants
Commercial &
Residential Services
Business Services
Automotive
0% 5% 10% 15% 20% 25% 30% 35% 40%
Percentage

Figure 3.2 10-Year Review of Over 1,119 Emerging Franchises from 2010 to 2020.
Note: Analysis of Emerging Franchises (2021). FranchiseGrade. file:///C:/Users/carol%20eddie/
Documents/analysis-emerging-franchises_3.pdf
50 Emerging Franchise Performance

70%
60%
% of Franchise Systems

50%
40%
30%
20%
10%
0%
0 1 to 10 11 to 25 26 to 50 51 to 100 100+
Outlets outlets outlets outlets outlets Outlets
Range of Outlets
2 years 4 years 6 Years 8 years 10 Years

Figure 3.3 Emerging Franchise Growth from 2010 to 2020.

Note: Analysis of Emerging Franchises (2021). FranchiseGrade. file:///C:/Users/carol%20eddie/
Documents/analysis-emerging-franchises_3.pdf

100+ locations after 6–8 years of franchising (Figure 3.3).8 The number
of franchises that reached or surpassed 100 locations represents a sig-
nificant accomplishment for those brands. As the average number of
franchise locations added was 50, the emerging franchise brands that
achieved this level of growth possessed certain characteristics or features
that made them desirable franchise investments.

Amount of Franchise Investment

Although not a specific measure of emerging franchise performance the
amount of franchisee investment plays a key role in emerging franchise
growth. Franchise investment is defined as the amount of money an in-
dividual must invest in a franchise. The lower the franchise investment
the larger the number of potential franchise prospects a franchisor can
draw from. Depending upon the franchise sector and category, the initial
investment can range from less than $50,000 for a home-based service
franchise to over several million for a restaurant or motel franchise.
When the investment for a new franchise is higher compared to com-
parable franchise brands it can retard new franchise growth. Potential
franchisees will scrutinize the new franchise opportunity even more be-
cause the emerging franchisor will lack any franchise performance history
so it must rely upon successful company operations for validation. This is
an important reason why the emerging franchisor should be able to de-
monstrate strong leadership and a successful track record in the perfor-
mance of its core business. When a potential franchisor designs the
structure of their new franchise program it is important that they consider
the amount of the required franchisee investment by recognizing that the
 Emerging Franchise Performance 51

higher the investment the smaller the number of potential franchisees. The
lowest franchise investments tend to occupy the service categories such as
home care, children’s services, and residential and commercial services
while the highest franchise investments are found in the food, lodging
categories, and large retail categories.
As franchise investors are concerned about the degree of risk when
considering a franchise opportunity, a high franchisee investment for a
new franchise will invite increased due diligence by a prospective fran-
chisee. Emerging franchises that require a high investment must have
strong appeal, impressive market potential, and favorable prospects for
an attractive franchisee financial return.
In a study conducted by Franchise Grade, 41.6% of emerging fran-
chise brands had an average franchise investment under $250,000. In the
group, 28% of the emerging franchises had an average investment in the
$100,000–$250,000 range. There were 14% of emerging franchises in
the study that required an investment under $100,000. These results
reflect the popularity of personal services, commercial and residential
home services, and home-based franchises which have lower investment
requirements.
A company considering franchising their business model should have a
comprehensive 5-year business plan including franchise sector analytics
and a competitive overview. They should gather and compile franchise
performance data pertaining to the franchise sector and category that
pertains to their business model. Consideration should be given to the
potential appeal of the franchise products or services to prospective
franchisees and consumers. The plan should identify and project realistic
franchise unit economics which are used by franchisors to identify or
project the profitability of a franchise at the unit level. The reason certain
emerging franchise sectors are more successful than others is due in great
part to consumer demand for their products and services. As a result,
entrepreneurs considering franchising as a growth strategy should be
aware of the composition of similar and successful franchises both
emerging and established.

Summary
In this chapter, we presented data that revealed how companies and
entrepreneurs that implemented the franchise business model can ex-
perience various rates of growth. We demonstrated why potential fran-
chisors should be aware of emerging franchise performance by
presenting franchise category data that identify franchise categories that
had the highest sustained growth. Potential franchisors should compare
their proposed franchise concept to comparable franchise categories to
identify how well they have performed. We discussed how emerging
52 Emerging Franchise Performance

franchises grow and the fact that an emerging franchise can experience
slow growth that could cause them to leave franchising altogether. The
importance of growth for an emerging system was demonstrated by
presenting historical data that showed which emerging franchise cate-
gories grew faster than others. Also, we explained the reasons why
certain emerging franchises succeed while others may struggle or fail.
We indicated how the size of the initial franchisee investment can
affect the ability to attract franchise prospects and a high franchisee
investment can attract fewer prospects. Franchise performance data for
emerging franchises is a key component of the potential franchisor’s tool
kit when designing and constructing their new franchise business.

Notes
1 Chan, C. S. R., Patel, P. C., & Phan, P. H. (2020). Do differences among
accelerators explain differences in the performance of member ventures?
Evidence from 117 accelerators in 22 countries. Strategic Entrepreneurship
Journal, 14(2), 224–239. McGahan, A. M., & Porter, M. E. (1997). How
much does industry matter, really? Strategic Management Journal, 18(S1),
15–30. Short, J. C., Ketchen Jr., D. J., Palmer, T. B., & Hult, G. T. M. (2007).
Firm, strategic group, and industry influences on performance. Strategic
Management Journal, 28(2), 147–167. Patel, P. C., & Chan, C. R. (2021).
Non-economic performance of benefit corporations: A variance decomposi-
tion approach. Journal of Business Ethics, 1–22.
2 Richard, P. J., Devinney, T. M., Yip, G. S., & Johnson, G. (2009). Measuring
organizational performance: Towards methodological best practice. Journal of
Management, 35(3), 718–804.
3 Barthélemy, J. (2008). Opportunism, knowledge, and the performance of
franchise chains. Strategic Management Journal, 29(13), 1451–1463.
4 Wu, C. W. (2015). Antecedents of franchise strategy and performance. Journal
of Business Research, 68(7), 1581–1588.
5 Kang, J., Asare, A. K., Brashear-Alejandro, T., & Li, P. (2018). Drivers of
franchisor growth: A meta-analysis. Journal of Business & Industrial
Marketing, 33(2), 196–207.
6 Thompson, A. O. C. (2021). Emerging Franchisee Data. Franchise Grade.
7 Usher, J. M. (1999). Specialists, generalists, and polymorphs: spatial advantages
of multiunit organization in a single industry. Academy of Management Review,
24(1), 143–150.
8 Franchise Grade. 2021Emerging Franchise Report. https://www.franchisegrade.
com/reports/download/analysis-emerging-franchises_3/start
Chapter 4

Evaluating the Franchise

Venture

Chapter 3 presented statistics and commentary on how emerging fran-

chises perform differently across major industries. These performance
differences illustrate the emerging trend of franchise growth and high-
light the importance of attending to industry-level factors that could
shape the success and failure of franchise programs. Potential franchisors
and franchisees could use franchise performance information to gauge
potential growth and possible obstacles that they may encountered when
operating in a particular industry.
Chapter 4 discusses the next step in the franchising process, the eva-
luation of the franchise venture. It is essential for franchisors to carefully
examine their qualifications for adopting a franchising strategy. Studies
have indicated that business planning significantly improved new venture
performance.1 While the planning–performance relationship seems
weaker for new ventures,2 franchisors should still carefully examine
franchising strategies before implementing them, to avoid jeopardizing
their financial health, sharpen their potential franchise business models,
and improve their overall chance of profitability.
In the following sections, we define the evaluation process and illustrate
its importance. We demonstrate an initial thought experiment for poten-
tial franchisors and franchisees in order to quickly examine the feasibility
of a franchise strategy. We then describe the five major aspects of a re-
commended evaluation process. We begin by examining the company’s
growth objectives and elaborate on four additional criteria: Company
Credentials, Business Qualifications for Franchising, Franchisee Return on
Investment, and Pausing the Franchise Program. Carefully examined,
these aspects may help potential franchisors determine the probability of
success by implementing a franchise strategy.

The Evaluation Process and Its Importance

This process illustrates extensive procedures to determine whether an
existing or proposed business has the attributes necessary to become a
DOI: 10.4324/9781003034285-4
54 Evaluating the Franchise Venture

successful franchise system. This process involves careful examination of

essential internal and external factors. The objective is to compare the
present values of a company developing its own business units versus
franchising the business for others to expand into unexplored regions.
This will help to identify the probability of success or failure and whether
a franchise venture should continue. If the results of this analysis are
positive, the next step would be to build a franchise system by carefully
documenting various aspects of business operations.
According to the business planning literature,3 failure to conduct this
process could jeopardize the financial health of an existing business
and its franchise units. Building and launching a franchise program can
require a substantial outlay of capital for legal services, consulting,
marketing, franchisee recruitment, and staff. Because it can take time
for initial franchise fees and royalty income from franchisees to become
available to enhance company operations, initial capital is critical.
Certain franchise sectors, such as lodging and food concepts, require a
higher capital investment because of the higher costs of creating op-
eration manuals, franchise design and decor, purchasing equipment,
securing site locations, and remodeling stores, compared to service
franchises. Because franchising an existing business can represent a
substantial investment for a small business, failing to thoroughly
analyze whether the business has enough capital for the project might
lead to poor financial management and premature failure of adopting
franchising strategy.
An evaluation process can help potential franchisors not only to avoid
making the wrong decision but sharpen aspects of their business model.
If the focus and emphasis are on the franchise concept, company defi-
ciencies may be overlooked, which can jeopardize the launch and suc-
cess of a franchise program. Some companies are so confident of their
new franchise venture they overlook key aspects of their business. One
startup franchisor with an in-the-home maintenance business for seniors
who did not properly test his concept or analyze his potential market
ended up closing his business. Another franchisor spent the bulk of his
investment capital on a poorly qualified consultant, under whose gui-
dance he franchised before thoroughly qualifying his company. He
ended up with only one franchise and a franchise system that failed to
take off.
These companies failed because they did not fully qualify their com-
panies before franchising. By following a franchise evaluation process,
there is less risk in overlooking an important area. While this evaluation
process could and should be time-consuming, potential franchisors
should conduct the thought experiment below to gauge whether a
franchising strategy would be appropriate and effective for them.
 Evaluating the Franchise Venture 55

Initial Thought Experiment

Before devoting a significant amount of resources to evaluate franchising
as a potential growth strategy, people should conduct a simple initial
thought experiment, comparing Starbucks Coffee Company and Subway’s
franchise growth strategies to envision how these could align with their
business and personal preferences.4 This experiment involves juxtaposing
Starbucks’ company-operated and licensing program with Subway’s
franchise program, one that reveals major differences between a large
chain operated by franchisees compared to a large chain of company-
operated locations.
Although both companies sought to increase their revenue by adding
new retail stores, Starbucks used company-operated locations and in-
centivized managers through training and stock options to gain em-
ployee buy-in and commitment, while Subway utilized franchising to
make sure managers had ownership and equity in their own business in
order to gain brand loyalty. Companies that provide certain consumer
food products have found that franchising is a more effective business
model when the objective is to expand to a national chain. Examples of
this strategy include Dunkin’, Chick-fil-A, Pizza Hut, and Taco Bell.
Retail chains that provide durable goods and clothing have not em-
braced the franchise model for expansion, due to the need for strong
control over pricing and marketing strategies. For a company as big as
Starbucks to successfully operate a large national chain is a unique out-
come. The comparison between Subway and Starbucks may prompt en-
trepreneurs to recognize the advantages and disadvantages of the franchise
model and help them better estimate whether such strategy could align
with their business. This experiment, however, only focuses on whether to
franchise or develop company locations. To proceed, we recommend the
potential franchisors carefully examine the growth objectives of their
company and consider if these objectives could align with a franchising
strategy.

Confirming Company Objectives

Perhaps, the most important aspect of the franchise evaluation process is
the careful examination of company objectives. Potential franchisors
should ensure that company performance objectives are closely aligned
with franchising strategy. Doing so will not only set a performance
benchmark for potential franchisors to systematically compare fran-
chising to other growth strategies but help them to plan and orchestrate
their resources to achieve these objectives.
Different company objectives reflect different growth vehicles that
require different sets of resources and strategies for entrepreneurs to
56 Evaluating the Franchise Venture

grow their companies. In addition to franchise strategy, another fre-

quently utilized strategy is the expansion of company-owned units in
different locations. Next, we compare the advantages and disadvantages
of the franchise and company growth strategy based on company re-
sources and objectives.
One goal that potential franchisors incorporate to determine company
growth objectives is the size of business units. While some franchisors
seek to add 3–5 franchise units during the first 3 years, others develop a
more aggressive growth objective by setting a goal of 20 new franchise
locations per year.
If fast growth of the business locations is the primary growth objec-
tive, franchising offers the best method to achieve that goal. Unlike the
case where a franchisee funds the investment in a new location, a com-
pany location must be funded by the company. This approach may re-
quire as much capital investment for one company location as the cost to
launch an entire franchise program. The deciding factor is whether the
growth of locations is the primary objective.

a In order to achieve fast franchise system growth, the franchisor will

need to offer potential franchisees the opportunity to acquire multi-
unit franchisee rights, which requires the development of numerous
unit locations over a set period of say, 2–5 years, versus unit franchise
growth which grants the rights to one franchise location.
b If retaining company revenues and earnings are more important than
fast growth, a company growth strategy will make sense compared
to franchisees retaining profits after paying an initial franchise fee
and a small percentage of revenues in royalties to the franchisor.
c If the company is not able to find enough qualified franchisees, it
may have difficulty benefiting from the franchise process. Some
companies avoid franchising because they fear potential lawsuits
from disgruntled franchisees.
d Smaller companies seeking to expand may prefer the franchise model
because they lack the financial and human resources to launch
company-owned locations.
e Control is an important consideration for some businesses. Certain
retail businesses exercise a high degree of control over product and
promotional pricing. This is the reason why many clothing, super-
market, and other retail businesses don’t franchise.
f Managing company locations is costly and labor-intensive compared
to a franchise model, where the franchisee manages the day-to-day
operation, is highly motivated, and is financially vested in the franchise.
g Market expansion strategy is an important factor because franchise
locations can be established in different markets at the same time,
compared to adding one location at a time.
 Evaluating the Franchise Venture 57

h Company leadership may have financial and business reasons to

limit investing in company locations and prefer implementing the
franchise model.

The advantages and disadvantages between two main growth strategies,

franchising, and company-owned locations, require potential franchisors
to carefully examine the alignment between their company objectives and
a particular franchising strategy. Once this alignment has been confirmed,
potential franchisors may move on to evaluate their own competence and
qualifications for using a franchise business model to grow and develop a
business.

Five Key Aspects of the Evaluation Process

After ensuring alignment between company growth objectives and
franchising strategy, potential franchisors can move on to the evaluation
process. This consists of five major activities that may be done sequen-
tially or concurrently. Potential franchisors may rotate these activities if
desired, as they may trigger useful ideas and insights on other aspects of
the evaluation process. We discuss five aspects of franchise evaluation:
Internal Feasibility Analysis – Resource Availability, Internal Feasibility
Analysis – Franchisability of the Core Business, External Feasibility
Analysis – Industry Practice and Trend, Franchisee Return on Investment
(ROI), and Final Check.

Internal Feasibility Analysis – Resource Availability

The first aspect of the evaluation process is conducting an internal feasi-
bility analysis. In order to review the likelihood of a company successfully
creating, launching, and executing a franchise program, potential fran-
chisors must conduct a careful examination of various capabilities of the
company and determine whether there are sufficient and/or unique re-
sources to design and implement a corresponding franchising strategy.5
This does not mean that potential franchisors need to possess significant
capabilities to start their franchise program. Next, we elaborate on two
major categories of company capabilities that should be closely examined:
financial capital and management/employee competence.

Financial Capital
Financial capital is essential in order for firms to plan, execute, and
develop a franchising strategy. Estimated initial investment in a new
franchise program may range from $100,000 to $500,000, depending on
the size of the operation and corresponding industry. The company
58 Evaluating the Franchise Venture

should have ample capital to build, staff, and launch the franchise pro-
gram. If it does not, it will have difficulty funding a franchise venture,
building a profitable franchise model, or neglecting operational or
marketing areas. This will jeopardize the success of the entire project.
Indeed, many emerging franchisors have foundered and eventually failed
because the company lacked the capital to fund and develop a franchise
project.
If the franchise project is considered a viable venture, a company that
lacks suitable funding may seek capital from external investors such as
family members, friends, or angel investors. However, equity investors
such as private equity groups and venture capitalists may have little in-
terest in a franchise startup unless they can extract an extraordinary
return on their investment.
An initial investment must be backed by a history of profitable com-
pany financial performance that provides a continuous stream of fi-
nancial resources to help potential franchisors build and develop their
franchise operation. It can also demonstrate the feasibility and applica-
tion of company operations to convince potential franchisees to adopt
and duplicate the existing business model. The importance of a firm
profitability history is echoed by numerous experts. According to Steve
Begleman, CEO of SMB Franchise Advisors, “the company or pilot
operation should have a positive sales trend and sustained profitability.
Without a positive sales trend and good earnings history, the company is
not prepared to franchise. When a company cannot demonstrate a his-
tory of continuing sales growth, then the due diligence performed by a
prospective franchisee will reveal this flaw and deter them from wanting
to invest in the new franchise.”

Management/Employee Competence
The management competence of the top management team is the second
key aspect of company abilities that should be carefully examined for an
internal feasibility analysis. The leadership and stability of a company is a
critical factor in deciding whether to implement the franchise business
model. A strong management team should represent the franchisor. The
leader of the company needs to possess the traits required to build and
launch a new business. Starting a franchise results in the operation of two
companies: the current business and the new franchise. When a company
lacks the necessary leadership to oversee the operation of both the existing
company and new franchise operation, it may face difficulties.
The executive leader should have the proven business skills and ex-
perience that implementation of a new entity requires. This includes
experience starting a new business, the ability to identify the skills re-
quired by supporting staff, and proven skills in business operations,
 Evaluating the Franchise Venture 59

finance, and marketing. In essence, they must be a well-rounded busi-

nessperson.
A potential franchisor leader should possess traits common to suc-
cessful franchisor founders and leaders.

• Be a visionary, who see a realistic path to building a successful

franchise system.
• Has a plan and strategy for growth, based on sound principles and
realistic. expectations. Some potential franchisors imagine future
system growth as if they are the next McDonald’s.
• Recognize the importance of franchisees earning a reasonable profit
and return on their investment.
• See the importance of obtaining franchisee feedback when appro-
priate, and gain franchisee buy-in before making significant changes
to franchise products and major promotional programs.
• The existing company should be successful business operation.

In addition, the management team should be knowledgeable in techno-

logical and business aspects that are essential to the core business of a
franchise system. Knowledge areas are important because such a base
allows the top management team to create a comprehensive operating
manual that can facilitate the transfer of essential knowledge to potential
franchisees. It may help them to resolve potential operating issues that
franchisees could encounter. This knowledge base enables the top
management team to develop training programs to pass down important
skill sets relevant to the franchise business.
Vehicle Tracking Solutions (VTS) located in Deer Park, New York,
was a growing company that provided automatic vehicle location pro-
ducts, enabling its customers to see the location of a vehicle and other
data, on terminals that use a proprietary software program. After careful
analysis, John Cunningham, the CEO, decided in 2007 to implement a
franchise program for VTS expansion, which was achieving strong
growth. Some of the newly recruited franchisees experienced problems,
due in part to their lack of technical knowledge and weak business-to-
business selling skills. It proved difficult for corporate headquarters to
provide technical support for VTS products thousands of miles away,
which resulted in dissatisfied franchisees and customers.
After careful consideration, Cunningham decided amicably terminate
the franchise agreements. Today, VTS flourishes as a highly successful
fleet tracking company because its leadership and stability allowed it to
make a dramatic shift to its growth strategy. For certain companies,
especially those with unique operating systems, success may be easier to
achieve when the company maintains full control over its operation.
60 Evaluating the Franchise Venture

In addition to management capability, a potential franchisor should

evaluate the capabilities of current company staff to determine whether
they can effectively work in the new franchise company. Good inter-
personal communication and selling skills are needed to interact with
franchise candidates. They also need to counsel and advise franchisees,
recognizing that the franchisee is not an employee. In some cases, this
can require a degree of diplomacy. Evaluating whether an individual
possesses these traits should be based on their performance as a company
employee such as how they interact with subordinates and colleagues.

Internal Feasibility Analysis – Franchisability of the Core

Company Attributes
The second aspect of the evaluation process is examining key company
attributes to determine the franchisability of the core business model,
such as whether the business used to build the franchise has the attributes
to qualify as a successful franchise. It is important to gather preliminary
data and information on the existing business operations to determine
whether its core business model can be easily implemented in different
locations facing various competitors and consumers. Doing so will help
benchmark key metrics against comparable franchise systems.
The first company attribute is brand equity. This refers to the social
value of a company/product brand name and is a key factor in shaping a
company’s revenue, as the products of well-recognized brands are gen-
erally perceived to be better than those of lesser-known brands.6
Although recently launched franchise systems may not be well re-
cognized at the national level, potential franchisees could still evaluate
company performance and reputation in local markets as a heuristic to
determine franchisability. This suggests that potential franchisors need
to carefully manage and build their brand equity.
For example, they should make sure the company trademark has been
registered, and if not, the company should have a trademark search
completed and the mark registered. The franchise trademarks represent
the foundation of a franchise system. Without a protected trademark, the
value of the franchise may be diminished and competitors could infringe
on the trademark. It’s not unusual for a company to try to save money
using an online legal service to register a trademark, not always the best
decision, since the service may not include a comprehensive trademark
search. Most online legal services companies provide a minimal number of
services at a low cost. As additional services cost more, for someone not
familiar with various aspects of trademark law, this can be a problem.
The second attribute to be examined is the number of company-owned
units operating across various locations. Emerging franchise systems that
are launched by a company with multiple company-owned units usually
 Evaluating the Franchise Venture 61

perform better than franchises launched from a company with a single

unit. Multiple company operations provide competitive advantages for a
startup franchise program because such experience enables potential
franchisors and top management to acquire valuable knowledge, skills,
and abilities that will help in the duplication, modifications, and im-
plementations of the core business model in new locations.7 Such ex-
perience will help franchisors deal with competitors and customers at
various locations. Multiple company locations can provide additional
revenue streams to fund the operation and marketing of franchising
strategies, further strengthening bargaining power with existing vendors
to obtain purchasing benefits. Finally, multiple company operations
often impress potential franchisees and lead to more favorable evalua-
tions of the franchise system.
The third attribute is the repeat customer rate, a simple ratio of the
number of return customers to the total number of customers. The
business a potential franchisor operates should differ from popular res-
taurant that attracts loyal diners and rely heavily on repeat customers. A
heavy reliance on repeat customers suggests that franchising may not be
optimal because this type of businesses, commonly observed in legal and
financial services, advertising, or public relations, may be difficult to
replicate and export to new markets. Such businesses often rely upon a
personal and enduring relationship between service providers and their
clients. Such a relationship is difficult to replicate in a franchise model
which is based on the ability to systemize a business concept. When a
business is based on a personal relationship rather than a business model,
such a franchise model is not easily replicable.
The fourth attribute is the marketing plan of the existing business.
This should be a unique selling plan that makes the business attractive in
terms of market appeal.8 A proposed franchise should have such features
as a product with certain unique features, a market that will allow po-
tential customers to want to use products, and the ability to compete
against similar franchises and independent businesses that may offer si-
milar products. If a franchise doesn’t have these features, it may be
difficult to find qualified prospects willing to invest in the franchise.
The fifth attribute to consider is whether there are existing guidelines or
manuals that document the business operation. Such documents provide
potential franchisors with the materials to duplicate the core business
model.9 It can determine how easily an existing business may be duplicated
by examining whether there are easily teachable procedures. If such doc-
umentation is not available, it should be created quickly. If, however, after
careful evaluation potential franchisors cannot come up with a standar-
dized operation of the core business, this is a signal that the franchise
operation cannot easily be replicated or taught, and that such companies
should not move forward in adopting a franchising strategy.
62 Evaluating the Franchise Venture

External Feasibility Analysis – Industry Practices and Trends

An important aspect of the evaluation process is to conduct an external
feasibility analysis by examining whether there are existing franchising
systems offering similar products/services within the same industry, in
particular, whether a franchise category exists in a targeted industry.
Potential franchisors utilize such resources as the Entrepreneur 500
Ranking Report which contains over 100 franchise categories, or
Franchisegrade.com, which allows users to filter a choice of various fran-
chise categories and make comparisons among key franchise attributes such
as fees, number of locations, and estimated franchisee investment.
If a franchise category already exists, it is important to identify the in-
dustry trend by examining how well such franchise systems are per-
forming. For example, certain franchise concepts such as fitness, childcare,
senior care, and certain food concepts are popular franchise categories,
i.e., acceptable to consumers in most consumer markets. Other franchise
products or services may be more appropriate for certain markets and
geographic areas, such as high-end sit-down restaurants or franchises that
feature ethnic foods. In these cases, the marketing strategy needs to be
targeted and carefully researched, which may mean focusing on markets
with higher-income residents, located in major metropolitan areas or an
appropriate ethnic population, such as Miami, New York City, or Los
Angeles. When there is concern about marketability, it’s important to
engage the services of a market research firm to perform an in-depth
analysis before investing substantial capital into a franchise.
A company that is considering franchising in a competitive category
dominated by several popular franchise systems should be diligent when
it comes to evaluating any potential difficulty competing against domi-
nant franchise brands. Without unique features, an emerging franchise
may have problems facing an existing brand that can compete from a
position of strength. For example, franchising a chicken concept may
mean competing with a formidable franchise brand and strong market
share. Starting a new franchise system in such a competitive category can
sometimes be an advantage, as competitiveness can reflect increasing
consumer demand. The growth of home care franchise brands has re-
sulted in the lack of attractive franchise territories. Because of the de-
mand for home care services, this may be seen as an opportunity for new
home care franchise brands in those territories. Conversely, some fran-
chise brands are so dominant (such as McDonald’s or Chick-Fil-A), a
franchise startup could find it difficult to penetrate that market area. Key
decision factors are the size of the market, potential customer demand,
and number of competing locations.
On the other hand, if the franchise is a new concept without compe-
tition from existing franchise systems, this may be an advantage or
 Evaluating the Franchise Venture 63

disadvantage, depending upon certain factors and whether similar

franchises preceded the potential franchise program.

• A potential franchisor should identify similar franchise brands and

find out if some have been successful or failed, and how they
performed.
• Lack of existing franchise competition could be a warning sign of
low customer demand for the franchise products or services. This
may require a marketing study.
• A competitive analysis that reveals few if any franchise competitors
may mean the potential franchisor could have an advantage,
providing there is ample demand for the products or services. An
example is home care franchises which 15 years ago had only five
franchise brands but now boast 70. The growth in this sector is the
result of a reasonable franchise investment in the $100,000–125, 000
range, coupled with strong market demand for home care services,
driven by an aging population.
• Lack of a competitive franchise climate may be a disadvantage when
a business is difficult to replicate. Evaluating whether a business has
such attributes can answer the question of whether lack of existing
franchise competitors is a disadvantage.

Franchisee Profitability, Cash Flow, and Return on Investment

The last aspect of the evaluation process is to analyze expected profit-
ability, cash flow, and return on investment (ROI) for potential franchisees.
This is important, as it enables franchisors to evaluate the likelihood of
attracting enough franchisees to grow a profitable franchise system.
When potential franchisees consider investing in a franchise, they want
to identify potential earnings, or if not, feel confident that they can achieve
those earnings. Otherwise, they will not be willing to invest in the fran-
chise. Related to projected earnings is the cash flow a franchise will gen-
erate. It’s expected that at the start of a franchise operation there will be
some negative cash flow, which will turn positive within a reasonable
period of time, for example, 6 months. To project franchise earnings and
cash flow, i.e., how much ROI they can expect from their franchise in-
vestment, may be difficult. Given potential ROI may vary across different
franchise systems and industries, potential franchisors need to carefully
identify potential earnings and cash flow and ROI to determine whether
they can successfully franchise their core business.
To identify potential earnings, cash flow, and ROI, potential fran-
chisors should prepare a pro forma income statement, cash flow pro-
jection, and estimated ROI. A pro forma income statement should
64 Evaluating the Franchise Venture

include projected revenues, gross margin, operating expenses, royalties,

and continuing fees projecting pretax income.
A pro forma income statement and cash flow projection should depict
several financial models to establish potential breakeven and income
points for the franchise operation. Pro forma income statements and
cash flow projections are critical to the introduction of an emerging
franchise program. Without this information, the company can’t confirm
if it’s feasible to franchise. If a company doesn’t do financial projections
but overlays franchise fees onto an existing company income statement,
it may result in an inaccurate depiction of projected franchise income.
This could distort the required investment and breakeven points.
It is critical that the emerging franchise program is built on accurate
and realistic financial information. When projected franchise financial
performance is based upon unrealistic expectations or inaccurate fi-
nancial data, a new franchisee may face the possibility of failure.
Companies and entrepreneurs looking to launch a franchise program can
act in haste and focus more effort on the operational and marketing
components of the franchise versus establishing credible financial esti-
mations. Because franchisees invest their own capital in a franchise, it is
critical to estimate potential ROI and understand its components while
evaluating the feasibility of a franchise system. Estimated ROI should be
based on realistic and reasonable expectations so that potential fran-
chisors can move on and devote resources to planning and implementing
their franchising strategy.
In terms of estimated franchisee ROI, it is generally accepted in the
franchise industry that the pretax income of a franchise operation should
range from 30% to 50% of the total franchisee investment. This would
include additional income in return for investment, time, and effort ex-
pended in operating the new franchise location. In many cases, a fran-
chisee will draw a weekly or monthly salary, so pretax income would be
lower, due to this added expense and result in an ROI of 15%–20%.
Whether the company has one location or ten, it is critical to in-
corporate existing company financial statements into the creation of a
pro forma income statement. After adding proposed royalty fees and
other franchise operating expenses to the proposed franchise model, it
should be possible to show examples of projected potential franchise
earnings. Calculations used to compute franchise royalties and other
fees should be drawn from competitive franchise systems or inputting
franchise fees into the financial model. Franchise projections should be
realistic, based on existing company performance and reasonable ex-
pectations of a franchisee-led operation (Figure 4.1).
 PROFORMA INCOME STATEMENT AND CASH FLOW PROJECTION

MONTH 1 2 3 4 5 6 7 8 9 10 11 12 TOTAL
CASH ON HAND 1,00,000 71,455 69,135 61,675 59,670 60,022 60,752 60,062 62,177 64,497 61,097 68,037 71,512
SALES 0 20,000 25,000 30,000 35,000 40,000 40,000 50,000 50,000 55,000 60,000 60,000 4,65,000
GM DOLLARS 0 6,000 7,500 9,000 10,500 12,000 12,000 15,000 15,000 16,500 18,000 18,000 1,39,500
TOTAL CASH 1,00,000 77,455 78,135 70,675 70,170 72,022 72,752 75,062 71,177 80,997 79,097 86,027 9,33,569
EXPENSES
Rent 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 12,000
Salaries 4,000 4,000 4,000 5,000 5,000 6,000 6,000 6,500 6,500 7,000 7,000 7,500 68,500
Telephone 500 500 500 600 600 600 700 700 700 700 700 700 7,500
Advertising 3,000 1,000 1,500 1,500 1,500 1,500 2,000 2,000 2,000 2,000 2,000 2,000 22,000
Office Supplies 1,000 250 250 0 0 250 0 0 350 0 0 350 2,450
Equipment 10,000 0 0 0 0 0 0 0 0 0 0 0 10,000
Travel&Entertainment 2,000 250 250 250 250 250 250 250 250 250 250 250 4,750
Leases 300 300 300 300 300 300 300 300 300 300 300 300 3,600
Insurance 625 0 0 625 0 0 0 625 0 0 0 625 2,500
Deposits 3,000 0 0 0 0 0 0 0 0 0 0 0 3,000
Professional Fees 2,000 0 0 0 0 0 500 0 0 500 0 0 3,000
Utilities 500 0 0 500 0 0 500 0 0 500 0 0 2,000
Postage 120 120 120 120 120 120 120 120 120 120 120 120 1,440
Misc. 500 200 200 200 200 200 200 200 200 200 200 200 2,700
Royalty 5% 0 1000 1250 1500 1750 2000 2000 2500 2500 2750 3000 3000 23,250
Ad Fund 2% 0 400 500 600 700 800 800 1000 1000 1100 1200 1200 9,300
Total Expenses 28,545 9,020 9,870 12,195 11,420 13,020 14,370 15,195 14,920 16,420 15,770 17,245 1,77,990
Pre-Tax Income 28,545 2,320 1,960 2,005 590 730 690 2,115 2,320 2,600 5,030 3,485 18,190
CASH POSITION 71,455 69,135 61,675 59,670 60,022 60,752 60,062 62,177 64,497 61,097 68,037 71,512

NOTES: GM % 30% x sales

Royalty 5% multiply X sales
Ad Fund 2% multiply X sales
Total expenses

Total cash plus GM dollars

GN dollars minus total expenses #NAME?
Evaluating the Franchise Venture 65

Figure 4.1 Sample Pro Forma Income Statement and Cash Flow.
66 Evaluating the Franchise Venture

Final Check
Once these evaluations have been completed, the final step is contending
with any unanticipated barriers that would jeopardize the implementation
of the franchise program. There can always be sudden changes in the
business world that may disrupt the best-laid plans of companies seeking
to implement new business strategies such as franchising. When this oc-
curs, a company must seriously consider pausing its franchise program.
Failing to respond can have a negative impact on the launch and im-
plementation of a new franchise program and company operations.
Examples of factors that could cause a company to pause its franchise
program include the following:

External Factors
• New franchise regulations at the federal or state level may require
certain qualifications before a franchisor can offer new franchises for
sale. For example, the state in which the company operates may
require franchisors to register their documents, such as New York or
California.
• A catastrophic event such as a pandemic. At the end of 2020
continuing into 2021, the unanticipated arrival of the COVID-19
pandemic had a devastating impact on world economies and
countless businesses.
• A severe economic downturn, such as a recession, can limit the desire
of individuals to risk investing in a franchise. Although history has
revealed that certain recessions have maintained franchise activity,
this is not a large enough sample to render a statistically accurate
prediction.

Internal Factors
• A financial, management or operational disruption within the
company could directly impact the success of the franchise project.
• A significant competitive event in a strategic market or region could
disrupt new franchise recruitment and development activities.
• If the company doesn’t have a thorough trademark search done and
it turns out another company has prior rights to the same trademark
in other states, the company might need a new trademark or avoid
franchising in conflicting states.

A careful examination of these aspects in the evaluation process will un-

cover potential problems the company may encounter if it decides to
construct and launch a new franchise program. If a problem is found after
the evaluation is completed, potential franchisors should address these
problems before proceeding. One way to avoid overlooking potential
 Evaluating the Franchise Venture 67

obstacles to building and launching a successful franchise program is to

seek objective input from qualified individuals including franchise con-
sultants, company CFO, Board of Directors, or financial advisors, by
providing the chance to review and critique the franchise project. If the five
aspects of franchise evaluation are favorable and indicate the franchise
venture should proceed, potential franchisors may take the next step,
presented in Chapter 5.

Summary
Before committing to a franchise program, potential franchisors should
conduct an in-depth evaluation of the qualifications the company has
for a franchise operation. This evaluation process could start with a
thought experiment comparing franchising with other growth strategies.
Franchisers should then carefully examine the five key aspects of fran-
chise evaluation that require franchisors to conduct internal feasibility
analysis and investigate whether there are sufficient internal capabilities
and resources to plan and implement franchising strategies. They should
also examine whether the core business can be easily franchisable.
In addition, potential franchisors need to scrutinize industries to
identify existing competitors and best practices. Potential franchisors
should estimate the return on investment for helpful information to
gauge the interest of potential franchisees. They should follow with a
final examination of unanticipated barriers that could prevent the launch
and implementation of a new franchise system. Analysis and conclusions
regarding whether a company should franchise represents a decision
process that should be separated from the determination of type,
method, and timing of a new franchise program. If the evaluations of
these aspects are positive, potential franchisors could proceed to building
and launching the new franchise program.
Companies that qualify for establishing and launching a franchise
program should be well managed, profitable operations with an attrac-
tive product or service, preferably multiple locations, suitable investment
capital, and competent management. Their product or service should
appeal to customers and there must be reliable financial projections that
present a realistic projection of a profitable franchise operation. In the
next chapter, we present the steps and requirements for building a new
franchise program.

Notes
1 Delmar, F., & Shane, S. (2003). Does business planning facilitate the devel-
opment of new ventures? Strategic Management Journal, 24(12), 1165–1185.
68 Evaluating the Franchise Venture

2 Brinckmann, J., Grichnik, D., & Kapsa, D. (2010). Should entrepreneurs plan
or just storm the castle? A meta-analysis on contextual factors impacting the
business planning–performance relationship in small firms. Journal of Business
Venturing, 25(1), 24–40.
3 Brinckmann, J., Grichnik, D., & Kapsa, D. (2010). Should entrepreneurs plan
or just storm the castle? A meta-analysis on contextual factors impacting the
business planning – performance relationship in small firms. Journal of
Business Venturing, 25(1), 24–40.
4 Spencer, E. (2006). Franchising – A way to supersize a business. The National
Legal Eagle, 12(1), Article 2. Available at: http://epublications.bond.edu.au/
nle/vol12/iss1/2
5 Hussain, D., Sreckovic, M., & Windsperger, J. (2018). An organizational cap-
ability perspective on multi-unit franchising. Small Business Economics, 50(4),
717–727. Gillis, W. E., Combs, J. G., & Ketchen Jr., D. J. (2014). Using
resource-based theory to help explain plural form franchising. Entrepreneurship
Theory and Practice, 38(3), 449–472.
6 Keller, K. L. (2003). Brand synthesis: The multidimensionality of brand
knowledge. Journal of Consumer Research, 29(4), 595–600. Ailawadi, K. L.,
Lehmann, D. R., & Neslin, S. A. (2003). Revenue premium as an outcome
measure of brand equity. Journal of Marketing, 67(4), 1–17. Litz, R. A., &
Stewart, A. C. (1998). Franchising for sustainable advantage? Comparing the
performance of independent retailers and trade-name franchisees. Journal of
Business Venturing, 13(2), 131–150.
7 Gillis, W. E., Combs, J. G., & Ketchen Jr., D. J. (2014). Using resource-based
theory to help explain plural form franchising. Entrepreneurship Theory and
Practice, 38(3), 449–472. Kaufmann, P. J., & Dant, R. P. (1996). Multi-unit
franchising: Growth and management issues. Journal of Business Venturing,
11(5), 343–358. Shane, S. (1998). Explaining the distribution of franchised
and company-owned outlets in franchise systems. Journal of Management,
24(6), 717–739.
8 Butt, M. N., Antia, K. D., Murtha, B. R., & Kashyap, V. (2018). Clustering,
knowledge sharing, and intrabrand competition: A multiyear analysis of an
evolving franchise system. Journal of Marketing, 82(1), 74–92.
9 Kaufmann, P. J., & Eroglu, S. (1999). Standardization and adaptation in
business format franchising. Journal of Business Venturing, 14(1), 69–85.
Sorenson, O., & Sørensen, J. B. (2001). Finding the right mix: Franchising,
organizational learning, and chain performance. Strategic Management
Journal, 22(6–7), 713–724.
Chapter 5

Preparing for New Franchise

Launch

In Chapter 4, we presented the process that potential franchisors should

follow to determine if they have the qualifications and resources to de-
sign and execute a franchise business model. This is the initial step in the
implementation of a franchising strategy; the process involves five major
evaluation aspects that can enable potential franchisors to determine the
feasibility of a franchising strategy. If the results confirm that the com-
pany and its business operation have met the qualifications necessary to
franchise, the next step is to design and build the new franchise.
This chapter discusses the preliminary activities that can help potential
franchisors prepare for the launch of a franchise business. These activ-
ities are essential, given the legal requirements that franchisors must
address in order to prevent a potential fiasco. Such activities can also
help explain important franchising business and legal documents, and
guide the franchise business development.
Launching a franchise program can be a daunting task, because the
franchising process requires a comprehensive understanding of rules and
regulations, and involves a set of complex activities ranging from the
standardization of business operations to franchisee recruitment, training,
and management. Many franchisors may not possess the knowledge and
skill sets required, and must seek help from relevant stakeholders, so it is
important for them to recognize groups of advisors who can bring value-
added knowledge and skills to the franchise development process.
Next, we discuss securing trademarks, registering website domain
names, and incorporating the new franchise system. We then highlight
four vital documents: the Franchise Operations Manual, Franchise
Disclosure Document, Franchise Agreement, and Franchise Business
Model. These are areas that potential franchisors should be familiar
with. They are often legally required and can also guide franchisors in
constructing their business model. We conclude with a discussion by
franchising professionals who may assist potential franchisors with the
design and construction of their franchise programs.

DOI: 10.4324/9781003034285-5
70 Preparing for New Franchise Launch

Securing Trademarks and Website Domain Names

The name of the company and its website domain are important, as these
are often the first pieces of information that external stakeholders such as
customers, investors, and franchisees encounter; they have been proven
to significantly influence how stakeholders evaluate and view a com-
pany.1 Studies have found that companies that have easily pronounce-
able names are perceived to be more familiar and less risky, offer better
returns, and achieve higher value in the stock market.2 Names that are
less frequently used in a particular language may result in positive eva-
luations, especially in early-stage ventures.3 The designs of logos and
trademarks have also been shown to influence evaluations.4 Taken to-
gether, such studies suggest that potential franchisors should carefully
consider names of a company and website domain, and how the logo and
trademark should be designed.
As indicated in Chapter 4, potential franchisors should make sure
names and trademarks have not been used nor previously registered by
other companies. Otherwise, they may have to rename their company or
redesign logos and trademarks. Properly registering names and trade-
marks will ensure that they are conflict-free and fully protected. A do-
main name that echoes the trademark should also be secured. A potential
franchisor should acquire a domain name with the suffix .com, .org, .us,
and .biz to avoid conflicts and competitive encroachment on domain
names that may be confused with the franchise name. The cost to acquire
additional domain names is minor compared to the potential damage
from another company, competitor, or franchisor using the same name
with a different suffix. If there are plans to go international, potential
franchisors may wish to consult with a trademark attorney about the
registration of trademarks and domains in specific countries.

Incorporating the Franchise Corporation

Once the trademark and domain names have been properly acquired and
registered, the next step is to incorporate a new and independent com-
pany to operate the franchise system and create, advise, and manage
franchise units. Although the original company may be incorporated, it
is considered best practice for potential franchisors to operate under a
new corporation. First, doing so will avoid potential conflicts or financial
entanglements with the existing corporation because they will be sepa-
rate entities, and any assets, liabilities, and equity will be held by in-
dividual entities. This will make it difficult for claims to be made against
the company for acts under the franchisor corporation, and may insulate
the original company from future claims or litigation that pertain to the
franchisor. Finally, because audited financial statements for the franchise
 Preparing for New Franchise Launch 71

corporation are required to be included in legal documents, having a

newly capitalized corporation with minimal financial history will reduce
the cost of audited financial statements, which may be substantial if the
company has a number of financial transactions.

Choosing between Two Franchise Development

Models
It is important to choose a franchise development model. It will affect
what types of franchise candidates should be targeted, and how and
where to recruit them. The most prevalent franchise development model
is the single-unit franchisee, where an individual purchases the rights to
open a franchise unit. The structure consists of a franchisee owner-
operator who is responsible for the day-to-day operations of the fran-
chise. Examples include homecare, landscaping, and children’s services,
which require only a modest investment and do not generate enough
income to fund a manager along with an owner-operator. The single-unit
franchise development model takes longer to grow locations, because
each transaction results in one franchise. A franchise system comprised
of single-unit franchises requires additional support personnel because
they will be dealing with numerous individual franchisees.
An alternative development model is the multi-unit franchisee, where a
franchisee or group of franchisees acquire the rights to own and operate
several locations. The multi-unit franchisee is the preferred strategy in sit-
down and quick-service restaurant sectors, which require a substantial
investment and highly qualified franchise candidates. A multi-unit fran-
chisee will agree to open multiple locations in a specific territory. The
advantages of a multi-unit strategy include faster system growth, quicker
brand recognition, and the ability to purchase products and services at a
reduced cost due to increased buying power. Most multi-unit franchisees
utilize franchise managers, with the franchisee overseeing the overall op-
eration. An advantage of the multi-unit model is that support staff deals
with fewer franchisees who control multiple locations.
Certain franchise models are better suited to specific types of fran-
chises, depending upon the operation, amount of investment, and po-
tential earnings. Beginning with the unit franchise, a franchisor can
better support a franchisee because they are operating at a single loca-
tion. Also, it may be difficult for a startup franchisor to attract candi-
dates willing to invest substantial capital into an unproven franchise.
Some franchisors offer unit franchise and multi-unit models in their
Franchise Disclosure Document in the event an investor sees a good
opportunity investing in multiple units of the new franchise and com-
mitting substantial capital. While startup franchisors initially tend to
launch a franchise using the unit franchise model, some systems may
72 Preparing for New Franchise Launch

offer a multi-unit opportunity to prospective franchisees who have suc-

cessfully managed single units after 2 years or have sufficient resources to
open a minimum of ten units. Ultimately, the franchisor must be sure
that the opportunity is sufficiently appealing that potential franchisees
will want to own several units.

Understanding Essential Franchise Documents

Building a franchise system requires documents that will form the basis of
the contractual relationship between franchisors and franchisees. It en-
ables franchisors to record their business activities and effectively com-
municate with potential franchisees. Some documents are legally required.
To prepare for a new franchise business, it is important to understand the
basic outline and key components as these help potential franchisors
prepare for building a franchise system. Next, we discuss four major
franchise documents: the Franchise Operations Manual, Disclosure
Document, Franchise Agreement, and Franchise Business Plan.

The Franchise Operations Manual

The Franchise Operations Manual, often referred to as the Manual,
contains the systems, procedures, and guidelines that assist and direct
franchisees in their operation. It also presents several checklists for
franchisees to examine key aspects of site selection, employee recruit-
ment, competitive analysis, and marketing evaluation.
The Manual serves three purposes. It acts as a training tool and provides
content for the initial training program. It helps franchisees to understand
the proper operation of their franchise unit by laying out the specific
materials and exact procedures needed to create products and/or services.
Its second purpose is to ensure franchise compliance and maintain con-
sistent product/service quality across business units. Operations Manuals
depict specific standards and procedures of business operations; the
Manual is referenced in several legally binding franchise documents, and
thus prevail as the determining factor in case of operational disputes be-
tween a franchisor and its franchisees. Finally, creation of a Franchise
Operations Manual offers potential franchisors the opportunity to orga-
nize, standardize, and document the existing company or pilot operation.
It is common for a smaller company to lack written procedures and
training programs, so once the franchise has been confirmed as a feasible
growth strategy, potential franchisors should systematically compile this
information for the development of an Operations Manual. The Manual
must be organized so that the franchisee has a template for how the
business will be operated. If necessary, franchisors may consult with
 Preparing for New Franchise Launch 73

companies that specialize in producing Manuals. A Manual may be or can

be 75–150 pages long and cost $10,000 to $25,000 or more to compile.
The typical Operations Manual often consists of 10–12 sections.
According to Collin Gaffney, President of FranStart which specializes in
producing franchise manuals, the Operations Manual may consist of
several sections or separate topical manuals that include a pre-opening
or startup manual, as well as marketing and human resource manuals. A
sample of the typical sections is shown in the following example of an
Operations Manual from a retail franchise that serves snacks and bev-
erages. The chapters are an example of those found in many Operations
Manuals for different types of franchise systems.

Sample Operations Manual

TABLE OF CONTENTS

Welcome from the President. This occurs at the beginning of the

Operations Manual where the President of the Franchiser presents a letter
welcoming the new franchisee and providing a description of the mission
statement and corporate culture to personalize the franchise–franchisor
relationship. The welcome letter adds a personal touch to the franchisor-
franchisee relationship and may be short or long, depending upon the
message to be conveyed.
Chapter 1. Introduction: This chapter provides a brief preview of what
to expect from the manual and highlights its confidential nature.
Franchisees are informed that they must update the manual when noti-
fied. The introduction often recaps important obligations under the
franchise agreement including a non-disclosure document.
Chapter 2. Human Resources: This chapter presents employee job
descriptions, recruiting suggestions, and employment practices and po-
licies that franchisees must adhere to. This section contains recommended
approaches for managing human resources and understanding labor reg-
ulations. Such knowledge and practices when implemented will prevent
the brand from suffering negative publicity due to poor human resource
management.
Chapter 3. Daily Operating Procedures: This chapter includes hours of
operation, preparation for daily opening, closing, reconciling sales re-
ceipts, and securing the premises. These operating procedures enable
franchise units to standardize operations and create an identical customer
experience.
Chapter 4. Product Handling and Sanitation: This chapter describes
how products should be received, stored, and maintained in compliance
with expiration codes. It presents the requirements for complying with
product storage, sanitation, and freshness coding. These procedures insure
74 Preparing for New Franchise Launch

that product quality remain consistent across franchise units and prevents
potential hazards resulting from faulty product usage or consumption.
Chapter 5. Customer Service: This chapter illustrates how to respond
and resolve customer complaints and problems related to product
quality, sales refunds, and other customer service issues. Franchise sys-
tems receive customer complaints from time to time, but most issues can
be anticipated. It is imperative to devise procedures for how to handle
these issues such as making sure that franchisees have the proper tools
and guidelines to resolve complaints, improve customer satisfaction, and
attract returning customers.
Chapter 6. Gross Profit and Inventory: This chapter explains proce-
dures for product pricing, calculating gross profit, and maintaining
proper inventory levels. In certain industries, franchisees are required to
establish retail prices based on their competitors and the gross margin.
This can help franchisees, especially those who lack a financial back-
ground or have difficulty maximizing their gross margins, to derive a
good pricing strategy by understanding whether and by how much they
may reduce prices and what impact this will have on the gross margin for
that product.
Chapter 7. Cash Handling: This chapter sets forth point of sale
terminals, commonly referred to as cash registers, so that franchisors
may uniformly record all sales transactions and reports. Many point of
sales terminals used by franchisees, especially in the retail sector, allow
the franchisor to download data directly from the terminals. This
chapter often cites the obligation of the franchisee to register all cus-
tomer sales or face violation of their franchise agreement.
Chapter 8. Marketing & Advertising: This chapter describes the
marketing programs recommended by the franchisor, the proper use of
franchise trademarks, and the approval process of franchise-created
advertising. It may include various forms of advertising, such as use of
social media. This is an important chapter, as use of unauthorized ad-
vertising vehicles or statements may damage or dilute the image and
reputation of the entire brand. Most franchisors strictly control and
restrict the use of social media and the brand by franchisees.
Chapter 9. Financial Reporting: This chapter describes monthly, quar-
terly, and/or annual financial reports that franchisees are required to
provide. It states the obligation to submit tax returns, financial reports and
supporting documents to the franchisor, information that may enable the
franchisor to identify and measure how well franchisees are performing.
Once a franchisor recognizes that certain franchisees are not profitable,
they can provide appropriate staff to turn around struggling franchises.
Chapter 10. Forms: This chapter presents examples of required forms
that need to be used by franchisees and highlights those that must be
submitted to the franchisor. The purpose of the chapter is to ensure that
 Preparing for New Franchise Launch 75

all franchisees are consistently using the same forms such as job appli-
cations, supplier requests, and customer incident reports.
The Operations Manual is usually created in tandem with the
Franchise Disclosure Document (FDD) because certain provisions are
based on and reference the FDD. Most Franchise Operations Manuals
are provided digitally, although some franchisors may provide hard
copies upon request. Provisions and requirements in the Operations
Manual must be amended from time to time, except for certain con-
tractual items such as the royalty fees, termination provisions, etc. These
changes or updates need to be shared with franchisees who are then
responsible to make any changes or updates.

The Franchise Disclosure Document

The Franchise Disclosure Document (FDD) is one of the most important
franchise documents and must be carefully drafted. It is part of presale due
diligence and is required to be given to a franchise candidate by the Federal
Trade Commission. Based in part on U.S. securities laws, the FDD must
provide every prospective franchisee in every state information about the
franchisor, the franchise system, and agreements with which a franchisee
must comply. The FDD should enable a franchise prospect to make an
informed investment decision. A franchise candidate must be provided
with an FDD 14 calendar days prior to signing a franchise agreement or
paying money for a franchise. A franchisor is obligated to have the pro-
spective franchisee sign, date, and return the acknowledgment of receipt to
the franchisor to confirm that these were properly disclosed. The required
disclosure of the FDD is the same whether a franchisor is large or small,
established or new. The format of required disclosure has been revised
several times by the Federal Trade Commission and certain states in order
to provide meaningful disclosure to prospective franchisees and require
that franchisors provide specific items such as the franchise territory, li-
tigation, and financial performance representations in their disclosure
document. The FDD refers to specific provisions in the franchise agree-
ment. Typically, a prospective franchisee and his/her attorney will review
the FDD before reading the franchise agreement, because it contains the
most important parts of the franchise agreement. It can be considered a
synopsis of the franchise agreement.
There are 22 categories in the FDD, known as items. These disclose
relevant information in what is referred to as simple English, a change
enacted in 1979 to prevent inflicting overly legal language on individuals.
Some items are informational such as Litigation, Bankruptcy, Trademarks,
and Public Figures, which require little or no decision-making on the part
of the potential franchisors and their franchise attorneys. Other items deal
with operational and financial areas specific to the franchise which require
76 Preparing for New Franchise Launch

potential franchisors to carefully analyze and consult with an attorney.

These include other fees, Franchisee’s Obligations, and Territory. There
are several exhibits in the FDD. One of the most important is the Franchise
Agreement, which contains the covenants and franchisee and franchisor
obligations that form the franchise relationship and is the binding contract
that both parties will sign. The provisions in the franchise agreement in-
clude franchise fees, term of the franchise agreement, territory, insurance
requirements, ongoing operations, and the basis for default and termina-
tion of the agreement. Because the franchise relationship may potentially
involve conflicts and disagreements between parties, it is important there
are vehicles to resolve disputes in the franchise agreement, such as med-
iation and arbitration, which can avoid costly litigation.5 Other exhibits
include the table of contents for the operations manual, non-compete and
non-disclosure agreements, and franchisor financial statements.
Based on our experience, and discussion with prominent franchise at-
torneys, there are eight FDD items that may require further explanation.

Item 5: Franchising Model

The franchising business model is used to develop the franchise system.
The two most popular models are the unit franchise and multi-franchise.
In the unit model, the franchisee acquires the rights to one location
within the territory, which may be a separate or home-based location.
According to several industry sources, including the International
Franchise Association, unit franchises represent approximately 70% of
all franchises. The unit franchise model is important because it conforms
to most franchise concepts that require an onsite owner-operator, be-
cause there are not enough profits to justify a passive owner, that is, a
person who doesn’t work in the franchise.
A multi-unit franchise grants the right and obligation to own and
operate several franchise locations in multiple territories under separate
franchise agreements according to a schedule; this is the model preferred
by food franchisors. This is an important franchise model for franchisees
who desire to own multiple franchise units and can justify paying the
salary of a manager. Several years ago, Mcdonald’s transitioned to a
multi-unit franchise model.

Item 5: Initial Franchise Fee

This item highlights the fees a franchisee must pay before a franchised
business opens for business. It includes franchise rights, use of the brand,
training, operations manual, and grand opening support. The average
franchise fees range from $25,000 to 50,000. When determining the initial
franchise fee, startups should charge fees comparable to those charged by
 Preparing for New Franchise Launch 77

competitors. This is an important item in the FDD because prospective

franchisees compare the amount of the Initial Franchise Fee to other
franchises. When an individual questions the amount of the initial fee, they
want to know what they are receiving in return.

Item 6: Royalties and Other Fees

One of the more important Items describes continuing fees that the
franchisee is obligated to pay as stipulated in the franchise agreement.
These fees can be based on a percent of revenues, a fixed dollar amount,
or a combination of both.
A startup franchisor without an established reputation may face
problems attracting franchisees because potential franchisees do not
know if the value of the system is going to be high enough to justify the
royalty rate they have to pay the franchisor. Systems with lower royalty
rates will find it easier to attract franchisees than those with higher
royalty rates. The lower the royalty rate, the greater the chance that the
system value will be high enough to justify a royalty rate.6

Item 7: Estimated Initial Investment

The franchisor must disclose minimum and maximum investments of all
fees, costs, and expenses that a franchisee will incur prior to operating the
franchised business. The Federal Trade Commission requires that a fran-
chisor know and specify the range of franchisee investments. This item
enables franchisees to understand the cost structure of launching and
managing a franchise unit so they can get a realistic preview of the fi-
nancial management of their franchise units. Franchisers should provide a
reasonable basis for each category when citing estimated costs, and state in
general terms the basis they relied upon to calculate estimated additional
funds, including local market variations in price and annually updated
figures, to ensure they are providing accurate numbers.7

Item 9: Franchisee’s Obligations

Item 9 discloses principal obligations for operating a franchise. This item
is essential, as the highlighted obligations, which are also presented in
the franchise agreement, are legally binding. Franchisees will be placed in
default of their agreement, or their unit may be terminated from the
franchise if these obligations are not fulfilled and followed closely. Such
information is required by the Federal Trade Commission and registra-
tion states.
Franchisee’s obligations are presented in a three-column table which
references the franchise agreement or other relevant agreements as well
78 Preparing for New Franchise Launch

as the item in the FDD where more information about a particular ob-
ligation can be found. Examples include site location, fees, restrictions
on products or services, advertising, and location appearance. Unlike
other items in the FDD, Item 9 does not contain specific details regarding
franchisee obligations but rather cites sections in the franchise agreement
where a description is contained.

Item 11: Franchiser Obligations

One of the lengthier and more important disclosure items is the franchisor
obligations, including the services it provides to franchisees. Like Item 9,
franchisor obligations, once listed in the franchise agreement, are legally
binding. With this knowledge, prospective franchisees not only know the
specific services and assistance they will receive from a franchisor, they can
compare them with other franchise systems. Important franchisor ob-
ligations include pre-opening and site selection assistance, training pro-
grams, advertising programs, the minimum number of visits a franchisor
will make to the franchisee location, and provided counseling.

Item 12: Territory

This item describes the territory where franchisee customers, revenues,
and future growth will originate. A franchisee territory may be exclusive,
protected, or open. If the territory is too small, generating revenue can be
difficult, and franchisees must compete for customers within a territory.
This is an important consideration for franchise candidates. In some
programs, a franchisee can be on the border of another territory and
must vie for the customers in that territory.
Although often used interchangeably, “exclusive” and “protected”
territories have different meanings within a franchise context. If a franchise
territory is exclusive, the business should be the only source of goods or
services in the territory. If a franchisee territory is protected, the franchise
agreement may authorize certain forms of competition such as franchisor
sales through alternative channels of distribution (i.e., the internet and
supermarkets).8

Item 19: Financial Performance Representation

Under Federal Trade Commission rules, information about the financial
performance of a franchise such as average franchisee revenues or profits
can only be disclosed in Item 19 to be given to a prospective franchisee. For
startup franchisors without previous franchisee financial information,
franchisors should disclose company-level financial performance in-
formation. This is very important, as franchisees typically want to know
 Preparing for New Franchise Launch 79

how much they may expect to earn if they invest in a particular franchise.
Franchisers need to identify specific type of financial information relevant
to their business and industry. For example, a hotel franchise system may
use occupancy rates as a key financial indicator, while restaurant systems
include gross sales figures and key percentages reflecting food or labor
costs, and car wash businesses offer daily car counts and average ticket
numbers.9

The Franchise Agreement

An essential franchise document is the Franchise Agreement, a legally
binding document executed by franchisor and franchisee which sets forth
what a franchisee is obligated to do in the operation of their franchise and
what a franchisor is obligated to do to support franchisees. Certain ob-
ligations and requirements may be amended or clarified in the Franchise
Operations Manual, excluding material provisions of the franchise
agreement such as royalty payments, fees, franchise term and renewal, and
default and termination provisions.
Although franchise agreements follow a certain format, there is no
standard form of franchise agreement because the terms, conditions, and
methods of operations of various franchises may vary, depending on
the type of franchise. A franchise attorney will insert provisions and
requirements into the franchise agreement that conform to the specific
franchise concept. While there may be some overlap between the
Franchise Agreement and the FDD, they are two distinct documents.
Unlike the FDD, which provides an overview and description of key
components of the franchise program, the franchise agreement goes into
detail to elucidate all aspects of the franchisee/franchisor relationship.
This includes information regarding operational standards, proprietary
statements, and franchisee responsibilities such as site maintenance, re-
modeling requirements, and franchisee financial obligations.
Examples of important Franchise Agreement Provisions that are
common to all franchise agreements include the following:

a Grant of the Franchise describes the franchise and products or

services it provides, the products a franchisee is allowed to sell and
the product/service characteristics that must be maintained in order
to achieve system-wide standards.
b The Franchise Territory describes the area a franchise can operate
within, where franchisees can open a location and sell their products
or services. It can prevent potential conflicts among franchisees. For
example, a franchisee that does medical staffing for hospitals could
enter another franchisee’s territory and solicit business. With
80 Preparing for New Franchise Launch

territorial protections, franchisors can prevent this from happening

and protect the franchise system and brand.
c The Franchise Term states the length of an initial franchise and
renewal terms. Franchise terms can range from 5 years to as long as
20 years, in the case of hotel and certain fast-food franchises. The
most common franchise term is 10 years with a 5-year renewal term.
d Royalties and fees specify the amount of money the franchisee is
obligated to pay along with frequency and payment method. It
contractually binds a franchisee to pay royalty and other fees on a
continuing basis. The basis of a franchisee-franchisor relationship is
royalties a franchisee must pay for the right to operate under the
franchise brand, operating system, and territory. Examples may state
that a franchisee agrees to pay a 5% royalty on all gross sales each
month, based on the previous month’s sales.
e Franchisee Insurance Requirements describe the insurance coverage,
amount of coverage, and required credentials of the insurance
carrier, such as AAA rated. It is important that each franchisee has
insurance to protect its franchise from losses due to events such as a
fire or hurricane. One example of franchisee insurance coverage is
Business Interruption Coverage, which protects a franchisee from
business losses due to a fire or natural disaster.
f Franchise Opening describes how many days before a franchise opens
for business. This can depend on the complexity of the franchise. A
hotel franchisee may have 1 year to open due to extensive construction
requirements, while a fast-food franchise may be required to open
within 6 months. If a franchisee can open any time it wants, the
franchise system would lack sufficient order. Franchisees are required
to open their franchise within a specific period of time; otherwise, the
franchisor could terminate the franchise and grant the franchise rights
to someone else.
g Franchisee Defaults details the specific items under which a franchise
can be placed in default of their franchise agreement, how many days
are required to cure the default; if not cured, the franchise may be
terminated. This is a clause required by Federal Trade Commission.
Franchisees must recognize in a legal form that certain actions on
their part can jeopardize their franchisee rights, for example, if a
franchisee fails to open their business within a certain number of
days. The most common default provision occurs when the fran-
chisee lacks sufficient funds to pay their royalty fees.

While certain details in the FDD may change as the franchise system
grows, the franchise agreement will change very little in order to allow
all franchisees to operate under the same obligations and be treated
fairly. While the franchise agreement should balance the interests of
 Preparing for New Franchise Launch 81

franchisor and franchisee, the agreement must provide certain rights to

the franchisor so it can uphold and enforce the overall standards of the
franchise system; otherwise, a franchisee could sell unauthorized pro-
ducts or services, or operate in an unlicensed location. These actions
could hurt the franchise brand and other franchisees, and are another
reason why franchisees deserve a strong franchise agreement.

The Franchise Business Plan

As franchise documents are being constructed, work should commence
on the franchise business plan. When a potential franchisor is involved in
building the franchise program, questions may arise regarding the de-
velopment and growth of the franchise system. These subjects should be
included in the Franchise Business Plan.
The franchise business plan represents an important strategic docu-
ment that describes and summarizes how a new franchisor will meet its
operational and financial goals. When planning a new franchise pro-
gram, the business plan will outline key steps necessary to launch and
build a successful franchise network. The business plan can be used to
raise capital and prompt franchise management to answer questions
pertaining to the franchise venture. A business plan can help manage the
franchise operation and identify important timelines and goals. Without
a business plan, a potential franchisor would lack a detailed plan to
navigate the launch and development of a successful franchise.
The following components should be included in a franchise business
plan:

a The Executive Summary: This should be short and concise – one page
is ideal. It is perhaps the most important section, as most readers often
do not read the entire plan. It should include a brief overview of the
business strategy and describe the franchise product or service, market
and major competitors, why the product or service has promise, and
what distinguishes them from other franchises.
b Franchise Concept: This section describes the core business idea of
the franchise system and what makes it appealing. It should explain
what sets the business apart from the competition. A reader should
be able to understand the products or services a franchise will offer
its customers and how these may differ from those of competitors.
c Franchise Leadership: This section highlights individual profiles of
the management team and specifies key responsibilities. It may
describe the characteristics of the management team that contribute
to the success of the franchise launch and development. This
information signals the underlying quality of a franchise business
82 Preparing for New Franchise Launch

and enables potential investors or lenders to know who will be

leading the organization and their experience and accomplishments.
d The Market: This section describes the potential market size and
specifies the local or national scope and strategies that a franchise
system will focus on in company-operated locations. Most impor-
tantly, it highlights the trends in a particular market and whether the
market is growing, stable, or shrinking.
e Competition: This section contains an in-depth analysis of potential
competitors, including both franchise systems and non-franchise
businesses. It highlights the strengths and weaknesses of competitors
and elaborates on how potential franchisees may deal with them
effectively by highlighting counter strategies and approaches to allay
major concerns that may hinder success.
f Product features and benefits: This section describes the key features
of the franchise, products, or services. It is important to be clear not
only about distinguishing features of a product or service but to
delineate customer benefits. Ultimately franchisees need to know
what makes their product or service better than competitive offer-
ings so they can market these to potential consumers.
g Brand strategy: This describes the marketing plan for the franchise,
highlighting how the franchise will be marketed, to whom, and
where. This is an important element because it describes the specific
methods used to develop brand recognition.
h Franchise Development: This is a critical and unique component of
the franchise business plan that presents a strategy for growing the
franchise system. It should provide an overview of the marketing
strategy for developing a franchise network, targeted markets and
advertising, and promotional programs used to recruit qualified
candidates.
i Financial Projections: This section should include franchisor and
franchisee pro forma financials which include projected revenue/
income streams: This is an important component of any business
plan because it represents projected cash flow and income state-
ments, i.e., how much a franchise stands to earn.

Considering Franchise Advisors

The process of building a franchise system is complex and may require
assistance from professionals who have experience in the franchise in-
dustry. With the requisite skills, qualifications, and experience, these
individuals can help potential franchisors design and build a franchise
program effectively and efficiently, draft franchise documents, and deal
with franchisor-franchisee disputes and other challenges and problems
 Preparing for New Franchise Launch 83

that startup franchisors may face. Next, we discuss two groups of ad-
visors from whom potential franchisors often seek help.

The Franchise Attorney

The franchise attorney is one of the most important members of the
franchise team. Because the franchise industry is regulated by the Federal
Trade Commission and several states, it is important to consult with an
attorney familiar with franchisor compliance, regulatory requirements,
and the franchise business model. Many qualified franchise attorneys can
be found on the internet or listed on the websites of franchise-related
entities, such as the International Franchise Association. You may also
consult with your own attorney, accounting firms, and franchise con-
sultants to identify a qualified franchise attorney. It is important to
conduct a thorough evaluation and speak with previous clients to de-
termine if an attorney is the right fit for your franchise service. Questions
may include legal fees, responsiveness to requests for information,
feedback regarding the quality of the franchise documents, and duration
for completing franchise forms.
After an attorney has been chosen to review franchise documents, they
should meet with the potential franchise principals for an in-depth dis-
cussion of the business being franchised and its objectives, size, and
timing related to the launch of the franchise network. An attorney will
often provide an overview of the franchise process, ask questions re-
garding the franchise operation, and recommend how a franchise should
be structured. Some franchise attorneys present the advantages and
disadvantages of launching and implementing a franchise program to
confirm that their clients understand and are committed to a franchising
strategy. At the end of an initial meeting, the attorney will present their
fee structure and the services they provide. Most franchise law firms have
a fixed fee for their services, including the production of franchise
documents and required ancillary services. These can range from
$15,000–30,000. Potential franchisors should avoid being “penny wise
and pound foolish” and not choose a law firm primarily based on cost.
Such a cost-saving strategy could be detrimental in the long run, because
poorly constructed documents can create numerous problems that will
be expensive to fix, once the new franchise program is launched and
franchisees brought onboard.
Once an engagement letter is signed with the attorney, the law firm
will send the potential franchisor a detailed questionnaire for franchisors
to complete and return. Such a questionnaire asks for preliminary in-
formation about the new franchise including its operation, projected
franchisee investment, initial franchise fee, royalties, and other in-
formation necessary to prepare the documents. The franchise attorney
84 Preparing for New Franchise Launch

may suggest that the potential franchisor obtain the services of a con-
sultant regarding important business decisions that require industry
knowledge.

The Franchise Consultant

Most franchise consultants have experience as a franchise executive or
former owner of a franchise company, so they understand the process of
launching and implementing a franchising strategy. Their services can be
quite helpful, particularly when potential franchisors do not have sub-
stantial experience with the system. Not engaging a qualified franchise
consultant or choosing the wrong one can cost a potential franchisor
time and money, and may negatively affect the quality of the entire
franchise program, leaving franchisors with less capital to launch and
develop the new program. Due diligence is needed when choosing a
franchise consultant.
As with a capable franchise attorney, it is important to evaluate the
competence and qualifications of a consultant. The best way to evaluate
the qualifications of a consultant is to contact past clients and contact
and evaluate the quality and cost of their services. When seeking feed-
back on a franchise consultant, potential franchisors should ask about
the cost of the consultant, their business style, franchise knowledge, and
if they had to do it again, if they would use that consultant again.
A franchise consultant offers advice on the non-legal components of
franchising, such as how to determine the initial franchise fee, royalties,
and structure the franchise territory. He or she should have experience
recruiting franchise candidates, marketing and operating procedures,
and franchise relations. In addition, a franchise consultant should know
how to acquire competitive franchise information to assist the potential
franchisor in designing competing strategies. Some franchise use con-
sultants as a staff member who can provide marketing services and
construct training manuals.

Summary
This chapter describes the process of preparing a new franchise launch. We
have discussed the importance of securing trademarks, registering website
domain names, and incorporating the new franchise system. We described
the outline and key aspects of four important franchise documents, in-
cluding the Franchise Operations Manual, Franchise Disclosure Document,
Franchise Agreement, and Franchise Business Model. We concluded by
highlighting important considerations for recruiting franchise professionals
who will assist in building the new franchise, including the franchise at-
torney, franchise consultant, and accountant.
 Preparing for New Franchise Launch 85

Taken together, these activities will prepare potential franchisors in

launching their new franchise system by setting up legal protections that
will help to avoid preventable fiascos, understanding the franchise
business, providing legal documents to guide franchise business devel-
opment, and recognizing groups of potential franchise advisors who can
provide insights and tools that improve the efficiency and effectiveness of
the franchise development process.

Notes
1 Alter, A. L., & Oppenheimer, D. M. (2006). Predicting short-term stock
fluctuations by using processing fluency. Proceedings of the National Academy
of Sciences, 103(24), 9369–9372.
2 Green, T. C., & James, R. (2013). Company name fluency, investor recogni-
tion, and firm value. Journal of Financial Economics, 109(3), 813–834.
3 Chan, C. S. R., Park, H. D., & Patel, P. (2018). The effect of company name
fluency on venture investment decisions and IPO underpricing. Venture Capital,
20(1), 1–26.
4 Mahmood, A., Luffarelli, J., & Mukesh, M. (2019). What’s in a logo? The
impact of complex visual cues in equity crowdfunding. Journal of Business
Venturing, 34(1), 41–62.
5 Leblebici, H., & Shalley, C. E. (1996). The organization of relational con-
tracts: The allocation of rights in franchising. Journal of Business Venturing,
11(5), 403–418.
6 Calderon-Monge, E., Pastor-Sanz, I., & Huerta-Zavala, P. (2017). Economic
sustainability in franchising: A model to predict franchisor success or failure.
Department of Economics and Business Administration, University of Burgos,
Burgos, Spain; pp. 1–5.
7 Lusthaus, J. How Do You Determine the Initial Investment for the Item. https://
lusthausfranchiselaw.com/blog/how-do-you-determine-the-initial-investment-
for-the-fdd/
8 Teixeira, E. (2018). Understanding key aspects of the franchise territory.
Forbes. https://www.forbes.com/sites/edteixeira/2018/05/31/understand-key-
aspects-of-the-franchise-territory/
9 Caffey, A. The importance of item 19 in the franchise disclosure document. All
Business. https://www.allbusiness.com/the-importance-of-item-19-in-the-
franchise-disclosure-document-13425632-1.html
Chapter 6

Developing Franchisor
Organizational Capabilities

In Chapter 5, we presented the process for preparing the launch of a

franchise program and the resources necessary to accomplish that
objective. During the period between the completion of the franchise
documents and the launch of the franchise development program,
the franchisor must establish the structure and hire the staff that can
recruit, develop, and support new franchisees combined with the re-
quired financial and operational controls. To accomplish these objec-
tives, the franchisor must create and strengthen their organizational
capabilities.
In this chapter, we delineate the blueprint for establishing the orga-
nizational structure and capabilities for the franchisor to effectively
operate and manage its franchise system. This is an important step for
developing a franchise program because potential franchisors need to
build up the internal capability to train, support, and assist franchisees.
Otherwise, franchisees and the franchise program could fail easily
as poorly qualified staff would not be able to fulfill the franchisors’
contractual obligations, resulting in ineffective management of the
franchisor–franchisee relationships.
Next, we present three possible configurations of franchisor organi-
zational structures as these could differ drastically depending upon the
size and stage of the franchise systems. We then delineate and discuss key
top management team members (the “TMT”) who would essentially
establish, provide, and administer franchise operational systems. Finally,
because most startup franchisors emerge from small companies there
may be a need to engage outside resources to provide specific services
to the franchisor until the franchise system reaches a certain size. We
conclude by illustrating several potential service areas, such as marketing
and Information Technology supports, that franchisors may wish to
outsource at the initial startup process.

DOI: 10.4324/9781003034285-6
 Franchisor Organizational Capabilities 87

Three Examples of Franchisor Organizational

Structure
The franchisor organizational structure highlights the key positions,
functional areas, and reporting relationships in the franchisor organi-
zation. This is important because such structure not only provides a
blueprint on the reporting relationships among employees, but also il-
lustrates how organizational resources are being assembled and orche-
strated to achieve organizational performance.1
Further, franchisor organizational structures can differ depending
upon the size of the franchise system and the number of supporting re-
sources to be offered to its franchisees. It is important for the franchisor
to incorporate the important members of its TMT and support staff in
the organizational structure that strategically align with the size of
franchise system. The arrangement of organizational structure also de-
pends upon the products and services provided by the franchisees and the
overall franchise business model. For example, because a fast-food
franchise is among the most complex and unique franchise structures
based upon menu creation, product procurement, and operating system
requirements franchisors in this sector will need to employ corporate
staff with an expertise in food preparation, ingredients, and product
sourcing. These positions require individuals that can create new menu
items, are aware of where to purchase ingredients, and can participate in
the creation of training regimes for franchisees and their employees.
To create the proper organizational structure, franchisors need to in-
corporate their organization size and the number of operating locations
into their decision-making. The organizational structure would need to
be updated when the existing structure no longer supports the growth of
franchisee units. If the existing company operation consists of a few
locations, as the franchise system grows the franchisor will transition
from a smaller franchisor organization into a larger one that is com-
mensurate with the increasing growth responsibilities of franchisor staff
that may need to be specialized. While we will focus on a startup fran-
chisor organizational structure in this chapter, in this section, we provide
three sample organizational structures to illustrate how these structures
differ for franchise startups, typically up to 25 franchised locations, a
mid-size franchise with 50–100 locations, and a more established fran-
chise brand that exceed over 100 locations.
Figure 6.1 presents the organizational structure of a franchise startup
that delineates the key positions and staff. Although there may be var-
iations among franchisor startup organizational structures, the core
feature is its simplicity and flat hierarchy because the franchise system
has not been developed and only requires minimal staff. Also, because
most franchise startups emerge from small companies, there is a lack of
88 Franchisor Organizational Capabilities

CEO

Admin. Asst.
When Needed

Director Franchise
CFO VP Franchise Dev.
Ops.

Accounting Firm Franchise Marketing Agency

I.T. Support
Insurance Broker Cooordinater

Figure 6.1 A Tradional Franchisor Startup.

capital to fund a more robust franchisor organization and several TMT

often needs to be responsible for diverse tasks and groups from multiple
functional areas. In most cases, the franchisor startup would often
choose to outsource certain functions, such as Marketing and IT Support
services, that are less vital to the core franchise business until the fran-
chise system reaches it next stage of development.
Figure 6.2 presents an example of the organizational structure for a
typical mid-sized franchisor that administers a network of 50–100
franchise locations. This figure illustrates that the TMT has been ex-
panded to include a Chief Operating Officer (COO), and VP Operations
support staff. To support and manage the growth and development of
the franchise network, mid-size franchisors often need to hire additional
franchise development staff, a Marketing Director, and IT Manager. In
addition, field staffs who can train, support, and audit new franchisees
are important human capital to acquire.
To support the responsibilities of the CFO in managing increasingly
complex financial resources, additional staff would be added, including
an accounting manager, accounts receivable, and accounts payable po-
sitions. Finally, for a mid-sized franchisor who intends to expand in-
ternationally, it would require the franchisor to recruit and assign the
responsibility for international operations to a dedicated franchise op-
erations staff member. Overall, the organizational structure of a mid-
sized franchisor would be more complicated and hierarchical, compared
with that of a franchise startup.
Figure 6.3 depicts the structure of an established mature franchisor
which can have from 100 to 500 or more franchise locations. When a
 CEO

Administrative
Assistant

Marketing
CFO COO
Director

Administrative Administrative Administrative

Assistant Assitant Assistant

Vendor Account Chieft Infor- VP Franchise VP Franchise

Media Relations
Relations Management mation Officer Opperations Development

Accounts Network Administrative Administrative

Payable Support Assistant Assistant

Accounts Regional Regional Regional Franchise Franchise Franchise

Broker
Receivable Director Director Director Developer Developer Coordinator

Figure 6.2 A Mid-Size Franchise System.

Franchisor Organizational Capabilities
89
 90

CEO

Administrative
Assistant

Marketing Legal Internal

CFO COO
Director Department Opporations

Administrative Administrative Administrative Administrative

Assistant Assitant Assistant Assistant
Franchisor Organizational Capabilities

Vendor Media Account Chieft Infor- VP Franchise VP Franchise

Auditor Para Legal
Relations Relations Management mation Officer Opperations Development

Accounts Administrative Administrative Administrative

Payable Assistant Assistant Assistant

Accounts Network Regional Regional Regional Franchise Franchise Franchise

Programmer Broker
Receivable Support Director Director Director Developer Developer Coordinator

Figure 6.3 A Mature Franchise System.

 Franchisor Organizational Capabilities 91

franchise system reaches this size, the franchisor will require extensive
staff to support the TMT, which can include a National Accounts
Director who would implement and administer National Accounts, an
auditor who would audit franchisor and franchisee financial transactions
when appropriate.
There should be additional marketing staff to support advertising, pro-
motional programs, and expenditures from the advertising fund as mar-
keting strategies need to strike a balance between globalization and
localization approaches.2 Those franchisors with several hundred franchise
locations may have an in-house legal department and where appropriate
VP of International Operations. To resolve these complex and unique is-
sues that large franchisors often encounter, their organizational structure
tends to be highly complex, hierarchical, and rigid with individual em-
ployees specializing on few tasks within a specific functional area and TMT
mainly overseeing the overall strategic directions of the firm.

Top Management Team

The development of organization capability begins by understanding the
key top management team (TMT) members of the franchise system that
are essential for launching and building the new franchise operation.
With this understanding, franchisors could then effectively identify and
recruit the right candidates for these positions. The main source of the
TMT members could come from the existing company operation.
In many cases, certain franchisor TMT positions can be filled by existing
company executives, such as the Chief Executive Officer (CEO), Chief
Financial Officer (CFO), and a Franchise Coordinator. Other top man-
agement positions, such as the Vice President of Franchise Development
and Director of Franchise Operations should ideally be recruited externally
as these positions would benefit from hiring individuals with prior fran-
chise experience. Further, at the early startup stage of franchise system
development, especially when human capital is limited, some franchisor
top management team members could take on the responsibilities of an-
other vacant TMT position. For example, a franchise startup will not
require a full-time Training Director, so the key responsibility of this
position, such as franchisee training and development, could be fulfilled by
the Director of Franchise Operations or even the CEO. Alternatively, if
a vacant TMT position could not be filled by the existing company
executives or managers, then franchisors would need to recruit and identify
external candidates with the proper knowledge, skills, capabilities, and
franchise experience. Indeed, this external search is quite common espe-
cially when franchise systems are going through a rapid development stage.
According to Doug Kushell, the founder of Franchise Search, who has
been placing franchise industry talent in key positions, including CEO,
92 Franchisor Organizational Capabilities

COO, Franchise Operations, and International Development, for over

three decades, it is common for franchisors to work with executive re-
cruiters who specialize in the franchise industry to identify the best
candidates for vacant TMT positions. He indicated that the most fre-
quent search positions for emerging franchisors are for Franchise
Development followed by Franchise Operations. These executive re-
cruiters could sometimes recruit individuals who have worked for other
related stakeholders, such as franchisor suppliers, to fill the vacant po-
sitions because they have experience interacting with franchisors and
franchisees. This provides them an understanding of the franchise busi-
ness model, and some may have an existing relationship with the fran-
chisor staff or the franchisees which could enable their performance.
Whatever the source of franchisor human capital whether from in-
house company staff, recruiters, or existing relationships it is important
that the most qualified and capable staff be in place because they will be
responsible to the franchisor but also its franchisees who have a financial
interest in the success of the franchise. Next, we discuss these key po-
sitions and their key responsibilities in the order of.

Chief Executive Officer

The Chief Executive Officer (CEO) is the person responsible for directing
and leading the franchisor organization. Table 6.1 highlights the CEO’s
key responsibilities. The role of the CEO grows in importance as the
franchise system evolves into a larger company, however, regardless of
franchise system size, this position is critical to the success of the franchise.
This person will be responsible for the overall operation of the franchise,
providing its vision, establishing key objectives, and capable of guiding the
franchisor TMT and the franchisees to fulfill their collective goals.
The CEO will establish and approve the major objectives of key
franchisor staff to include the number of new franchisees, the addition of
new products or services, and major advertising campaigns. An effective
franchisor CEO should demonstrate their creative abilities when struc-
turing the franchise program in concert with their franchise advisors.
The CEO must focus on building a franchise brand while ensuring that
the initial franchisees are satisfied. This is a very challenging aspect of
building and cultivating a new franchise system which is one of the
important responsibilities of the CEO.3
The most successful franchisor founders and CEOs, including Ray
Kroc of McDonald’s, Dave Thomas of Wendy’s, Fred Deluca of Subway,
and Peter Cancro who founded the highly successful Jersey Mikes
franchise, were entrepreneurs who focused upon activities that helped
propel the growth of their franchise brand and their relationship with
franchisees. They actively participated in the development of their
 Franchisor Organizational Capabilities 93

Table 6.1 CEO Responsibilities

Chief Executive Officer

Franchise Leadership The franchisor CEO must guide the franchisor

organization through the franchise launch,
startup phase including qualifying and
appointing key franchisor staff. This is
important because this person is the leader of
the franchise and someone who franchisees
look to for direction, guidance, and support.
Franchise System Growth Establishing short- and long-term franchise
development objectives. Determine the
appropriate targets for new franchisee growth
in coordination with VP Franchise
Development. This is key for the franchisor to
have consistent new franchisee development
and drive franchisee recruitment,
presentation, and sales strategies.
Franchisor Representative Serve as the primary spokesperson for the
franchise brand in recruitment advertising,
with the media, industry representatives and
franchise trade associations. As the face of the
franchise brand, there must be a consistent
image and voice.
Establishing Financial and Coordinate objectives with financial and
Operating Objectives operating management to establish targets that
are shared throughout the franchisor
organization. Without clearly defined financial
and operating objectives the franchisor can
lack a consistent strategy employed by
components of the franchisor staff.
Franchise Relationship Has key responsibility for overseeing the state of
Management franchise relations between the franchisor and
franchisees using satisfaction surveys and
franchisee feedback to identify franchisee
satisfaction levels. Positive franchise relations
are an attribute of successful franchise
systems.

franchise system, played an active role in interacting with their fran-

chisees, and became the voice and face of their franchise brand. Each was
innovative and implemented programs and strategies that were used by
other franchisors.
This is one of the major traits that sets successful franchise CEOs apart
from company CEOs who are engaged to lead an existing company and
tend to have administrative and management responsibilities and unlike
franchisor CEOs, are not accountable to franchisee owner-operators.
Because a franchisor CEO is dealing with franchisees who made an
94 Franchisor Organizational Capabilities

investment in a franchise compared to company employees the CEO

must be able to lead an organization that reflects this distinction.
Because most startup franchisors emerge from small businesses, it is not
uncommon for startup franchisors who develop into larger organizations
to recruit a CEO with experience operating large franchisors because the
founder/CEO may have some limitations operating a large franchisor. In
these cases, the founder may assume the title of President leaving the CEO
responsible for leading the day-to-day operation of the franchise.
An effective CEO must have the ability to relate to franchisees during
the pre- and post-franchise startup phase. They must be capable of pro-
moting the franchise brand and establishing the corporate culture of the
franchisor because they will be the voice of the franchise. Eddy Goldberg
of Franchise Update Media Group interviewed seven franchisor CEOs
who collectively represented 4,600 franchise locations. They were asked to
present their key roles and areas of concern as the CEO and leader of their
franchise. The most prominent mentions by these CEOs included re-
cruiting franchisees and training those franchisees and trainers, to main-
tain an active role in their operations. Focusing on franchise system
growth and prosperity, growing existing franchisee sales and profits, and
listening to their franchisees. Finally, they were the face of the organization
and set and communicated the mission and vision for the franchise net-
work for current times and five or more years ahead.

Chief Financial Officer

The Chief Financial Officer (CFO) will report to the CEO and occupy a
strategic role in the overall leadership of the franchisor. Table 6.2 lists
the CFO’s key responsibilities. The CFO may already occupy a position
in the company, but previous franchise experience is not a requirement
for this position.
Barry Knepper, CPA, who operates the Franchise CPA, provides fi-
nancial statements and royalty audits to emerging and mid-size fran-
chisors. He states that if you are a small to mid-sized franchisor, having a
CFO is important so that one person is focused on creating long and
short-term financial goals, obtaining financing, improving profitability,
and ensuring financial information is timely and accurate. If a startup
franchisor cannot afford or justify a full-time CFO at the early startup
stage a part-time CFO can fulfill the requirements and necessary results.
According to Knepper, it is the responsibility of the CFO to establish the
franchisor Chart of Accounts to organize transactions and provide in-
puts to the financial statements. If the Chart of Accounts is not properly
set-up it, it can result in errors and misinformation in the franchisor’s
financial statements. Because franchisors collect franchise and adver-
tising fees from their franchisees these funds must be properly accounted
 Franchisor Organizational Capabilities 95

Table 6.2 CFO Responsibilities

Chief Financial Officer

Financial Accounts, System Establish the required accounts, financial

Controls, and Capital Flow systems, and controls necessary to produce
financial statements and protect the financial
assets of the franchisor. Manage and control
the financial-related activities of the
franchisor including accounting, payroll,
financial planning and analysis, billing and
collections, and accounts payable. Monitor
and maintain capital availability and where
required source additional funds.
Financial Controls The CFO has the obligation for implementing
and maintaining the franchisor controls, and
the accounts of royalty and continuing
payments. This is an important requirement
for protecting the assets and revenues of the
franchisor.
Preparing and Tracking Budgets Responsible for budgets, ensure that effective
internal controls are in place and maintain
compliance with GAAP and applicable
federal, State, and local regulatory laws and
rules for financial and tax reporting. Provide
input to the marketing department when
considering possible franchise price
promotion programs.
Franchisee Performance Reports The CFO will be responsible for monitoring
and Analysis the financial performance of franchisees by
compiling data from franchisee financial
statements and publishing results to
appropriate franchisor staff. They will also be
responsible for establishing Key Performance
Indicators which can be used to monitor
franchisee performance utilizing key data
points. These are necessary requirements
for identifying how the franchisees perform.
Maintaining Insurance Coverage The CFO works with a qualified insurance
for the Franchisor agent to ensure that the proper franchisor
coverages are in place. They must obtain the
proper coverages for the franchisor and
ensure that franchisees comply with the
required insurance coverages stipulated in
their franchise agreements.

for and must be disclosed in the franchisor FDD. There may be a need to
account for purchases made by franchisees from required franchisor
vendors and any rebates received by the franchisor, all of which must be
disclosed in the FDD.
96 Franchisor Organizational Capabilities

A CFO should have a deep understanding of the franchise business

model and banking relationships and may work with the board of
directors. The CFO prepares detailed financial and management re-
ports, works with auditors, oversees tax planning, and sets policies
around controls and payroll. Their responsibilities include budgeting
and forecasting, managing mergers or acquisitions, and compliance
issues.
The CFO should be forward-thinking as they consider economic, in-
dustry, tax, government regulation, and social issues. A CFO is especially
valuable for a company that is growing quickly, has many employees,
and has complex product lines. Finance officers also bring tremendous
value to a company when it is considering acquiring or preparing itself to
be acquired.4

Vice President Franchise Development

The Vice President (VP) Franchise Development is responsible for
administering the franchise department and directing the recruit-
ment, qualifications, document distribution, and is the primary
contact for qualified franchise candidates. Table 6.3 highlights the
key tasks of a VP. This person reports to the CEO and is a key
member of the TMT. They are responsible for managing the
Franchise Coordinator to ensure that franchise leads are being
properly processed and recorded and franchise program materials
are forwarded to the candidate. They should have experience with all
components of the franchising process from recruiting candidates to
completing franchise transactions.
The VP Franchise Development plays an important role in leading
the development, growth, and success of the franchise program. This
person has the key responsibility of guiding people through the
franchise process. If the VP fails to properly execute its responsi-
bilities, it will have a significant impact on the ability of the franchisor
to effectively fund the franchise operation and even achieve success
due to a lack of franchise fees and royalties. They will be responsible
for helping to structure franchisee presentations by members of
the TMT.
In some startup franchise programs, this position is filled on a tem-
porary basis by the franchisor CEO because it can enable them to learn
about the franchise recruitment and development process before adding
a person to fill this role. However, if this approach is employed it should
be on a short-term basis because there are important responsibilities
associated with this position.
 Franchisor Organizational Capabilities 97

Table 6.3 VP Franchise Development Responsibilities

Vice President (VP) Franchise Development

Franchise system growth Constructing franchisee system growth projections

and submitting to the CEO for approval. At the
initial startup stage, this is an important
component of the franchisor budgeting process
because franchisees are the only way to generate
franchisor revenues.
Franchisee recruitment and Design and implement franchisee recruiting
lead generation programs, monitor and evaluate the results of
franchisee recruitment programs and supervise
the intake, approval, and documentation of all
franchise inquires. This is an important activity
because the goal is to maximize franchisee leads
at the most reasonable cost.
Franchisee Prospects Review and approve franchisee applications, engage
Qualifications with qualified franchise candidates, and at early
franchise stage guide candidates through the
franchising process. This is an important role of
the VP because qualifying franchise prospects is a
key component of the franchising process.
Franchise Regulatory The VP is responsible for complying with franchise
Compliance offering and sales regulations per regulatory
requirements of the FTC and in any States where
the franchisor can sell franchises. It is important
that all franchise development activities comply
with all franchise regulatory requirements and
are properly documented.
Franchisee Negotiations Participate with franchisor attorney in contract
negotiations with franchise candidate and their
attorney. Interface with franchisor field
operations to be aware of franchisee
performance issues and assist franchise
operations with franchisee relationship
management when appropriate.
Franchise Documentation Administers staff responsible for fulfilling franchise
documentation requirements to include
maintaining and filing franchisee contractual
documents, franchisor–franchisee
communications, agreements, and related
information.

Franchise Coordinator
The Franchise Coordinator (FC) reports to the VP Franchise Development
and plays an important role in franchise development because the FC is
typically the first person from the franchisor’s staff a potential franchisee
speaks with. They frequently communicate with franchise prospects as the
98 Franchisor Organizational Capabilities

prospect moves through the franchising process. It is important that the FC

creates a favorable impression on behalf of the franchisor because they
communicate with many potential franchisees some on a continuing basis.
The FC is responsible for sending franchise information and FDDs to
qualified franchise prospects and will support the VP Franchise
Development and development staff throughout the franchising process.
Previous experience interacting with customers in a customer service,
telemarketing, or personnel recruitment environment is an important
prerequisite for this position. The FC should have excellent oral and
written communication skills and be proficient in MS Word and Excel.

Table 6.4 Franchise Coordinator Responsibilities

Franchise Coordinator

Franchise lead intake Responsible for receiving franchise inquiries and

recording key prospect information. Answer
basic franchise-related questions from
individuals when required.
Communicating Franchise Forwarding franchise information, applications,
Information and Franchise Disclosure Documents (FDD)
to qualified franchise prospects.
Recording and maintaining Responsible for the tracking, receipt, and filing
franchise documents of all FDD acknowledgment of receipts from
franchise prospects.
Contact Franchisee prospects Interface with franchisee prospects and qualified
franchisee candidates from time to time
regarding requests, documentation, and on
behalf of the VP Franchise Development

Director of Franchise Operations

The Director of Franchise Operations (DFO) will report to the CEO and is
responsible for franchisee compliance, diagnosing, and assisting with
franchisee operational problems, and conducting franchise compliance
audits. Table 6.4 illustrates its key responsibilities. This position may assist
franchisees with recruiting and evaluating key franchisee employee can-
didates. They will assist in franchisee training program presentations. As
the franchise grows into a larger franchise system the DFO position can
expand into a VP of Franchise Operations or Chief Operating Officer role.
The DFO occupies an important position in the franchisor TMT as the
individual will be required to support and assist franchisees in the operation
of their franchise. Because successful franchisees are the cornerstone of a
successful franchise brand, franchisee support is a key franchisor’s respon-
sibility. This individual should be capable of managing a team of franchise
field consultants and should have previous management experience. It is vital
 Franchisor Organizational Capabilities 99

that this individual have excellent communication skills. As First Author

who has served as VP Franchise Operations and COO in both small and
large franchise systems, I can attest to the important role this position plays
in a franchisor organization. There is responsibility and involvement in
virtually every aspect of the franchise operation which requires an individual
with a broad range of skills.
The Director of Franchise Operations should coordinate the method
and frequency of support the franchisees can expect to receive. Although
the franchise agreement will describe the obligations of the franchisor
regarding franchisee site visits, grand opening support, and other types
of assistance, these are often defined in broad terms. Because franchise
candidates may want to know what kind of support, they could expect to
receive if they became a franchisee and current franchisees may request
support it is important that they receive a consistent response.
As the leader of franchise operations, it’s important that this in-
dividual has specific skills that will make them an effective franchisor
representative who can help franchisees become successful. Franchise
operations play an important role in the franchisor organization because
it touches on every aspect of franchising and is directly involved with
franchisees personally and through subordinates (Table 6.5).

Franchisor Outsourced Services

Depending upon its size and maturity stage, a startup franchisor may
require outside support to perform and fulfill certain functions namely,
marketing services and information technology (IT) support until the
franchise system grows to a certain size. Approximately 70% of startup
franchisors are small firms with one or two locations. These startups
often do not have dedicated marketing and IT departments and must
strategically secure outsourcing companies to provide these services until
they reach a certain organizational size. Further, regardless of firm size,
franchise companies are required to hire an independent accounting firm
to perform annual franchisor financial audits due to regulatory re-
quirements by the Federal Trade Commission and certain states reg-
ulations. Next, we highlight three important functional areas that
franchise startups often need to seek outsourcing services.

Marketing Agency
Except in rare cases, startup franchisors outsource marketing services
until the franchise system reaches a certain number of franchisees. The
benefit of outsourcing is to control operating expenses by spending on
marketing programs when needed. Marketing is an important activity
for a franchisor because it’s needed to create marking materials, establish
100 Franchisor Organizational Capabilities

Table 6.5 Director of Franchise Operations Responsibilities

Director of Franchise Operations

Franchisee Training Administer franchisee training and assist in initial

franchisee training to properly prepare each
franchisee to operate their franchise. It is important
that the DFO or similar position supervise and have
a role in franchisee training because they are the
most involved franchisor TMT in franchisee
operations and have franchisee operating
experience.
New franchise opening Provide franchisee onsite assistance including
assistance franchise pre-opening and grand opening assistance
and support. Be available for post-opening support
if required. This is an important requirement for a
successful franchisee startup.
Franchisee support Provide franchisee support where required and
needed to assist franchisees who are
underperforming. At the initial stage of franchise
operations, the DFO may provide direct assistance
to franchisees, and as the number of franchise
locations increases, field staff may be added to
support the DFO in providing franchisees
assistance and to perform audits.
Franchisee Compliance The DFO and staff will perform site visits to ensure
franchisee compliance with required franchise
operating procedures. Except for non-retail
franchises where consumers are not attending the
location it is important that franchise sites be
audited to validate compliance. These audits are
necessary to uphold proper and consistent
franchise standards.
Marketing Support They will assist franchisees in local marketing and
promotional program design and execution. This is
important because franchise performance will
depend in part upon local marketing. The DFOs can
use their marketing experience with other
franchisees to transfer this knowledge to new
franchisees.
Franchise Development The DFO will participate in certain franchise
development presentations including Discovery
Day to provide details regarding franchisor training
and support. As prospective franchisees will seek
validation of franchisor support from the franchisor
and existing franchisees, it is important that the
DFO participate in the franchise development
process.
Franchise Relations Assist with franchisor disputes and franchise relation
issues from time to time.
 Franchisor Organizational Capabilities 101

promotional programs, and assist in the introduction of new products or

services. A common tactic is for a startup franchisor to outsource its
marketing activities to create marketing materials, assist in the website
design and construct a grand opening program for its new franchisees.
The marketing firm can also provide input to the franchisor regarding
other marketing activities on an as-needed basis. The marketing firm will
support the VP of Franchise Development in the design and placement of
franchisee recruiting ads. The firm also works closely with the Director
of Franchise Operations in the design and placement of franchisee pro-
motional advertising.

IT Support
It is unusual for a small company or startup franchisor to have an IT
Department and like most small companies will usually outsource IT
support and assistance. Whether there is an existing IT staff member or it
is necessary to go outside the organization, it is important to have this
resource available because the franchisor and its franchisees will require
support from time to time. This function will report to the Director of
Franchise Operations because it will help to implement various software
programs used by franchisees and may provide email addresses and
Social Media sites for franchisees. Electronic reporting, franchisor fi-
nancial reports, and required franchise software may require interven-
tion by IT support to help or in case of problems. For example, to
download specific information from franchisees may require IT support
to effectuate the most efficient method.

Independent Accounting Firm

An independent accounting firm is required to assist the franchisors to
prepare audited financial statements to be included in the FDD. The
Federal Trade Commission and certain states require a franchisor to
have financial statements prepared each year and the statements must be
included as an exhibit to the updated FDD. A new franchisor is per-
mitted in most states to “phase-in” the preparation and disclosure of
audited financials over an initial 2-year period. This means that a new
franchisor may not need an audit in the first year of operation but will
need an audited balance sheet in year two and a full audit by year three
of operation. It is important for a new franchise system to engage early
with a CPA firm that can audit the business and become familiar with the
disclosure requirements of franchise systems under state and federal law.
Financial statements are required in several franchise-related documents,
such as the FDD and Franchise Business Plan. The accounting firm will
work closely with the CFO and CEO.
102 Franchisor Organizational Capabilities

Summary
In this chapter, we discussed the importance of establishing the fran-
chisor’s organizational structure and key positions that play a key role in
the startup organization. We refer to this important group of executives
and managers as the franchisor Top Management Team or TMT.
Beginning with the Chief Executive Officer each position is described
including the key responsibilities and qualifications. Each of these posi-
tions including the CEO, CFO, VP Franchise Development, and Director
of Franchise Operations, collectively play a major role in launching the
new franchise operation.
We explain that certain functions such as marketing and IT services
may be outsourced to outside firms until the franchisor achieves a certain
size. Finally, although most startup franchisors start with a small group
of executives some franchisors can startup with the capital that can
enable them to launch their franchise with a more robust TMT and staff.
As a franchise system develops into more franchise locations, the fran-
chisor will add more staff to complement and perform its key duties and
responsibilities pertaining to its franchisees.

Notes
1 Chadwick, C., Super, J. F., & Kwon, K. (2015). Resource orchestration in
practice: CEO emphasis on SHRM, commitment‐based HR systems, and firm
performance. Strategic Management Journal, 36(3), 360–376. Scott, W. R.
(1975). Organizational structure. Annual Review of Sociology, 1(1), 1–20.
2 Jain, S. C. (1989). Standardization of international marketing strategy: Some
research hypotheses. Journal of Marketing, 53(1), 70–79. Ramarapu, S.,
Timmerman, J. E., & Ramarapu, N. (1999). Choosing between globalization
and localization as a strategic thrust for your international marketing effort.
Journal of Marketing Theory and Practice, 7(2), 97–105.
3 Vernon, S. C. (2016). From Small Business Owner to Franchise CEO:
Expanding the Brand While Keeping the Pulse of Day-to-Day Operations.
https://www.franchise.org/franchise-information/franchise-relations/from-
small-business-owner-to-franchise-ceo-expanding-the
4 Stowe, S. (2015). Role of the CFO in today’s franchise environment. Inside
Franchise Business. https://www.franchisebusiness.com.au/what‐is‐the‐role‐of‐
a‐cfo‐in‐todays‐franchising‐environment/
Chapter 7

Franchise System
Development

In Chapter 6, we presented three potential organizational structures and

delineated essential human resources for franchisors to effectively operate
and manage their franchise development program. Once the structure has
been implemented, franchisors can begin to promote and develop their
franchise. We now move on to discuss Franchise Development which
consists of recruiting, selecting, processing, and qualifying franchisee
candidates. It is one of the most important activities franchisors engage in
because such development enables franchisors to attract highly qualified
franchisees to their network and achieve a higher franchisee success rate.
The failure of developing successful franchisees can result in the dimin-
ishing financial success of franchise performance, and shortfalls in fran-
chisor royalty revenues for the franchisor. Overall, effective franchise
development would enable franchisors to finance and grow their franchise
organization, build franchise brand recognition and add value to both the
franchise and franchisee.
In this chapter, we will discuss how to implement and execute a suc-
cessful franchise development program following seven sequential steps
(Figure 7.1). This franchise development process begins with targeting
franchise territories which is essential for implementing a successful
franchise development strategy. With target territories identified, it’s
vital to build a franchisee profile that will be used to recruit and qualify
the right franchise candidates. We then discuss the importance for
franchisor representatives to properly engage with qualified candidates
and effectively address their requests to negotiate the terms of the
franchise agreement to complete a franchise transaction. We conclude
with a brief description of International Franchising.

Target Franchise Territories

The first step in the franchise development process is identifying the
specific franchise territories that would provide the highest demand for
the franchise products or services. Targeting franchise territories is a
DOI: 10.4324/9781003034285-7
104 Franchise System Development

1.Target
Franchise
Territories

7 Finalize 2. Create
Franchise Franchisee
Transaction Profile

6. Discovery 3. Recruit
Day Franchisees

5. Engaging 4. Qualify
Franchise Franchise
Candidates Candidates

Figure 7.1 The Franchising Development Process.

process based upon careful research instead of intuitive speculation. Key

considerations should provide the franchisee a route to profitability by
identifying the territory demographics that pertain to the number of
potential franchise consumers. For example, a home care franchisor may
define a territory of potential consumers by using the number of residents
over 65 on Medicare to estimate how many could afford to pay out of
pocket for home care services.
In addition, franchisors should also consider various cost aspects of
potential territories. For example, if the costs for retail and office space
are unusually high, it can prevent a franchisee from generating sufficient
revenues to overcome their high occupancy costs. Also, the cost of media
in a specific territory is an important consideration because high media
costs can make promotional advertising costly for the franchisee and
franchisor. Despite the large number of potential consumers, certain
geographic areas such as Long Island, New York, with costly retail
space, labor, and taxes can be an obstacle to some franchises achieving
profitability.
One of the best examples of an effective territory development strategy
for startup franchisors is the wheel and spoke approach where franchises
are granted in concentric territories in proximity to franchisor head-
quarters, typically 2–3 hours, drive time. This enables the franchisor to
 Franchise System Development 105

build brand recognition and support its new franchisees. In addition to

conducting in-house analysis, franchisors should use a dependable
market research firm that applies reliable consumer demographics to
identify the most desirable territories to target.

Create the Franchisee Profile

After identifying the territories available for franchisees, the franchisor
needs to create an ideal franchisee profile, which helps to identify the most
qualified individuals to be recruited as franchisees. A franchisee profile is a
set of attributes and qualifications that the ideal franchisee candidate for a
particular franchise should possess. In the past, franchise candidates were
often evaluated based upon their financial qualifications without con-
sidering other factors. In recent years, additional emphasis on qualifying
franchise candidates has led to using a more sophisticated franchisee
profile. This approach can often improve accuracy and reduce the time and
costs to recruit qualified candidates.
A proper franchisee profile consists of several categories of information
and its content may vary depending on the industry a franchise system
operates in. One set of information that is universal and would enable a
franchisor to recruit the best candidates is the desirable knowledge, skills,
and abilities of candidates. For example, franchises that provide specia-
lized customer services such as automotive repair services would require a
candidate to have pertinent skills and experience.
A franchisee profile should also specify a candidate’s minimum fi-
nancial qualifications, particularly their net worth and available liquid
capital. The profile should include a candidate’s previous business
ownership and accomplishments to confirm that the candidate has spe-
cific business experience and skills that would enable them to better
operate the franchise. In certain cases, management experience is im-
portant for franchise concepts that require the coordinated effort of
many employees because a lack of this management experience could
hamper a franchisee’s potential success.
Another factor that should be included in the franchisee profile is per-
sonality characteristics. For example, an extroverted personality may be
important for certain franchise business concepts that depend upon direct
sales and business-to-business sales activities, such as real estate and
business services franchises. Another part of the franchise profile is whe-
ther the franchisee has the business experience to operate a single franchise
unit versus multiple franchise locations because some franchisors prefer to
recruit both single-unit and multi-unit franchisee candidates.
Finally, the timetable for a franchisee to open a franchise is important
because it enables franchisors to set priority when identifying and eval-
uating potential candidates. Often, franchise candidates who prefer to
106 Franchise System Development

open a franchise unit sooner in the same franchise territory would be

more qualified. Some franchisors establish franchise opening timelines
based upon the type of franchise that requires a franchisee candidate to
open within a specific period. For example, a hotel franchisor may allow
more than a year for an opening due to the complexity of the project.
Franchisors should frequently update their franchisee profile to ensure
its accuracy and usability. These updates allow franchisors to continue to
confirm whether a franchise candidate exhibits the characteristics to
launch and operate a successful franchise business. These updates would
require the usage of scientific human resource management,1 such as job
analysis and performance evaluation, to improve the predictability of the
franchisee profile on future franchisee performance.
Craig Slavin, President/Founder of Franchise Central and the owner of
Franchise Navigator, states that understanding and quantifying the skills
and the behavioral qualities that a company is seeking can be achieved
using a behavioral assessment tool designed for franchise applications.
Franchise Navigator, a Skills, Values and Behavioral Assessment, has
been used by hundreds of franchisors to model the skills and compe-
tencies of an ideal franchise prospect. This can represent the difference
between the success or failure of a franchise. A high performer profile is
created by benchmarking the performance of existing franchise operators
and or unit-level managers. This profile is used to compare inbound
candidates to determine whether the candidates have the right creden-
tials to be a franchise operator.

Recruiting Franchise Candidates

Recruiting franchise candidates refers to the process of franchisors uti-
lizing various marketing and advertising techniques to encourage qua-
lified individuals to reach out and apply to be franchise candidates. It is
also commonly referred to as franchise lead generation. The franchisee
profile will play a key role in determining how and where to recruit
franchise candidates. For example, if the franchisee profile requires the
prospect to have a financial background, then the best venue to reach
potential candidates could be communicating such franchise opportunity
on business publications such as The Wall Street Journal. Homecare
franchisors may choose to advertise in one of the various healthcare
publications. Without the ability to generate viable franchise leads, a
franchisor cannot grow its franchise system. To effectively recruit can-
didates, franchisors should prepare and utilize the following toolsets to
ensure that potential franchisees understand and appreciate the values of
joining their franchise system.
 Franchise System Development 107

Franchise Marketing Materials

Franchise marketing materials are designed to communicate the features,
benefits, and other relevant information of a franchise to its prospective
franchisees. It is important for franchisors to carefully craft marketing
materials to deliver an effective message to franchise inquiries. Because
potential franchisees often obtain and compare franchise information from
several franchise opportunities, poorly done marketing materials could be
associated with poor franchise opportunities as studies have shown that
document readability could easily influence investment decisions.2
To construct effective marketing materials, franchisors should review
examples of marketing materials from several competitors to identify the
typical content and structures they are communicating to potential
franchise prospects. These include a description of the franchise, and its
market, consumers, benefits, and features. In the franchise description, it
also includes the minimum and maximum franchise investment amount.
The primary marketing materials used in ads should be available to
franchise candidates in a franchise brochure.
Franchisors may email a digital franchise brochure directly to an in-
dividual or allow it to be downloaded from the franchise website. Most
franchisors use a similar format to describe and present the key attributes
of their franchise, except the content varies depending upon the franchise
opportunity. If there are no in-house marketing resources available to
create the franchisor advertising materials, then a marketing firm should
be used for the project.

The Franchise Website

The franchisor needs to build franchise website pages that can present the
benefits and features of its franchise opportunity. The franchise website
consists of several pages that describe the franchise’s products or services,
market opportunity, investment requirements, and other pertinent in-
formation relating to the franchise. Some franchisors choose to have the
franchise pages as a part of the existing website while other franchisors use a
separate franchise website that could be accessed from their primary website.
The franchise website pages should include a short information form
that the visitor can fill out and submit to download franchise information.
The design of the franchise website is important because it will highlight
the franchise program which should generate sufficient interest by visitors
so they will want to obtain more franchise information. Franchisor,
Russo’s New York Pizzeria, has a complete website that includes in-
formation about the franchise, a history of the company and product in-
formation. The Bright Star Home Care franchise uses a website to describe
and market its home care services, information presenting its franchise
opportunity is opened by clicking a link on their main website.
108 Franchise System Development

It is important to utilize the services of an experienced website de-

veloper unless existing staff has that capability. Some franchisors prefer
to have the franchise pages integrated with the main franchisor customer
website. This allows the franchisor to achieve two objectives; present its
history, products/services, and relevant information to potential custo-
mers and describe the franchise and provide information on the franchise
opportunity. The design of the website should create a desire on the part
of the visitor to click on the appropriate pages.
An example of an effective franchise website is Kung Fu Tea a Queens,
New York based franchisor, advertises as America’s largest bubble tea
brand with over 250 locations in the United States. It lists some of its
services on its franchise pages including site location recommendations, a
standard store layout and interior design, and assistance during the
franchise grand opening for up to 2 weeks.

Franchise Brokers
Franchise brokers can be an excellent source of franchise candidates.
Most franchise brokers are independent contractors who may be af-
filiated with one or more franchise broker groups. Broker groups have a
portfolio of franchisors they represent that can amount to several hun-
dred. The major responsibility of a franchise broker is to present a
franchise candidate to a franchisor after fully qualifying the candidate
and obtaining a completed franchise application. A major advantage of
brokers is that the franchisor does not have to manage them, and a
capable broker can qualify the franchise candidate and match them to
the most appropriate franchise opportunity. When the candidate is in-
itially presented to the franchisor, they should be vetted as to their
qualifications and interest in the franchise. A disadvantage of using a
franchise broker is that some may try to shift a franchisee prospect to a
franchise brand that provides the broker with a higher commission.
If a broker sells a franchise, they typically receive 50% of the franchise
fee as a commission or a minimum amount. Large brokers organizations
using brokers generate a high volume of leads from their websites.
Franchisors rarely grant exclusivity to one broker organization, which
means a franchisor can use several broker groups while still marketing
their own franchises. Except for a unique and attractive startup fran-
chise, most brokerage firms will only accept franchisors with a minimum
number of locations since there is history of franchisee performance.
Franchisors typically use a combination of in-house franchise develop-
ment staff supplemented by franchise brokers.
 Franchise System Development 109

Franchise Advertising Portals

Advertising portals are advertising sites that feature franchise opportu-
nities. The cost to advertise on these sites can be on a cost-per-lead basis
or a monthly subscription fee. Franchise advertising portals have high
visit rates from people interested in franchise opportunities, and visitors
can filter franchise opportunities based on business category, investment
amount, and available locations. However, although inquiries can be
filtered based upon investment and type of franchise several leads from
ad portals can be poor. It is important that ad portals are evaluated
based upon the number of franchises sold as a percentage of total cost of
leads. For example, it’s more efficient to sell five franchises for leads that
cost $2,000 than to sell two franchises that cost $1,200. The number of
franchisor leads will vary depending upon website placement; the more
you pay the more leads you are apt to get. The best advertising portals
will provide the most qualified leads; therefore, franchisors should seek
quality over quantity.

The Internet
The Internet can be a useful source of franchise leads. One way to generate
franchise leads on the Internet is accomplished by publishing original
content about the franchise in blogs of 300 to 500 words using specific
keywords to maximize Search Engine Optimization. To learn which
keywords are the best, franchisors can subscribe to Google Ad Words
which provides a listing of the most frequently searched keywords. The
cost of specific keywords, known as Pay Per Click, will vary depending
upon how many times it is searched. For example, the keywords “fran-
chise opportunity” is one of the costliest keywords for a franchisor
Internet ad., compared to “franchise attorney.”
It is important that franchisors can be easily searchable on the
Internet. Using more highly searched keywords in blogs or commu-
nication materials would result in a greater opportunity that the fran-
chise will be found via online searches. However, the cost to recruit
franchisees on the Internet increases as more money is spent on identi-
fying highly searched keywords. Some franchisors outsource their
Internet marketing to companies with an expertise in Search Engine
Optimization which can increase franchise website visits.
This approach for recruiting potential franchisees online is often re-
ferred as content marketing, i.e., the use of blogs, social media posts, re-
search articles, infographics, and other information relative to a franchise
posted on websites, online publications, and franchise sites. Content
marketing can be an important source of leads and for directing attention
to a franchise website. Blogs can be a productive source of leads because
110 Franchise System Development

“Marketers using blogs receive 67% more leads than those who don’t use
blogs.”3 A number of franchisors use contributors to write blogs that can
be posted on the franchisor’s website and LinkedIn. These blogs often
would be shared on Twitter and/or Facebook. Research articles are often
crafted by marketing research firms, which could elicit interest from
franchisee prospects.

Franchise Trade Shows

Franchise trade shows are held in certain cities throughout the United
States and are used to present and promote franchise opportunities. The
most popular franchise trade shows are held by MFV Expositions and
sponsored by the International Franchise Association. Participants are
limited to franchisors and related vendors and are held in major markets
including New York, Nashville, Los Angeles, Miami, and Houston. As
exhibiting at a franchise trade show can be costly, it is important that a
startup franchisor carefully consider the location, number of estimated
visitors, and whether the monies can be used in more effective ways to
recruit franchise candidates.

Print Advertising
The use of print media for generating franchise leads has shrunk due to
its cost and the dominance of digital media. Most print advertising for
franchisee lead gen consists of listings in franchise directories such as The
Franchise Handbook, Bonds Franchise Guide, and the International
Franchise Association Franchise Opportunities Guide which is for IFA
members. Some of these placements are free while others charge a
minimal cost. It is important for startup franchisors to post their fran-
chise on these directories because the costs are reasonable and it provides
added exposure.
The effectiveness of the above-mentioned toolsets has been docu-
mented over the years. One of the key measures is how many franchise
candidates are generated from the various recruitment methods and in-
vest in the franchise. The Franconnect Sales Index Webinar Study in
2020 indicated that franchise websites accounted for 28.7% of leads
source while franchise ad portals accounted for 9.2% of leads.4 In ad-
dition, a report of franchise sales activity for 2020 from Franconnect
revealed that although referrals from brokers are not in the top five
sources of leads, they resulted in 20.1% of completed franchise deals.
This important metric reveals that the number of quality franchise leads
to complete one franchise deal is what truly matters. Broker referrals
were 6.6%, while franchise referral consultants and website leads re-
sulted in 4.25% and 1.25%, respectively, of completed deals. Overall,
 Franchise System Development 111

the average percent of leads required to close a franchise deal was found
to be 1.07%. These statistics point out the important contribution suc-
cessful franchisees can make to franchise development and how brokers
play a key role in franchise system growth by delivering qualified and
fully vetted candidates to the franchisor.

Processing and Qualifying Franchisee Leads

After generating franchise leads, the next step in the franchise develop-
ment process is processing and qualifying franchisee leads and inquiries
from potential franchise candidates. This step refers to the methods and
procedures franchisors utilize to identify the most capable and best-
qualified franchisees for their franchise system. It consists of a preliminary
review of an individual’s qualifications followed up by specific candidates
completing and submitting a formal franchise application. Regardless of
how the franchisor receives a lead, a Franchise Information Form (FIF)
needs to be completed by an individual on the franchise website or by the
Franchise Coordinator when receiving a telephone inquiry.
It is important to obtain preliminary information on every franchise
lead to perform an initial qualification of a candidate by determining
whether they have the financial qualifications and are requesting a
franchise territory that is available. By having preliminary information
pertaining to a franchise lead, it can prevent franchise development staff
from devoting their time to unqualified franchise leads. Following is a
sample form known as an FIF that can be used or edited for recording
basic franchisee information

Franchisee Information Form

Name:
Address:
City: State: Zip:
Telephone:
Email:
Desired Territory:
Amount Available to Invest: Liquid Capital_______ Total
Capital_______
Time to Open: 3 months 6 months 1 year.

The most productive way to record and track franchise leads is through
Contact Relationship Management (CRM) software which can store and
record activities, information and update the status of franchise candi-
dates. With the use of CRM and retained contact information, periodic
112 Franchise System Development

emails can be sent to people who expressed an initial interest in the

franchise. This process is known as a drip campaign. Further, an analysis
of the data can help to provide information on the entire franchising
process including the source of franchise leads and how long it takes to
complete each stage of the franchising process. Franchisors that use a
CRM system, should make sure that they have a backup to the system
software. Finally, it is important that all paperwork, correspondence, and
notes relating to a qualified franchise candidate is in a file under the
person’s name.

The Franchise Application

Once potential franchisees have been initially qualified, the next step is to
have them complete a franchise application. A franchise application
consists of several sections requesting information to be furnished by the
franchisee prospect. Some franchisors would make their franchise ap-
plication available on their website, so it is easier for franchise applicants
to download, complete, and submit the application at an early stage in
the franchise development process.
Because completing a franchise application requires an individual to
provide a good deal of personal and financial information, a completed
application usually indicates that applicants have a keen interest in the
franchise. Based upon assorted industry sources, 10%–15% of franchise
candidates who have an approved franchise application and are con-
sidered qualified. Franchise brokers who devote considerable time en-
gaging a candidate will judiciously qualify a candidate before presenting
them to the franchisor. The broker process can lead to 1 out of 7 ap-
plications that result in a completed transaction because a broker wants
to be sure that an individual, they submit to the franchisor is well qua-
lified and committed to investing in the franchise.
Once a completed franchise application is received by the Franchise
Department, the franchise candidate should be notified by telephone ASAP
and told that they will be contacted once the application is reviewed. The
next step is for the VP Franchise Development to review the application
with a focus on the person’s financial qualifications, personal attributes,
and business experience. It is common for franchisors to do a credit check
on the applicant. The response time for contacting the person is important
because franchise candidates respond favorably to a quick response,
especially, regarding their application and do not want to wait longer.
Assuming that the initial franchise application is approved, additional
information regarding the prospect’s qualifications may be gathered from
subsequent conversations and a franchise candidate corporate visit.
 Franchise System Development 113

Qualifying the Franchise Candidate

Once a completed franchise application is received, the next step is for
the franchisor to evaluate the application to determine the individuals’
franchise qualifications. Qualifying the franchise prospect is the process
franchisors use for fully approving an individual’s qualifications to be
granted a franchise.
Qualifying franchise candidates is a vital component of the franchise
development process because nothing can be more disruptive and difficult
for a franchisor to deal with than a poorly qualified franchisee who cannot
properly operate their franchise. When a franchisee fails and is terminated
it must be reported on the FDD, which can be harmful to a startup fran-
chisor. Further, a franchisee candidate who is not properly qualified can
result in potential problems that can include deficient performance in op-
erating their franchise and in some cases a failed franchise. Poor qualifi-
cations can include a franchisee prospect that is undercapitalized which can
prevent them from having sufficient capital until the franchise becomes
profitable. It is also important to confirm that the franchisee recognizes
how much work it takes to build a successful franchise that could be in-
dicated by unrealistic expectations. Finally, some franchisees are un-
coachable and fail to follow the franchisor’s advice. The Franchise
Department should look for indications that a franchise prospect will be
compliant and follow the franchisors operating standards. This can require
skilled interviewing techniques on the part of franchise development staff.
As the first author who has supervised franchise development personnel,
I cannot overemphasize the importance of properly qualifying franchise
candidates. Having been personally involved in hundreds of franchisee
transactions for both private and publicly traded franchise companies, I
can confirm that the structure and emphasis of a franchise company foster
the addition of new franchisees. Many franchisor leaders are focused on
growing their franchise system, especially if it is a startup or emerging
franchise company because it is a basis for publicity and gaining additional
revenues. In addition, franchise development staff who usually earn a
salary and a commission for each completed franchise transaction are
initiative-taking to sell franchises. On certain occasions, they may promote
a franchise candidate who may be partially qualified. I have been per-
sonally involved in several situations where the CEO suggested I consider
approving a franchise candidate who I did not consider fully qualified. In
these cases, the franchisees eventually left the system.
The qualifying process usually starts with an initial review of the
prospects’ application which can be performed by the VP Franchise
Development or a member of the development team. It is important that the
review of the franchise application focuses on the attributes and skills of the
candidate and how they compare to the franchisee profile. To prevent
114 Franchise System Development

poorly qualified franchise candidates from being accepted, it is important to

construct a franchisee approval committee, which can include members of
the Top Management Team or several individuals who can objectively
evaluate a candidate such as the CFO and human resource director.
When a franchise candidate is deemed qualified, they should be sent a
copy of the FDD and told to review the documents and then contact the
Franchise Department with any questions. They should also be advised
to utilize a franchise attorney to assist with their review. It is important
that the Acknowledge of Receipt for the FDD which is contained at the
end of the document has been signed by the franchisee and returned to
the franchise department. This must be done 14 days before there any
monies are paid or agreements signed by the franchise candidate.
In most cases, the franchise candidate will have initial questions after
reviewing the FDD. This often takes place before their attorney has re-
viewed the FDD and presented their findings to their client. After this,
the franchise candidate will have additional questions and possible
concerns to discuss with the franchisor representative, leading to the next
step of the franchise system development process.

Engaging with the Franchise Candidate

Engaging the franchise candidate represents the process whereby a
member of the franchise development team can present the franchise
candidate with important aspects of the franchise opportunity and ac-
quire more information regarding the candidates. Once prospective
franchisees have been qualified and had an opportunity to review the
FDD they will be contacted by the VP Franchise Development or other
staff members who can guide the candidate through the franchising
process. In larger franchise organizations, the person contacting the
candidate is usually a franchise development specialist or salesperson.
This will be an opportunity to answer any questions the candidate may
have after their initial review of the FDD.
The engagement process is a key part of the franchise development
because it will allow the franchisor representative to gain insight regarding
any concerns a candidate may have regarding the franchise. This can also
provide added information regarding a candidate’s qualifications, which
may not have been observed from the franchise application. It is essential
to assign a specific franchise staff to work with a franchise candidate. This
could better ensure a smooth communication flow between the franchisor
and franchisees and prevent a candidate from receiving mixed responses.
This arrangement can create a good relationship between the franchisor
representative and the franchise candidate.
After the candidates’ questions and their initial concerns have been
sufficiently addressed in the engagement process, franchise candidates
 Franchise System Development 115

often would start to negotiate with franchisors and request certain terms
of the franchise agreement to be amended, stricken, or altered. This ne-
gotiation process could be quite sensitive as a candidate may have received
advice from their attorney to request certain terms of the franchise
agreement be altered. It also needs to be determined by the franchisor
representative how important certain changes are to completing the
franchise process. It is not uncommon for a franchisee candidate to state
that a certain provision of the franchise agreement if not changed can be a
“deal-breaker.”
The problem with agreeing to amend certain terms of the franchise
agreement is that other franchisees could claim discrimination on the
part of the franchisor. Such a claim could entitle a franchisee to receive
financial compensation for the same changes they never received. To
preempt these potential issues, franchisors could explicitly state that
they do not negotiate some terms of the franchise agreement. Based on
the first author’s experience, when it comes to a qualified franchise
candidate requesting a few changes to the franchise agreement that is
not of major importance, most franchisors will acquiesce, except for
the leading brands with abundant candidates. When the subject of
negotiating terms of the franchise agreement is raised by the franchise
candidate or their attorney, franchisors should consult with their
franchise attorney before responding unless a precedent has been
established.
In general, however, there are certain terms in a franchise agreement
that is nonnegotiable.

1 Royalty payments and advertising fund fees are franchisee obliga-

tions contained in the franchise agreement. These specify a specific
amount of these fees that each franchisee is required to pay on a
continuing basis. These should not be negotiable for any franchise
candidates; else existing franchisees are likely to question why they
did not receive this benefit.
2 The Initial Franchise Fee, paid upon the execution of the franchise
agreement, should not be changed in general. The only exception is
for a franchisor discount granted to veterans under special programs
such as the Vetfran program which was introduced by a franchisor a
number of years ago and actively promoted by the International
Franchise Association.
3 The initial term of the franchise agreement should be fixed for all
franchisees. Most franchise agreements specify a 10-year duration
with an option to renew for five additional years. The current
franchise terms a franchisor provides should remain the same for all
franchisees. It is rare but not unusual for a franchisor to change the
term of the agreement for a specific franchisee.
116 Franchise System Development

4 Default and termination provisions specify the conditions that can

cause a franchisee to be placed in default of the agreement which if
not cured can lead to the franchise being terminated. Examples of
defaults can range from not being open for business as required to
operating an unclean location to selling unauthorized products. It is
important that default and termination provisions remain the same
for all franchisees and not be changed. Otherwise, the franchisor
could be accused of discriminatory franchise practices.
5 Additional franchise agreement provisions that should not be
changed for the same reasons are nondisclosure and noncompete
provisions, legal venue, franchise site-location size, location, and
unauthorized décor.

Following are Items that some franchisors may negotiate:

1 Financing of the initial franchise fee over a brief period could enable a
highly qualified candidate to pay the initial franchise fee over several
payments. There may be a highly qualified franchise candidate who
may not meet the financial qualifications but has exemplary creden-
tials. An arrangement to defer a portion of the initial franchisee fee can
be granted, however, this should be disclosed in the FDD in likelihood
this concession could be granted.
2 Although most franchisors will not change the initial term of the
franchise agreement, which is usually 10 years. Some franchisors
may agree to add an additional 5-year renewal term if this could help
to close the franchise transaction as it is not a major concession.
3 Deferring a portion of royalty or advertising fund fees for the first
few months after franchise opening can be granted, providing the
franchisee is obligated to fully pay any deferred fees in full. The
franchisor should not waive the full payment of these fees.
4 The size of the franchisee territory can be slightly adjusted, provided
it does not represent a major departure from the procedure used by
the franchisor to define and grant territories. For example, a
franchisor that uses zip codes to define a franchise territory coupled
with an estimated population size can be altered to grant a
franchisee candidate’s request so long as the overall territory adheres
to the usual policy.
5 A cap or limit of the franchise Personal Guaranty, whereby a
franchisor agrees to personally guarantee any financial obligations
owed to the franchisor, may be negotiable. A franchise is held in the
name of a corporation without a personal guarantee a corporation
may lack the funds or assets to meet its financial obligations the
franchisor is entitled to. Because some franchise candidates may not
want to risk exposing all their assets to a financial judgment, they
 Franchise System Development 117

would request a dollar cap on the personal guaranty. One solution

could be to agree to a cap that represents 5 years estimated future
franchisee royalty fees or a set dollar amount.
6 The right of first refusal for adjoining territories that are available is
often negotiable. This is often requested by franchisees as a form of
protection when they feel that a future neighboring franchisee could
drain revenues from their franchise. It is not unusual for startup
franchisors to receive this request. Although some franchisors resist
granting this request it is not a major concession providing that the
franchisee must exercise this right within a brief time frame, for
example, 30 days. Additional stipulations can be included that can
make it difficult for only the most capable franchisees to exercise this
right. A franchisor should not lose a qualified franchise candidate
because an existing franchisee with a first right of refusal drags out
the process.
7 Various franchisors are willing to grant changes to the Transfer and
Assignment section, which defines the time that the franchisor can
exercise their right of first refusal if the franchisee has a qualified
buyer for their franchise. Given the typical 10-year term of a
franchise agreement, some franchisors take the position that the
possibility of this becoming a problem is remote and concede to this
request. Franchisors can deal with this request by agreeing that the
franchisee may be granted additional time to consummate the sale of
their franchise subject to the sole discretion of the franchisor.

The Franchise Discovery Day

The sixth step in the franchise development process is Discovery Day,
which is the meeting between the franchise candidate and the franchisor
at corporate headquarters. Discovery Day can be the first face-to-face
meeting between the franchise candidate and franchisor management. It
is important because franchisor staff can meet the franchise candidate,
review their qualifications, and make a final informed decision regarding
the candidate becoming a franchisee. This is also the last opportunity for
the franchisor to confirm that the candidate is qualified. Thus, it is not
surprising that every franchisor requires prospective franchisees to visit
their corporate headquarters as the last requirement before finalizing the
franchise transaction.
The objective of Discovery Day is for franchisor staff to meet the
franchise candidate after the candidate has spoken to franchisees, re-
viewed the FDD, and has gained an understanding of the franchise
program. It is also an opportunity for the franchisee candidate to meet
franchisor executives, observe the franchisor’s corporate culture, obtain
answers to any remaining questions, and negotiate any open items
118 Franchise System Development

pertaining to the franchise agreement. The Franchisor should share the

agenda for a Discovery Day visit including a list of attendees with the
candidate before the meeting. Although a candidate is responsible for the
expenses incurred to attend Discovery Day, some franchisors refund
those expenses if the franchisee purchases the franchise.
Franchisors should take a balanced approach to Discovery Day with
the following objectives:

1 Provide useful information to the candidate and answer questions.

2 Evaluate and qualify the franchise candidate by obtaining objective
feedback from several members of the franchisor staff.
3 Resolve any open issues or concerns on the part of both parties.

If these objectives are fulfilled, then both parties will benefit from
Discovery Day and move on to finalize the franchise transaction.

Finalizing the Franchise Transaction

The last step in concluding the franchise transaction is preparing the
franchise documents and scheduling a closing date. It is important that
all the documents are carefully reviewed by the franchisor before the
closing. This should be done to avoid any mistakes like excluding an-
cillary agreements including the personal guaranty, noncompete, and
nondisclosure agreements.
Finalizing the franchise transaction consists of the franchisor pre-
paring all the franchise document, ancillary agreements, and amend-
ments that may reflect any negotiated changes to the franchise agreement
and resolving any items that the franchisee candidate or their attorney
wish to negotiate. The franchisor should have two people review the
documents before presenting them to the franchisee for execution.
Relying solely on a franchise development staff member to review the
documents can be a mistake because they could miss something. As
the first author, we had a franchisee’s personal guaranty excluded by the
judge in a lawsuit because the franchisee signed the guarantee in the
name of their corporation. This meant that the franchisee was not per-
sonally liable for the obligations owing to us after the judgment and their
corporation had little assets.
Some franchisees may consider the signing of the franchise documents
so important they would prefer to execute the documents in person with
the franchisor. In some franchise systems, there may be an actual closing
where all signatories are in attendance although in current times most
franchise documents are signed offsite and originals exchanged.
 Franchise System Development 119

International Franchising
International franchising takes place when a franchisor decides to grant
to another entity, defined as the franchisee, the rights to operate in an-
other country utilizing the franchise brand, trademarks, franchisors
system, knowhow, and operating systems. The foreign franchisee pays
an initial franchise fee and ongoing royalty fees. It agrees to operate the
franchise according to the franchisor obligations contained in an inter-
national franchise agreement. Many of the major franchise brands op-
erating in the United States franchise throughout the world.
Countries that have the largest number of franchise brands include the
United States, China, India, Brazil, Germany, France, Australia, Japan,
and Canada. The popularity and growth of international franchising are
evidenced by the World Franchise Council (WFC) which consists of
franchise associations from 40 countries. International franchise at-
torney Carl Zwisler advises that franchisors and potential franchisee
candidates should research the market and test the viability of the con-
cept through modeling, using the best available information for each
market when developing a plan for that specific market.
Possessing the experience to enter other countries requires that a fran-
chisor has a minimum of 30–50 franchise units, operates a successful
franchise brand, and possesses the necessary human and financial capital.
Franchisors that consider franchising in other countries should first gain a
full understanding of international franchising. Information is available
from the U.S. Commercial Service and International Franchise Association.
International franchise attorney Carl Zwisler advises that franchisors and
potential franchisee candidates should research the market and test the
viability of the concept through modeling, using the best available in-
formation for each market when developing a plan for that specific market.

Summary
This chapter illustrated the franchise development process, which enables
franchisors to build a successful franchise system. The franchise develop-
ment process is the engine that can propel the growth of a franchise
system. We explained that the foundation of a successful franchise de-
velopment strategy begins by identifying the markets you should target for
franchises and profiling the key characteristics of a franchisee candidate.
We presented the ways that franchisors recruit franchise candidates and
the importance of using CRM software to process franchise leads. We also
discussed the significance of properly qualifying a franchise candidate and
defined and presented the engagement and negotiation between the fran-
chise candidate and franchisor. This process is then completed with the
franchisee candidate Discovery Day.
120 Franchise System Development

Notes
1 Cascio, W. (2021). Managing Human Resources. McGraw-Hill US Higher
Ed USE.
2 Chan, C. R., Park, H. D., Huang, J. Y., & Parhankangas, A. (2020). Less is
more? Evidence for a curvilinear relationship between readability and
screening evaluations across pitch competition and crowdfunding contexts.
Journal of Business Venturing Insights, 14, e00176.
3 Hodge C, Oppewal H., & Terawatanavong, C. (2013). Winmark Franchise
Partners (2017). The top elements of a franchise development strategy for
emerging franchisors. European Journal of Marketing.
4 Gerson, K. (2020). Franconnect 2020 Franchise Sales Index Webinar.
Chapter 8

Franchisor Support and

Services

In Chapter 7, we presented the components of franchise development

and how to recruit, qualify, and engage franchise prospects to complete a
franchise transaction. After the franchise agreement is signed and the
initial franchise fee paid, the contractual relationship between the fran-
chisor and franchisee begins.
To facilitate the symbiotic relationship between franchisees and
franchisors, this chapter illustrates the important toolset, i.e., the fran-
chisor support and services, created by franchisors to better guide and
develop their franchisees as it would make the difference between a
successful or unsuccessful franchise program. Franchisor support con-
sists of the contractual obligations that franchisors must provide to its
franchisees while franchisor services are programs that can facilitate a
more successful franchise operation.
Although both parties have specific obligations intended to achieve a
successful operation, franchisor support and services is the most im-
portant obligation. Because most new franchisees are inexperienced and
have not developed an understanding of their roles and tasks in the
franchise system, they depend heavily on their franchisors’ guidance, and
welcome their advice.1
Franchisor support includes franchisee training, startup and ongoing
franchisee support, specific services, and marketing programs that can
help franchisees generate additional revenues and profits. Franchisor
services consists of various items which typically include outside IT
support, product discounts, supplier purchase discounts, payroll pro-
cessing, and human resource support. We elaborate the most important
components of franchisor support and how these contribute to a suc-
cessful franchise program. We conclude with a discussion on how to
monitor franchisee performance using key performance indicators (KPIs)
to ascertain how franchisees are performing and which franchisees may
require franchisor advice and assistance.

DOI: 10.4324/9781003034285-8
122 Franchisor Support and Services

The Importance of Franchisor Support

As presented earlier, franchise support consists of those contractual
obligations that the franchisor is required to provide its franchisees.
These items can include site location visits, training, marketing assis-
tance, and marketing programs. Some franchisor support activities
may be stated as optional in the franchise agreement. It is important
for franchisors to recognize the value of franchisor support and how it
can facilitate the franchise development process. People invest in a
franchise to build and operate their own business with the expectation
that franchisors would provide the training, support, and structure
needed to successfully operate their business. The expertise and ex-
perience of a franchisor is part of the value that franchisees expect to
receive. When a franchisor fails to fulfil the expectations of its fran-
chisee, it can result in various negative consequences.
When a franchisor fails to properly support its franchisees, it can
leave some franchises adrift which can lead to mediocre or poor
franchise performance. In addition, insufficient franchisor support can
prompt a franchisee to request additional operational assistance which
would place an additional burden on franchisor resources, that could
result in a lack of overall franchisee support.2 Such a lack of support
could result in the failure of franchisees. Given franchise prospects seek
positive validation from existing franchisees, the frequent dissatisfac-
tion or even failures of franchisees could lead to serious litigation and
make it difficult to convince future franchise prospects to invest in the
franchise.
Appropriate franchisor support is needed to ensure that franchisees
would have sufficient resources to manage a successful franchise unit.
Each component of franchisor support is individually and collectively
important. Based on our experience, we have found that the most suc-
cessful franchise brands deliver substantial franchisee support for all
components of franchise operations. This pattern is also observed from a
report from Franchise Business Review and InGage Consulting, illus-
trating the impacts of these franchisor service and support engagements
being material and quantifiable. With a sample of 300 brands and
24,000 participants, this study found that franchisees that receive sup-
port and are engaged with franchisees are 3.7 times more profitable than
franchisees that do not receive active support.3
Next, we discuss several key components that are required to grow a
new franchisee unit into a successful one. These components include pre-
opening assistance, franchise opening assistance, marketing programs,
operational support, measuring franchisee financial performance, and
franchisee counselling.
 Franchisor Support and Services 123

Pre-opening Assistance
Pre-opening assistance refers to a set of franchisor activities that will
effectively prepare a franchisee for launching their new franchise busi-
ness. This assistance typically includes site-selection assistance, fran-
chisee training, and franchisor services.
The pre-opening assistance is important because it would prepare the
franchisee for finding the right location, understanding the fundamentals
of franchise operations, and arranging for the operational services that
the franchisor provides. When a franchisor does not provide adequate
pre-opening assistance, a franchisee often makes biased decisions. that
could impair the performance of its franchise operation. For example,
signing a lease for a location that has not been properly evaluated and
approved by the franchisor can have negative consequences. These can
include poor sales which can result in significant operating losses. If a
franchisor does not provide the franchisee the appropriate support re-
garding recruiting and hiring the right employees, it can negatively im-
pact the franchise operation.

Site Selection Assistance

While a small unique type of franchises may use a homebased operation,
most franchisees will need to find a location to operate their franchise.
Site selection assistance is franchisor provided guidance that helps a
franchisee identify and lease the most desirable franchise location. The
right franchisee location can be critical to the success of many franchise
concepts and for promoting the franchise brand. This is especially true
for franchise concepts such as retail and food franchises, compared to a
nonretail concept such as homecare or business services.
When a franchise operates from a poor location due to poor traffic
flow, ingress or egress, its potential franchises revenues and earnings
could be decreased. A poorly selected location often led to the closure of
a franchise unit, either because of a franchisee’s self- abandonment or the
franchisor-initiated termination. Such closure could harm the franchise
development program as future franchise prospects might equate a
closed location to a poor franchise investment opportunity.
Site selection can include the services of a site selection firm, a de-
mographic site selection software, or a national or local real estate
company to find the most suitable available site for their franchisee.
Some franchisors prefer to find and develop a site, which they will then
lease to their franchisee. While most franchisees execute the site lease
themselves, some franchisors have a different approach. When Christian
Brothers Automotive, a franchise business that offers automotive repair
and service products, looks for a site to present to the new franchisee for
124 Franchisor Support and Services

approval, it considers certain factors including customer demographics,

access, traffic, competition, natural and man-made boundaries, and
potential customer base. Once the site has been approved by a fran-
chisee, Christian Brothers will purchase the site and construct the
building to be leased to the franchisee.
When a franchise prospect has a location in mind before signing the
franchise agreement, they must request prior approval from the fran-
chisor before completing the transaction. This prevents both parties from
making a major commitment before the franchise transaction is com-
pleted. Except for most home-based franchises, franchisors will retain
the right to approve a location before the franchisee executes the lease. A
typical franchisor site selection process is used by Ben’s Barkek Place, in
Roseville, California, which franchises retail health food pet stores that
sell pet food, toys and related products. They provide site selection
guidelines and other location advice and require their franchisees to find
and select the site for a location within their territory, subject to fran-
chisor approval.
As discussed in Chapter 5, the Franchise Operations Manual will in-
clude a chapter that provides guidance on franchise site selection and
development. It should include important features of the site such as ease
of access, available parking, traffic flow, existing businesses, and other
features. There should be several alternative plans for building config-
urations, equipment, decor, and signage. Once the site is approved and
before any construction or modifications are started, a copy of the
blueprints and scope of work should be sent to the franchisor for ap-
proval. After approval, the franchisor should be available and prepared
to help once work has started on the new location and be responsive to
emails and telephone calls from the franchisee because site renovations
could be delayed until questions are answered.

Franchisee Training
For franchisees to reproduce a successful business model in multiple lo-
cations, the franchisor is required to provide its franchisees the knowledge,
skills, and ability to operate a franchise business.4 Franchisee training is an
important component of franchisor support. When franchisees are poorly
trained, they may not be prepared to properly staff, open and operate their
new franchise, potentially resulting in business unit failure, lengthy liti-
gation, and severe damage to the franchise brand. Quality training is so
essential, the training schedule, agenda, name, and title of presenters must
be disclosed in the Franchise Disclosure Document under Item 11.
A survey of Millennials and younger workers by Accel in 2018 in-
dicated that training is a major priority when that group is looking for
employment. As this group represents the largest number of franchise
 Franchisor Support and Services 125

employees, franchisors should formulate training as a top priority.5 This

strategy can enhance franchisee recruitment and improve employee
performance.
Depending upon the complexity of the franchise operation and type of
franchise business model, the training program can range from 1 to 6
weeks or longer. Training can take place at the franchisor’s corporate
office and can include onsite training at a company or franchise location.
The training agenda should include presenters that are knowledgeable
about a specific component of franchise operations, including marketing,
product purchasing, and day-to-day franchise operations. It is beneficial
to include franchisor staff who will interact with franchisees because
they can bring their experience to the training program.
Some training programs are done in two segments: the first segment
before a location is approved and prepared, and the second segment before
the new franchise opening. This type of training schedule is frequently
used in the franchise food sector. Kelly’s franchise based in Saugus,
Massachusetts, is a new casual fast-food franchise that has been operating
independently since 1951. Its training program is comprehensive, con-
sisting of 12 weeks of training for the franchise owner at Kelly’s corporate
headquarters and 8 weeks of training for management staff.
A well-structured training program must be designed so that a new
franchisee is able to complete their training with enough knowledge to
staff and prepare their new franchise for the opening. Follow-up training
and support should continue as the franchisee is preparing to launch their
new location. The timing of training is important, if training is done too
far in advance of the new opening the participants might not retain all the
information they were taught. Some franchisors provide training while the
site is under construction while others train before the site is identified.
From time to time, a franchisor may provide training to introduce new
products, services, marketing programs, or franchise operating proce-
dures. Given the benefits of technology, training can be provided in several
ways from a virtual setting, webinar or at a conference or annual meeting.
Despite their various setups and structures, these training programs often
include the following assortment of topics:

i Business management topics aim to provide franchisees the basic

knowledge and skills to manage their business units. It could cover
leadership skills, motivation techniques, and other important man-
agement toolset.
ii Franchise operating procedures will provide franchisees both de-
clarative and procedural knowledge on the operation of their
franchise and the corresponding requirements. Franchisees need to
understand and follow the proper procedures when operating their
126 Franchisor Support and Services

franchise, so the overall franchise system could maintain a consistent

brand image and product quality for its franchise customers.
iii Human resource management is an important training segment that
can ensure that franchisees will have a basic understanding of how
to effectively obtain, allocate, and manage their human resources to
effectively improve franchise performance. It provides guidelines on
various employee-related issues, such as job descriptions for various
position, the recruitment and selection of employees, and perfor-
mance evaluation and management.
iv Franchise-specific marketing information will provide the franchisee
with the product or service knowledge that will acquaint them with
a keen understanding of the franchisee’s customer offering. This can
include, but would not be limited to, franchisees in the food
business, residential and commercial services, home care, business
services or retail products and fast food.
v Marketing aims to cover the foundation techniques and tools to help
franchisees to communicate and engage their target customers to
create and capture values. Some common topics include sample
franchisor ads, product placement and layouts in the case of retail
franchises, competition analysis, and pricing strategies.
vi Financial Management enable franchisees to better understand the
allocation and management of financial resources relevant to the
specific business activities of their franchise units. It includes the
required financial reports for franchisors and often highlights the
financial obligations of the franchisees, such as the amount and
frequency of royalty and advertising fund payments. It often specifies
bookkeeping software programs that a franchisee may be required
to use.

Operational Services
In addition to franchisor support, franchisors frequently provide various
operational services that enhance franchisees’ ability to manage and
operate their franchise unit. These operational services include payroll
services, vendor purchase discounts, accounting, HR and IT support.
Operational services are important as these could assist in franchise
growth as it can allow franchisees to focus on their new franchise op-
eration. These operational services can be an attractive feature that may
appeal to prospective franchisees who are considering investing in the
franchise.
The scope of these services can differ depending upon the type of
franchise business, franchise operating system, and projected system
growth. Franchisors that operate franchises that employ more than
several people can provide payroll processing by contracting at lower
 Franchisor Support and Services 127

fees with a payroll processing company such as ADP or Paychex. This

enables a franchisee to process payroll, have withholdings made and
produce payroll checks more efficiently and at less cost compared to
doing it themselves. Franchisors in the food sector will specify required
suppliers that provide franchisees quality products at reduced costs.
Franchises in the commercial maintenance category such as ServePro a
large residential and commercial franchisor will usually provide their
franchisees with pre-packaged client service accounts that are pre-sold.
This enables a franchisee to have ready business.
As a franchise system continues to grow, the franchisor can arrange
for franchise purchase discounts from specific suppliers of required
products, equipment, services, and supplies. For example, some fran-
chisors might arrange for IT support, equipment, and accounting soft-
ware to be purchased by franchisees from vendors at a discount. First
Light Homecare, based in Cincinnati, Ohio, franchises homecare ser-
vices. First Light provides its franchisees software for client scheduling
services, accounting services and intranet access that supports their First
Light homecare business. This enables their franchises to focus addi-
tional time on marketing their services and recruiting caregivers.
Franchisors may arrange for a third party to process payroll and
perform mandatory withholdings and payments. SurePayroll, a division
of Paychex, provides large and small franchises a Franchise Management
Portal. Their portal enables franchises to easily process their payroll and
will pay and file federal, state and local payroll taxes for the franchisee.
SurePayroll cites their ability to free up valuable time for small franchise
operations.

The Franchise Opening

A franchise opening consists of those activities that enable a franchisee to
effectively introduce the new franchise unit to the media and public in
the targeted franchise territory. The franchise opening is important as it
represents the beginning of the franchisee’s responsibility for managing
their new franchise. It also serves as the beginning of the active
franchisor–franchise relationship. The activities leading up to this point
were preparatory in nature and did not require the franchisee to generate
on-going revenues and expenses. Once the franchise is open and oper-
ating, the franchisee will expend capital until the franchise achieves
break even and then profitability.
Executing a successful franchise opening can mean the difference be-
tween achieving franchisee financial goals or having the financial goals
fall short. To a new franchisee preparing to startup, nothing can be more
frustrating when they request assistance from their franchisor, and it’s
not provided in a timely fashion. As the first author who has participated
128 Franchisor Support and Services

in and attended numerous franchise openings, I have observed how a

successful franchise opening could generate enthusiasm and instill con-
fidence for both franchisees and franchisors. A successful franchise
opening would translate to a positive customer experience because the
franchisee and their employees will exhibit a positive and welcoming
attitude, attracting more potential customers. For the franchisor, it could
also result in a positive recommendation regarding the franchise pro-
gram from the franchisee to subsequent franchise candidates.
Because of the importance of successful grand openings, savvy fran-
chisors carefully design their grand opening program. They aim to create
attention to the new franchise, generate consumer traffic, and provide a
successful launch of the franchise. Creating attention to a new franchise
opening can provide other benefits such as attracting potential employees
and individuals who might be interested in a franchise opportunity in
another market. While some franchisors will fund a portion of the grand
opening, others may require the franchisee to expend a minimum
amount on grand opening advertising and price promotions. The grand
opening program usually consists of invitations to local business and
political leaders, a ribbon cutting, and special product promotions.
The franchise opening offers franchisors and franchisee representatives
an opportunity to meet special visitors and engage with the public. The
franchisees, their employees, franchisor CEO, and franchisor staff
should be in attendance and play active roles interacting with potential
customers. While the franchisees are often an active member of the local
community, local business and political leaders should be invited to help
attract added attention to the event. The opening of a new franchise
business is an opportunity for these stakeholders to be recognized and
connected with franchisees and franchisors. It is also important to ensure
that photographer and videographer are hired to record the grand
opening for local media because they can help to generate publicity for
the franchise. Except for smaller communities, onsite media coverage is
usually reserved for franchises with strong branding such as a
McDonald’s or Chick-Fil-a or a franchise hotel chain. Each of which hire
a significant number of employees which is newsworthy. Ribbon and
Commemorative Scissors should be available for performing and re-
cording the ribbon cutting ceremony.
During grand openings, one of the most effective ways to generate
attention and consumer interest is through special product promotions.
Various franchises offer different promotions. For example, product
coupons can be provided to visitors to the grand opening who will be the
first franchise customers. The coupons should offer substantial savings
and be redeemable for a specific period. Some franchises offer 2–4 weeks
of coupons. Certain businesses such as a home remodeling franchise that
provide services or other types of service may hand out a certificate that
 Franchisor Support and Services 129

provides a discount off services. Others, such as a franchise that provides

residential home services like bathroom or kitchen remodeling could
offer major discounts off the cost of a specific project while a homecare
franchise may offer several hours of homecare services at a reduced cost
for the first 30 days.
An example of an effective franchise grand opening program is how
Chick-Fil-a promotes new franchise openings by featuring numerous
specials and price promotions using direct mail and print media for several
weeks. Some franchises distribute children’s handouts for franchises have
children as potential customers. This is especially appropriate for fast food
franchisees that serve families. Franchisees also hand out key chains or
other in-expensive gifts with the franchise logo and address.
Franchisors in the food and retail sector often use a “soft opening” for
several weeks, prior to a grand opening. A “soft opening” enables a
franchisor to train and provide support to the new franchisee and help
fine-tune the franchise operation before conducting a full-blown grand
opening program. This strategy can produce a trouble-free grand opening.
Grand opening services are usually large scale for highly recognized
franchises, such as quick-service restaurant brands such as McDonald’s
and KFC. Their grand opening programs often include press releases and
direct mail to potential customers that feature special price promotions.
Conversely, franchises in the commercial, residential, and personal services
category may have a modest onsite grand opening and unveil the grand
opening with a campaign of direct mail, print, and electronic advertising.
After the franchise opening when the new franchise unit is up and
running, franchisor staff should remain in contact with the franchisee for
several weeks to ensure that the franchise is operating to their satisfac-
tion and expectations. It is not unusual for some franchisees to be re-
luctant to contact their franchisor representative after the onsite grand-
opening support has ended, the franchisor representative should take the
initiative and contact the franchisee to ensure there are no unresolved
problems. In fact, some franchisors provide post-grand opening assis-
tance for several days or longer. The Huddle House based in Atlanta;
Georgia has 400 locations that offer a Southern type of diner menu. It
provides two to three weeks of pre-opening and post-opening assistance
to its new franchisees. This type of onsite support is important because
the franchisee will be operating their franchise for the first time. In some
instances, a franchisor will assign a person to prepare the new owner for
its grand opening and remain onsite during and after the grand opening.

Franchise Marketing
Another key component of franchisor support is the marketing and
advertising assistance that franchisors can provide. Franchise marketing
130 Franchisor Support and Services

consists of the advertising, promotional, and marketing programs that

enable franchisees to build strong relationships with their potential
customers and generate consumer interest to purchase the franchisees
products or services. Marketing is a key activity and integral component
of the franchise business model because it can result in positive franchise
branding enabling franchisees to increase their exposure, which in turn
can lead to increased revenues. Marketing support is one of the main
reasons why individuals invest in a franchise, because they can take
advantage of the exposure, branding, and marketing support that a
franchisor can provide.
Although certain franchisors may provide limited marketing support
most agree to provide some marketing services. When franchisors fail to
fulfill their marketing obligations and leave their franchisees responsible
for promoting their own franchise units, it could impact franchisee per-
formance. This can include dissatisfied franchisees and lower franchise
sales. Also, franchisors that fail to provide adequate marketing support on
behalf of their franchisees can suppress franchise brand awareness for the
overall system. Next, we highlight important components of franchise
marketing assistance that franchisors should focus on.

Implementing Marketing Programs

Franchise marketing program consists of both regional and national
advertising activities intended to promote the franchise brand and
increase consumer awareness in the local franchisee market. It often
features major franchise products or services by utilizing effective ad-
vertising vehicles and has been considered as the most productive ways
to promote franchise brand awareness.
Franchisors should follow three steps when launching its franchise
marketing program. The first step is to provide marketing materials,
consisting of advertising brochures and ad slicks for print advertising.
Many franchisors provide these materials in a franchise start-up kit be-
fore the franchisee opens their new franchise. The second step is to
identify those promotional items that will appeal to consumers in the
target market to generate added revenues while preserving franchisee
gross margin dollars. The last step is to measure the financial results of
advertising programs to identify their effectiveness in generating addi-
tional revenues. As part of this process, it is important to solicit fran-
chisee feedback to determine their satisfaction with franchise marketing
program. As a franchise system grows, marketing activities will become
more sophisticated and complex, prompting franchisors to include
franchisees in a marketing committee to gain their insights and support
for their advertising programs.
 Franchisor Support and Services 131

Franchisee Advertising Funding

Franchisors often administer an advertising fund that receives financial
funds from its franchisees. This fund is in a segregated account separate
from any royalty or other franchisee payments. The monies can be spent
on local, regional, or national advertising activities. The use of advertising
funds is important because they can be used on behalf of an entire fran-
chise system or for targeted markets. Advertising funds enable franchisors
to leverage advertising monies more efficiently than an individual fran-
chisee. Once a certain amount of money in an advertising fund has been
accumulated, franchisors usually establish an advertising committee,
comprised of franchisor and franchisee representatives to effectively utilize
advertising fund based upon a consensus of both parties.
The amount a franchisee contributes to an advertising fund is usually
calculated as a percent of franchisee revenues ranging from 2% to 4% or
in some cases a fixed dollar amount. For example, Property Stewards, a
franchisor located just north of Atlanta, Georgia, manages and main-
tains vacation homes for clients, and has required its franchisees to
contribute from 0% to 2% of monthly revenues to the national adver-
tising fund.
Large franchise brands can have millions of dollars in their advertising
fund, which allows them to aggressively promote its franchise locations
and brand. For example, a national franchise brand could utilize its
national advertising fund to pay for the high cost for a Super Bowl
commercial. There have been several highly publicized lawsuits between
franchisees and franchisors that involved the use of advertising funds.
Burger King, KFC, Subway, and McDonald’s are franchise brands that
encountered major pushback from its franchisees regarding the appli-
cation of advertising funds.
It’s not unusual for a startup franchisor to defer contributions to the
advertising fund until they have a minimum number of franchisees, such
as five or more. Some startup franchisors would defer franchisee con-
tributions to the advertising fund until there are a minimum number of
locations, for example, 10 or more. The franchisor is obligated to keep
the funds in a separate account and may be required to provide its
franchisees an accounting of the fund upon request from franchisees or
on an annual basis.
In addition to an advertising fund, franchisees are usually required to
spend a minimum fixed dollar amount each month for advertising in
their territory. This amount can range from $1,000 to $4,000 or more
depending upon the type of franchise. Franchisees must document for the
franchisor how much they spent on local advertising for each month and
may be allowed to make a deficit spend in 1 month by exceeding the
requirement in the following month.
132 Franchisor Support and Services

Franchisor Pricing: Mandated versus Suggested Retail Prices

In terms of pricing, there are two main strategies that franchisors can
employ regarding the price of products or services. One is mandated
pricing, i.e., the practice of a franchisor requiring its franchisees to
charge specific prices for products or services. Unlike employing this
practice for company-owned locations, mandated pricing for franchisees
can create major problems for franchisors because this practice may
violate various federal and state statutes regarding allegations of price
fixing, unfair competitive practices and legal challenges from franchisees
that could end up in the courts.
The other strategy is the use of suggested retail pricing (SRP). SRP is the
most prevalent approach in franchising and refers to a franchisor providing
prices that a franchisee may charge but is not required to. Franchisors often
specify these suggested prices in the franchise operations manual and in
various franchisor communications. Franchisors must exercise caution
regarding franchisee pricing. Although franchisor and franchisee mar-
keting use promotional pricing in its advertising, franchisor pricing regimes
should consist of SRPs rather than mandating prices for its franchisees. A
common phase included in franchisor generated price promotion adver-
tising is “At Participating Locations,” which alleviates a franchisee from
being required to participate in promotional pricing campaigns while
providing notice to the customer. Despite some highly publicized disputes
regarding certain franchisor promotional price advertising programs, in-
volving Burger King, Subway, and KFC, most franchisees actively parti-
cipate in franchisor price promotions without complaint.

Franchisor National Account Programs

A National Account (NA) program is a marketing strategy employed by
franchisors to provide specific clients or customers beneficial pricing
when purchasing franchise products or services from a franchisee or
franchisor company location. An NA is important because it can provide
franchisees with a pre-sold customer in their territory. Although there
are price discounts granted to the NA, which can lower franchisee
margins, an NA can be beneficial for the franchisor and its franchisees
because it’s a source of revenues that do not require extensive sales ac-
tivities. The established business from an NA program can be an at-
tractive feature of a franchise program and can be valuable when
recruiting and signing new franchisees.
Thus, as the number of franchise locations grows, the franchisor may
consider establishing a NA program. A franchisor will require a
minimum number of locations to attract a potential NA customer.
However, it is not necessary that the NA company be national in scope
 Franchisor Support and Services 133

because it could have offices or business locations in a state or geo-

graphic region where there are franchisees. In most NA programs, the
franchisor has the exclusive right to negotiate and enter into an agree-
ment to provide products or services to a company and will have the
option to provide its franchisees the right to service the National
Account customer. If the National Account is in a franchisee territory,
most franchisors will provide the franchisee the opportunity to service
that account. However, if the franchisee declines or is not qualified, most
franchisors will retain the right to delegate the business to another
franchisee or can choose to service it themselves.
Examples of franchise services that could appeal to a potential NA
customer may include maintenance, commercial, and sanitation services
for property management firms, homecare franchises could establish a
NA with health insurance providers and senior retirement communities
and franchise fitness and gym memberships could be a perk provided by
companies to their employees. JAN-PRO which is a large international
commercial cleaning franchise based in Alpharetta, Georgia, has
National Accounts throughout the United States with commercial
building management companies. Its National Account Program features
a National Account Manager, consolidated billing, financial reporting
and franchisee access for service issues and requests. Franchisor CertaPro
Painters provides painting services to multi-site Kindergarten, Tutoring,
and Brick and Mortar Colleges and Universities accounts. As the first
author, I worked for a franchisor that had NA customers that included
McDonald’s and Carrol Corporation the largest Burger King franchisee.
These NAs added prestige to the franchisors brand and provided added
revenue opportunities for our franchisees.

Government Contracts
Another important part of marketing programs is government contracts,
i.e., agreements between Federal, state or local governments and non-
government entities that allow the government to purchase products or
services from a non-government entity. Government contracts are an
important way for generating revenues and are frequently used by
healthcare and medical staffing franchises. A number of personnel and
temporary employee staffing franchises also use government contracting
programs for their franchisees. Other government contracts are also
available for a wide range of products and services that both local and
federal government agencies may utilize.
Some franchisors choose to contract with local, state, or Federal
government agencies that enables the franchisor and its franchisees to
provide products or services to the contracting entity. To secure a gov-
ernment contract, a franchise or business must be a recognized business
134 Franchisor Support and Services

by the government which allows them to bid and compete for govern-
ment contracts by submitting a business proposal for the execution of
work, delivery dates, and other requirements.
The Small Business Administration provides a menu of services that
provides guidance on bidding for government contracts. The SBA web-
site states that it works with federal agencies to award twenty-three
percent of prime government contract dollars to eligible small businesses.
It also offers counseling and help to small business contractors and
disadvantaged businesses may benefit from participating in the SBA 8(a)
business development and mentor program for minority and dis-
advantaged small businesses that provides training and resources to help
participating businesses compete in the federal contracting marketplace.
National Account and government contracts can provide financial ben-
efits for franchises, providing there are the available resources to apply
for and administer the contracts.
An example of how franchisors utilize government contracts to attract
franchisees is Pestmaster Services. It is a franchisor based in Bishop,
California with franchises locations throughout the United States. It
provides vegetation management, mosquito control, and traditional pest
control services. Its franchisee recruitment advertising informs potential
franchisees they could provide services under a government contract.

Franchisor Operations Support

Franchisor operations support and evaluations are the various activity’s
franchisor staff engages in to provide franchisees the ability to enhance or
improve its franchise operation and financial performance. It includes
processes that can support and improve franchisee operations, evaluate
franchisee financial performance and assess franchisee compliance with
franchise operating standards. These activities are important because
as franchisor staff interact with franchisees, they will be able to learn how
franchisees are performing, obtain information on competitors, and learn if
a franchisee may require special assistance. Next, we describe three main
components of franchise operation support: Franchise Site Visit, Franchisor
Operations Representative, and Key Performance Indicators.

Franchise Site Visit

A franchisor site visit often involves a physical visit by a franchisor or
representative to a franchisee operating location to gauge franchisee
compliance. It is useful for obtaining market intelligence, feedback re-
garding competitors, marketing programs, and products. Its importance
is illustrated by a recent survey, highlighting that 72% of franchisees did
not think their field consultants spend enough time in the field visiting
 Franchisor Support and Services 135

franchise units.6 These site visits offer significant benefits for both par-
ties. For example, the franchisor representative can provide the fran-
chisee an assessment of their location appearance, product presentation,
discuss current challenges the franchisee may be encountering and the
competitive environment in the franchisee marketing area. The fran-
chisee and franchisor can benefit from the personal interactions that
provide each party what they expect from the site visits. It’s also an
opportunity to communicate with each other face-to-face which is more
effective than emails or the telephone. Although site-visits are the most
effective method of interaction, there are franchise brands, such as most
homebased franchises, residential remodeling services, and business
coaching franchises, that do not require site-visits.

The Franchisor Field Representative

Providing franchisor visits is the franchisor representative, also known as a
regional director, field consultant or franchisee consultant. This position
aims to support, advise, and audit the assigned franchisees. Franchisor
Operations representatives play a significant role in franchise organiza-
tions as they are constantly monitoring and managing the performances of
their assigned franchisees. Typically, a franchisor representatives may be
assigned to 15 or more franchise locations, depending upon the type of
franchise. Their responsibilities can include visiting franchise locations,
inspecting the location for franchise system compliance, discussing fran-
chise performance results with the franchisee and providing suggestions to
improve the franchise operation.
The most important time for the first franchise site visit is during 1–2
months after opening or earlier. This is when the franchisee is enthusiastic
about their new business coupled with high expectations and a willingness
to work long hours to build a successful franchise. If the new franchise
operation falters during this critical start-up phase, it could harm the
franchisees confidence and jeopardize the future success of the franchise as
a result. A franchisor that reviews and nurtures the performance of its new
franchisees can contribute to a successful franchise network.
Franchisor field staff can visit their franchisees on a schedule that can
range from every 2 weeks to once per month or quarterly. In less com-
plex and home-based franchise systems not frequented by customers,
such as residential remodeling and cleaning services a franchisor re-
presentative may visit the location once or twice per year or upon the
request of the franchisee. As the first author, my regional directors were
the most important resources I had. They provided me important fran-
chise information and could be used to gather vital intelligence ranging
from identifying the most successful franchise operations and signs of
franchisee unrest to new competitor information.
136 Franchisor Support and Services

The benefits from face-to-face contact are more effective compared to

the use of email or a telephone conversation. Franchisor representatives
need to keep in mind that a franchisee is not an employee of the fran-
chisor and as such should be treated with a degree of respect in view of
their contractual relationship with the franchisor and the franchisee’s
local knowledge of their marketplace. This means using a more con-
sultative approach rather than a supervisory role used in company-
owned operations. As a person invests in a franchise to capitalize on the
knowledge and experience, the franchisor has acquired franchisees will
expect that franchisor staff will interface with them and have competent
staff to share franchisor knowledge.
From a franchisee perspective, a visit from a franchisor representative
is usually welcomed because it enables the franchisee to provide feedback
on their operation, learn about the performance of other franchisees and
obtain advice and assistance if needed. It is important that a start-up
franchisor makes more frequent contact and visits during the first year it
is in operation. When a franchisee requests assistance from its franchisor
regarding an operational or financial issue, it is important that the
franchisor responds promptly to the request.
To help establish a business relationship, they can build a rapport with
their franchisees and become familiar with individual franchisee and
their operation. These tasks enable field representatives to develop in-
depth knowledge on why some franchisees are more successful than
others. These findings should be documented with any recommendations
provided to the franchisees and franchisors. This should include, where
necessary, a plan of action that the franchise should implement. Some
franchisees use a checklist or other form for documenting the results of
the site visit.
As indicated at the beginning of this chapter, one of the leading causes
of franchisee dissatisfaction is a lack of franchisor support. Because this
can sometimes lead to disputes and litigation between the parties, the
importance of proper franchisor documentation in the relationship be-
tween a franchisor and its franchisees cannot be over emphasized. Proper
franchisor documentation can motivate a franchisee to take corrective
action and may discourage a franchisee from escalating an issue into
litigation. Finally, the availability of accurate and available doc-
umentation can result in exonerating franchisors unfairly accused of
failing to support a franchisee.
It can be challenging for a franchisor representative to address a
franchisee’s operating and performance deficiencies because franchisees
will have more knowledge about their individual franchise business than
the representative assigned to support them. To accomplish these, we
next discuss how franchisors should use KPIs to acquire key operating
data to track and improve franchisee performance.
 Franchisor Support and Services 137

Key Performance Indicators

Managing franchise financial performance is a process that includes the
gathering of individual franchise financial data, analyzing the data, and
identifying the performance results to determine how each franchisee
and the overall franchise system is performing. It is an important process
for building a successful franchise program. When a franchisor acquires
key franchisee financial data, it can be used to ascertain the operational
and financial performance of individual franchisees and the overall
franchise system. This information enables franchisors to compare
franchisee and franchise system performance and identify any deviations.
To manage franchisee financial performance, franchisors often utilize
KPIs to capture specific financial data submitted by each franchise. The
corresponding monthly report is an effective method to measure fran-
chisee operational and financial performance. This process can serve as
an early warning system to identify franchises that are under performing.
KPIs help to maintain operating standards and identify franchisees who
are not meeting important goals.7
Following are KPIs that franchises use:

i Gross Sales is one of the fundamental measures of franchisee

performance. It is also used to calculate franchisee royalty payments
and other fees like advertising fund payments. Franchisors often use
gross sales to rank franchisee performance. This indicator provides
information on how much sales a franchise location is generating
which would allow for comparisons among franchise locations.
ii Monthly sales growth by percent enables the franchisor to identify and
compare the rate of sales growth or decline among franchisees and a
way to rank franchisee sales growth into quartiles. This information can
be used to diagnose why some franchisees perform better than others.
iii Franchisee monthly gross margin percent and dollars are metrics
that indicates the gross margins that each franchisee is achieving. As
gross margin dollars pay the expenses, this data can be used to
analyze why some franchisees have higher gross margin dollars than
others. In some cases, it could be type of products or services that a
franchise customers purchase.
iv Franchisee profitability is an important KPI used to identify which
franchisees are profitable and those who may be losing money. Like
other KPIs, these data can be ranked, and certain franchise operations
diagnosed to identify why some franchisees are more profitable than
others.

The usage of KPIs can vary depending upon the type of franchise. For
example, a report by Franconnect illustrates that certain KPIs that are
138 Franchisor Support and Services

mainly useful for franchise food concepts. For example, Speed of Service
which is (Food Order Time) minus (Food Delivery Time) is a good metric
for time-starved customers and does not require any new data points. A
Point-of-Sale register used to record customer purchases can be used to
automatically measure the time the customer walks in or drives up to a
restaurant to the time when the food is delivered to them based on your
kitchen display system.8
Using KPIs is an efficient way to evaluate and compare franchisee fi-
nancial performance. This is easier and timelier than extracting this in-
formation from franchisee quarterly financial statements. Franchisors
should implement the required technology to pull KPI franchise data
from their franchisees to provide franchise decision-makers the in-
formation they need more quickly.9

Summary
Franchisor support is one of the most important services that franchisees
expect to receive from their franchisor. Individuals invest in a franchise to
benefit from the expertise and knowledge that can be transferred from the
successful franchise business model. Because of such expectation, a lack
of franchisor support can adversely impact the franchise-franchisor re-
lationship and franchisee performance. Franchisors should be diligent
when supporting its franchisees and comply with its contractual obliga-
tions. Ultimately, franchisors need to ensure its franchisees can enhance
their ability to operate their business more effectively via providing sup-
ports in the training, operation, and marketing areas. It can also include
additional franchisor services, such as vendor purchase discounts, human
resources support, financial, and technical services. These support and
services are required to be provided in the Franchise Agreement and
Franchise Operations Manual.
It is important that franchisee operations are audited on a periodic basis
to confirm they are complying with their contractual franchise operational
and financial obligations. Franchisors can also measure the operational
and financial performance of their franchisees using KPIs. Based on these
indicators, they can then counsel and advise those franchisees that may
require operational assistance and counseling. Ultimately, the franchisor
needs to carefully manage these support and services areas to ensure the
development and growth of a successful franchise company.

Notes
1 Blut, M., Backhaus, C., Heussler, T., Woisetschläger, D., Evanschitzky, H., &
Ahlert, D. (2011). What to expect after the honeymoon: Testing a lifecycle
theory of franchise relationships. Journal of Retailing, 87, 306–319.
 Franchisor Support and Services 139

2 Frazer, L., & Winzar, H. (2005). Exits and expectations: Why disappointed
franchisees leave. Journal of Business Research, 58, 1534–1542.
3 Franconnect Blog (2021). How to do On-going Franchisor Monitoring Right.
https://blog.franconnect.com/how-to-do-ongoing-franchisee-monitoring-right
4 LaVan, H., Coye, R. W., & Latona, J. C. (1986). Training and development in
the franchisor – Franchisee relationship. Journal of European Industrial
Training, 12(3), 27–31.
5 Hackel, E. (2019). The value of ongoing training for building franchise suc-
cess. Franchising.com
6 Franconnect (2021). High-impact franchisee engagement. https://blog.
franconnect.com/franconnect‐franchise‐library‐2020/high‐impact‐franchisee‐
engagement
7 McCoy, R. (2018). Franchising KPIs and Their Use in Crisis Avoidance. LIGS
University.
8 Franconnect Blog (2021). The 15 Most Important restaurant KPIs August,
2021 The 15 Most Important restaurant KPIs. https://blog.franconnect.com/
the-15-most-important-restaurant-franchise-kpis?utm_campaign=FranConnect
%20Blog&utm_medium=email&_hsmi=150901962&_hsenc=p2ANqtz-
9zpgvYLWlL8Cew-X5MMJfLuwaKCPwS1HqlUjminbmTRKYD4rpRbTThdE
mcwk8wGMItROP6-qXmYCpX1dwh1S_aOIAm6aQ2n0NDtm61yNPKm443
Zd4&utm_content=150901962&utm_source=hs_email
9 Franconnect (2021). High-impact franchisee. Engagement. https://blog.
franconnect.com/how-to-do-ongoing-franchisee-monitoring-right
Chapter 9

Franchise Relationship
Management

In Chapter 8, we discussed the importance of administering and sup-

porting franchisees. We then elaborated on the essential franchisor
support services, including franchisee training, onsite franchise site visits,
providing marketing and advertising programs, human resource, payroll
programs, and favorable vendor purchase programs. Franchisees have an
expectation to receive support from their franchisor along with properly
managed services to ensure the development and growth of a successful
franchise company. The franchisee–franchisor relationship needs to be
carefully managed to ensure a harmonious productive relationship.
Successful franchise performance results ensue from dependable fran-
chisor support and Franchise Relationship Management (FRM).
FRM is a franchisor strategy that utilizes procedures, policies, and
tactics to promote a positive relationship between a franchisor and its
franchisees. It is one of several important activities, including franchise
development and support, that franchisors should focus on after the
emerging franchisor has introduced new franchisees into its network.
The importance of positive franchise relations cannot be overstated be-
cause it’s a characteristic of successful franchise operations.
In this chapter, we begin with a description of the various phases a
franchisee passes through during their relationship with the franchisor.
We then present the FRM strategy including specific tactics that can
produce positive outcomes between a franchisor and franchisees. These
tactics include managing conflict between the franchisor and its fran-
chisees, surveying and measuring franchisee satisfaction levels, evalu-
ating and monitoring franchisee financial performance, as well as how to
utilize franchisee associations to maintain open lines of communication
between franchisees with their franchisor. We conclude with how FRM
can help to avoid and manage litigation between a franchisor and its
franchisees by using alternative dispute resolution.

DOI: 10.4324/9781003034285-9
 Franchise Relationship Management 141

The Phases of a Franchisee

Based upon our experience, we have found that a franchisee passes
through certain phases from the beginning to the end of their franchise
ownership. It’s important for franchisors to be aware of these phases and
how they can impact franchisor–franchisee relations.
The initial franchisee phase starts during franchisee–franchisor inter-
actions before the franchisee signs the franchise agreement and continues
through the franchising process. During this phase, the franchisor usually
establishes expectations on the part of the franchisee. For example, if the
franchisor representative states that franchisor staff responds promptly to
a franchisee’s request for assistance the franchisee will expect to receive
this benefit when they begin operating the franchise. During this phase
franchise candidates usually ask questions that deal with the subject
of franchisor support. For example, how often would a franchisor re-
presentative visit the franchisee location, and how does the franchisor
assistance process work? If the franchisor representative misinforms the
franchisee and the franchisor fails to deliver when the person is a fran-
chisee it can result in a negative impression that can detract from a positive
relationship.
Once a franchisee opens their new franchise, and assuming that they
have received the proper training and initial support, the franchisee
will be enthusiastic about their new franchise. This can help to es-
tablish a harmonious relationship with the franchisor. During this
operational phase, most franchisees settle into a performance level that
is either acceptable or unacceptable to them and their franchisor. This
is a critical phase in FRM because franchisees that fail to exhibit
current or potential success need to be identified and franchisors need
to provide assistance. Otherwise, this is when underperforming fran-
chisees start to doubt the viability of their franchise operation and are
trapped on a trajectory leading to failure, resulting in serious conflicts
with their franchisor.1
Most franchisees eventually enter a final phase of their relationship
with their franchisor when they decide to sell their franchise. If there has
been a positive relationship with the franchisor during their tenure as a
franchisee, it can result in a positive end to the relationship. This can
assist the franchisee in obtaining a favorable selling price for their
franchise rights and may validate the quality of the franchise brand to
potential franchisees. It is important that franchisors are aware of how
the franchisor–franchisee relationship evolves so its staff is prepared to
respond to franchisee issues and challenges as a franchisee passes
through various phases as a franchisee.
142 Franchise Relationship Management

Conflict Management between Franchisees

and Franchisors
Conflict management represents practices and tactics that franchisors
implement to resolve disagreements between the franchisor and its
franchisees. Disagreements in a franchise relationship can occur anytime
from the franchise grand opening when they decide to sell their franchise.
When conflicts are unresolved, it can lead to major disputes, litigation
and can carry over into negative feedback to other franchisees and
franchise candidates. Franchisors should employ conflict management to
prevent disagreements with their franchisees from escalating into a major
dispute or legal actions.

The Source of Franchisee Franchisor Conflicts

Franchise conflicts can arise when the franchisee or franchisor has a
disagreement with the other party or fails to fulfill their contractual
obligations. Sources of conflict can result from specific actions by a
franchisee or franchisor. If a franchisor fails to fulfill a commitment to a
new franchisee that was made before the franchise transaction was
consummated, the franchisee will be disappointed and may seek redress
from the franchisor. For example, the franchisee reports a problem and
requests assistance, and fails to receive a response from the franchisor. In
this case, franchisor management should contact the franchisee and
advise them they will review and determine why the franchisee failed to
receive a response from the franchisor.
Another cause of conflict is when a franchisee fails to comply with their
obligations to comply with certain franchise operating standards. For
example, a franchisee does not spend the required amount of money on
advertising, opens their location late, or closes earlier than the required
hours of operations. In these cases, a franchisees’ continued failure to
comply could result in a serious conflict. The best way to resolve this
conflict is to verbally remind the franchisee of their contractual obligations
and document in writing. In addition, the franchisor representative should
explain to the franchisee why it’s important to comply with their obliga-
tions using the example of how they would react if a neighboring fran-
chisee did the same thing which could harm the franchise brand.
A different source of conflict can occur when a franchisor sells com-
peting products through alternative retail channels in a franchisees’
territories. For instance, a franchisor grants supermarkets the right to
sell the same franchise products in an existing franchisee’s territory, al-
though the franchise agreement may grant the franchisor this right. This
type of conflict can be minimized or avoided by sharing some of the
financial benefits from the supermarket product sales, which is exactly
what franchisor Dunkin’ Donuts did in the case of its coffee pod sales.
 Franchise Relationship Management 143

Tools for Managing Conflict in the Franchise

Relationship
Avoiding conflicts between a franchisor and its franchisees can be
achieved by employing franchisor practices that prevent conflicts from
escalating. Good communication, measuring franchisee performance,
and identifying franchisee satisfaction levels are the most important
factors in successful FRM regardless of franchise system size whether
emerging or mature.

Effective Franchise Communication

This is a process whereby; franchisees should expect they can bring their
questions and concerns to their franchisor and receive a timely and ade-
quate response. Some franchisors have a policy that states, except for an
emergency requiring a rapid response, a franchisee should receive a re-
sponse to an important question or concern within 24 hours. Franchisors
have an obligation to inform their franchisees about important changes to
franchise operating model, upcoming marketing programs, and other events
that can affect franchisee operations. Failing to inform its franchisees about
these changes in a timely manner can lead to franchisee dissatisfaction.
Communication remains a critical feedback mechanism regarding
franchise performance and the direction of future relationships.2 This is a
tool that should be used while a new franchisee is in the early phase of their
franchise operation. As the first author, I reported to a CEO who learned
of a franchisor representative failing to respond to a franchisee issue which
led to a disgruntled franchisee. The CEO asked me if they should call the
franchisee and if so would it help calm the situation and appease the
franchisee. This gesture by the CEO indicates how important commu-
nication can be to maintain and promote positive franchise relations.
Another way a franchisor can prevent conflicts from escalating is by a
franchisor soliciting feedback from its franchisees using its field re-
presentatives, franchise meetings, and conference calls. When a franchisor
is out of touch and unaware of the concerns of its franchisees these con-
cerns can escalate into major disputes. For emerging franchisors, the CEO
should personally contact select franchisees on a regular basis to obtain
feedback regarding their performance and whether they have any concerns
regarding the franchisor support. This is an important tool for a new
franchisor because most new franchisees require nurturing and welcome
hearing from the CEO.
An example of how important good communication is to the franchise
relationship is offered by Jimmer Bennett a franchisee with Unishippers
who states that the key to his strong relationship with his franchisor starts
with honest and trustworthy communication, not just the occasional email
144 Franchise Relationship Management

check in, or holiday text message. Being in the logistics and transportation
industry, Bennett states that events can happen over the course of a day,
when he needs to rely on the franchisor for assistance.

Measuring Franchisee Performance

As discussed in Chapter 8, franchisors measure franchisee financial
performance by acquiring monthly franchisee reports on key perfor-
mance indicators (KPIs). A KPI is a measurement of a specific set of
metrics that indicates how a franchise is performing against its goals and
the performance of individual and collective franchisees in the same
franchise system.
KPIs are identified by collecting and tabulating specific franchise fi-
nancial information. KPIs should include monthly sales, gross margin
percent and dollars, payroll costs, and other pertinent franchise financial
data. A franchisor should guide each franchisee toward achieving their
financial goals, therefore it is essential that the franchisor is aware of
whether their franchisees are meeting their financial objectives by iden-
tifying and comparing their individual financial performance.
KPI is a tool that franchisors should use as part of their operational and
FRM strategy. Identifying how each franchisee is performing enables the
franchisor to identify which franchisees are performing well and the rea-
sons why. They also need to identify those franchisees who are performing
below the top performers and learn why. A potential source of poor
franchise relations is when certain franchisees are either unprofitable or
dissatisfied with their financial results. By monitoring franchisee perfor-
mance, a franchisor can provide operational guidance and if necessary,
grant financial assistance such as deferring royalty fee payments for a
period of time. These interventions that assist deserving franchisees are
important for enhancing positive franchise relations because they demon-
strate the commitment by the franchisor to individual franchisee success.

Measure Franchisee Satisfaction Levels

Franchisee satisfaction levels are measured when a franchisor surveys its
franchisees and tabulates the results to identify how satisfied franchisees
are with various franchisor support, services, and the total franchise
program. Identifying franchisee satisfaction levels are important during
the various phases of a franchisee operation, especially during the initial
1–3 years which is when franchisees are at a critical phase of their
franchise operation. Measuring franchisee satisfaction levels enables a
franchisor to identify and address those areas that require improvement
and the opportunity to identify and correct any major problem areas
their franchisees may have.
 Franchise Relationship Management 145

Surveys should be conducted by the franchisor or a third party

that specializes in measuring franchisee satisfaction levels. The process
consists of franchisees being requested to respond to various questions
using a rating system. For example, 1 to 5, with 5 being “totally agree”
and 1 “being totally disagree.” Survey questions should be designed to
conform to the franchise category and include franchisor support,
franchisee profitability, franchisor response, and the effectiveness of
franchisor marketing programs.
After a franchise system has several franchisees, the franchisor should
begin to survey its franchisees to measure satisfaction levels. For emer-
ging franchise systems with less than 10–15 franchisees, satisfaction
surveys can be done by telephone or even in face-to-face meetings. As a
franchise system gets larger some franchisors use a third party to conduct
their franchise satisfaction surveys. These companies are specialized in
conducting satisfaction surveys. One company is Franchise Business
Review (FBR), located in Portsmouth, New Hampshire. According to its
CEO, Eric Stites, a common complaint found in FBR’s research is that
franchisees often feel uninvolved with their franchisor when key deci-
sions are dictated by the franchisor. Franchise companies with high sa-
tisfaction scores have learned to engage and involve their franchisees
using clear, transparent, two-way communication. Sites believe that the
top franchisors allow their franchisees to provide feedback which fosters
a collaborative, win–win culture. Sites also stated that better-performing
franchise brands manage to keep their marketing and technology-driven
programs less complicated which demonstrates to their franchisees the
effectiveness and return on investment these tools can provide.
Whether franchisors conduct their own satisfaction survey or use a
third party, it is important to identify how franchisees rate critical
components of their franchise system and their satisfaction with the
franchise program. Obtaining regular franchisee feedback is a necessary
requirement for maintaining positive franchise relations. Knowing how
satisfied or dissatisfied franchisees are regarding various aspects of their
franchise performance can enable a franchisor to address those issues
that can negatively impact FRM.

Additional FRM Tools

In addition to managing and avoiding conflicts with their franchisees,
practicing good communication techniques, and measuring franchisee
satisfaction levels franchisors can employ other tools that can enhance
FRM. When combined these components will provide the proper busi-
ness climate where the franchisor and its franchisees can achieve and
maintain a continuing positive relationship.
146 Franchise Relationship Management

a Documented Franchisor Operating Principles: Franchisors should have

an organized set of principles or practices they follow. Documented
franchisor operating principles and practices are published guidelines
that franchisor staff follow in the administration and support of their
franchisees. It’s important that franchisors have their principles fully
documented in their franchise operations manual or website so that
their employees, existing and prospective franchisees are fully aware of
franchisor business and operating standards.

An example of franchisor operating principles is shared by Mark Jameson,

Executive VP of Propelled Brands a franchisor based in Carrolton, Texas.
The four principles that guide Propelled Brands are to:

1 Drive franchisee profitability

2 Promote and drive top-line franchisee growth
3 Grow the franchise system
4 Assure that franchisee satisfaction is measured

In addition, Propelled brands use a third party to survey franchisees and

conduct a confidential company survey that is shared with the franchisor
employees. They have a Franchise Advisory Council and every six weeks
the CEO has a virtual town hall meeting that all franchisees can attend.
There is a National Advertising board that includes six elected fran-
chisees. A Diversity and Inclusion Task Force was formed by the fran-
chisor in 2020 to help attract potential franchisees.

b Franchisor FRM Leadership: Regardless of the role franchisor staff

may occupy it’s important for each employee to be aware of the
importance of positive franchise relations. Franchisor leadership in
FRM occurs when all members of the organization act in a
professional manner and are responsive to the needs of franchisees.
Important franchisee issues or problems should be brought to the
attention of franchisor leadership to devise an appropriate course of
action if needed. As the first author, I’ve been responsible for
conducting meetings with franchisor support staff to communicate
the importance of good FRM practices.
c A Franchise committee: A franchise committee is a representative
group of franchisees who meet with select franchisor staff on a
periodic basis. The most frequently used committee is a franchise
marketing or advertising committee. This is an effective vehicle for
supporting FRM because it enables franchisees to provide input
regarding proposed franchisor marketing and advertising initiatives.
An emerging franchisor with a minimum of 25 franchisees should
establish an advertising or marketing committee that includes
 Franchise Relationship Management 147

franchisor and franchisee representatives. It can provide a forum for

the franchisor to obtain feedback from their franchisees especially
when the franchisor is considering implementing operational or
marketing changes that can have a significant impact on franchisee
operations.3
d Franchisors Share Best Practices: Franchisee best practices are
operating practices that a franchisee employs to enhance their
performance. Best practices can include employee recruitment and
hiring tips, unique marketing practices, product enhancements, and
other methods that are transferable and which can improve fran-
chisee revenues and profitability. Franchisor field representatives are
usually aware of certain franchisee best practices because they
communicate with their franchisees on a regular basis and discuss
their operating practices.

It’s important that franchisors share successful franchisee best practices

because it can improve franchise relations. Soliciting and sharing fran-
chisee best practices can lead to new processes and programs that can
enhance franchise operations. An effective method for sharing best
practices is for the franchisor to solicit examples from franchisees and
share this information in a bulletin or newsletter. This will ensure other
franchisees are aware of best practices and support positive FRM.
Sharing what successful franchisees do can encourage other franchisees
to do the same.4 For example, McDonald’s Filet of Fish and Big Mac
sandwich were both the creation of franchisees.

Franchisee Owners Associations and Franchise

Advisory Councils
One of the most effective ways to improve franchise relations is via a
franchisee owners association (FOA) or franchise advisory council
(FAC). An FOA is operated and funded by franchisee representatives.
The FOA will include by-laws governing the election of association of-
ficers, payment of dues, and functional procedures. An FOA is an in-
dependent organization comprised of franchisees and administered by a
consultant or individual experienced in franchising or organizational
leadership. Another franchisee organization is an FAC, which is a joint
association or affiliation typically comprised of fifty percent franchisor
and franchisee representatives. An FAC meets several times per year and
is encouraged to share any significant franchisee issues with the fran-
chisor and will discuss and establish potential operational and marketing
initiatives. In most cases, the franchisor will pay for the travel, lodging,
and cost of meals for the FAC meetings.
148 Franchise Relationship Management

Keith R. Miller, a Subway franchisee of 32 years and franchisee ad-

vocate testified before the United States Senate Economic Policy
Subcommittee on franchising. He stated in part, that the keys to positive
franchise relations are achieved when franchisees are represented and
can provide feedback to the franchisor.
If franchisees believe that the FAC fails to meet their needs, is not
independent or effective in negotiating disputes with the franchisor, the
franchisees may convert the FAC to a new independent franchisee as-
sociation. For example, in the Denny’s franchise system, the franchisor
had established an advisory council to address the concerns of fran-
chisees and to give the franchise community the ability to communicate
with Denny’s corporate. In November 1997, however, the DFAC was
replaced by the independent, franchisee-sponsored Denny’s Franchisee
Association to eliminate the franchisor’s veto power over the associa-
tion’s decisions and to allow the franchisees to develop bargaining power
with outside vendors.5
There are several benefits of franchisee organizations. First, fran-
chisees may perceive the franchisor to be more willing to engage in fair
dealing with franchisees, as they have an opportunity to express their
lack of satisfaction with certain aspects of the franchise. This will help
contribute to enhanced franchise relations. Second, franchisees who are
members of a franchisee association may have a greater sense of loyalty
and commitment to the franchise because the franchisor has displayed its
respect for the franchisees by recognizing them as an organization. An
FOA or FAC can be used as a sounding board whereby the franchisor
can introduce proposed products or strategies to obtain feedback from
the franchisee representatives.
By soliciting feedback and suggestions from their franchisees the fran-
chisor is demonstrating a commitment to the franchise network as op-
posed to the franchisor mandating a change. Both parties can speak openly
at meetings and address sensitive topics in a productive way. This can help
to promote a relationship with added trust among the franchisor and
franchisee representatives. For example, Mosquito Joe, a mosquito control
franchise based in Virginia Beach, Virginia encourages and advocates open
communication with its franchisees. When a franchise system reaches a
certain size it’s not unusual for the franchisees to transition from a FAC to
an independent franchisee association. This is common with large fran-
chise systems like Subway, Wendy’s, Burger King, and McDonald’s, which
also has a McDonalds Black Owners Association.
Edwin Shanahan has been the Executive Director at DDIFO, Inc.
(Dunkin Donuts Independent Franchise Owners Association) for 9 years.
Mr. Shanahan states that there are important differences between an FAC,
which involves the participation of the franchisor and an Independent
Franchisee Association, which is operated solely by franchisees. He states
 Franchise Relationship Management 149

that with an FAC and its close relationship with the franchisor because it is
paying for dinners, lodging, and other expenses, some franchisees may be
reluctant to provide feedback regarding important concerns of other
franchisees they represent. He, states this is a natural inclination for
franchisees who receive certain benefits from the franchisor. In compar-
ison, an FOA is a separate organization operated and funded by fran-
chisees for franchisees. Shanahan states it is in the best interest of
franchisors to want honest feedback from its franchisees and credible
input regarding important issues or complaints.
As the first author, I have established, organized, and administered
several FACs as the franchisor representative. We would arrange for bi-
annual meetings in various off-site locations and pay for all the expenses.
Although our use of a FAC could possibly inhibit some franchisees from
being candid in terms of reporting franchisee concerns, that wasn’t my
experience. Whichever type of group a franchisor decides to advocate, it
is important that the franchisor obtains the advice and guidance of their
franchise attorney regarding the type of organization and its guidelines.
Whether using a FAC or dealing with an independent franchisee asso-
ciation, franchisors shouldn’t fear the formation of a franchisee orga-
nization. If they do, they may face far greater problems in the future.

Avoiding and Managing Franchise Litigation

As we indicated, conflicts and disagreements can arise between a fran-
chisor and franchisee from time to time due to the contractual re-
lationship between the franchisor and its franchisees on occasion, a
disagreement can be so serious that it could escalate into a lawsuit.
Commonly referred to as litigation it’s a complaint by one party, the
plaintiff against another party, the defendant that is brought in a court of
law. The franchisor or franchisee can be the plaintiff or defendant based
upon who initiates the litigation. All litigation, arbitration, and related
settlements are required to be disclosed in Item 3 of the Franchise
Disclosure Document. Unless a franchisor has no choice it’s important
that franchisors take steps to avoid litigation because it can be financially
costly, must be disclosed in the FDD, and can negatively affect franchise
relations.
An example of a dispute leading to litigation is when a franchisor
continually prices advertised products or services that result in a re-
duction of franchisee gross margin dollars. This causes franchisees
to question this practice which leads to a confrontation requesting
the franchisor to stop or reduce it. A lawsuit brought by Subway,
MacDonald’s, and Burger King franchisee associations over the past
number of years, although ultimately settled, impacted the reputation of
both franchise brands. Had the franchisors attempted to amicably
150 Franchise Relationship Management

resolve these disputes at the beginning it may have avoided litigation,

saved expenses, and avoided harm to franchise relations. Each of these
franchisors had powerful independent franchisee associations which can
be formidable opponents of franchisor decisions.
In some cases, litigation is unavoidable, for example when a franchisee
commits an egregious act and fails to cease and desist. For example, a
home care franchisee continues to fail to properly qualify caregiver
credentials, which could place their clients at risk and damage the re-
putation of the franchise brand.
Its important franchisors try to avoid litigation because of the legal
costs, poor publicity, and potential negative impact on the franchisor’s
reputation. In addition, when a prospective franchisee and their fran-
chise attorney review Item 3 in the FDD any franchise litigation is sure to
be scrutinized. An unusual amount of litigation in relation to the size of
the franchise system can end any interest by a prospective franchisee.
A strategy franchisors often employ is to have a financial resolution by
agreeing to purchase the franchise back. This will avoid litigation and
its disclosure in the FDD and end a disagreeable relationship between
the parties.
A major cause of franchise litigation is when a franchisor engages in
aggressive and deceptive franchises practices which can harm prospective
and existing franchisees. For example, Quiznos which franchised sand-
wich shops and had experienced dynamic growth in the early 2000s was
levied one of the largest financial penalties in franchise history in 2010.
The settlement was the result of four separate lawsuits. One lawsuit
included a memorandum by a Quiznos lawyer in 2003 that stated that
40% of Quiznos units weren’t breaking even. Between 2007 and 2017,
Quiznos shrunk from 4,700 U.S. locations to fewer than 400. John
Gordon, principal of Pacific Management Consulting Group, stated that
Quiznos’ franchise strategy, its store-level economics and business model
were deeply flawed.6

Preventing Disputes from Escalating into Franchise Litigation

It is important that franchisors seek to manage and control serious dis-
putes between them and their franchisees. Seeking a resolution that can
satisfy both parties should be the primary objective. If there is a potential
threat to the franchise brand, caused by the franchisee that remains
unresolved, the franchisor may have no option except to take legal ac-
tion. In many cases, resolving a dispute and avoiding litigation between a
franchisor and franchisee can be achieved with the assistance of the FAC,
the Franchisee Association or intervention by a well-respected fran-
chisee. One of these parties may have sufficient influence and experience
to help broker a resolution and avoid a lawsuit.
 Franchise Relationship Management 151

Certain franchisor practices, like properly documenting the support

and assistance it provides its franchisees can discourage a dissatisfied
franchisee and their attorney from filing a lawsuit. By demonstrating
the totality of assistance, the franchisor has provided a franchisee can
be useful in the event a franchisee chooses to file a lawsuit. As the first
author, I’ve had the experience of being involved in numerous franchisee
lawsuits against the franchisor. In those cases where we prevailed, it was
the result of having a carefully documented franchisee file. When the
outcome was unfavorable it was the result of sloppy or poor doc-
umentation by a member of franchisor staff. I was also in both Federal
and state court and participated in Arbitration proceedings. It’s by ex-
perience that arbitration is a more effective process for the adjudication
of major franchisor–franchisee disputes.

Alternative Dispute Resolution

A common business and legal practice to resolve disputes and prevent
litigation is to utilize Alternative Dispute Resolution (ADR) which is
included in almost every franchise agreement. ADR consists of methods
to avoid or settle litigation by engaging the franchisor and franchisee in a
structured process that can resolve a dispute. ADR is less costly and
disruptive to both parties and avoids the consequences of participating in
a courtroom engaged in a formal legal process. There are two forms of
ADR, Arbitration and Mediation, which can be used to resolve serious
disputes and prevent litigation:

Arbitration
Arbitration is a procedure in which a dispute between two parties, for
example, a franchisor and a franchisee are submitted, by the agreement
of the parties, to one or more arbitrators who make a binding decision
on their dispute. By engaging in arbitration, the parties avoid court li-
tigation. Franchise agreements typically include arbitration as the re-
quired method of dispute resolution in lieu of formal litigation in a
courtroom.

Mediation
Mediation involves the use of a neutral, third-party Mediator that like
Arbitration can be agreed upon by the parties. The Mediator meets with
the parties and their lawyers, serving as a facilitator for discussion and
negotiation that can resolve the dispute. When using a Mediator, no
decision or ruling is imposed on either the franchisor or franchisee, and
neither party is required to accept a specific outcome or proposed
152 Franchise Relationship Management

Table 9.1 Major Differences between Litigation, Arbitration, and Mediation

Litigation Arbitration Mediation

More costly than ADR Less costly than litigation Least costly
Public Private Private
Formal process. Set Less formal than litigation Least formal
rules
Inflexible rigid process Simplified rules of evidence and Very flexible
procedure
Judge is appointed Parties can choose substantive Parties can select an
expert(s) to serve as arbitrator
arbitrator(s)
More complex with May not require depositions N/A
depositions
Easily appealed Difficult to appeal N/A
Decision can take time Decision provided faster Parties agree to
result
Process can be designed by the Mediator may be
participants poorly qualified

resolution. A Mediator seeks to help the parties reach their own mutually
acceptable solution (Table 9.1).

The Franchise Mediation Program

In 1994 a Franchise Mediation Program, was formed in collaboration
with the International Institute for Conflict Prevention and Resolution
which is a non-profit alliance of corporations and law firms founded in
1979 to develop alternatives to the high costs of litigation. This program
has been endorsed by the International Franchise Association, Asian
American Hotel Owners Association, and the American Association of
Franchisees and Dealers, and has been used by franchisors, franchisees,
and franchisee associations. The Conflict Prevention and Resolution
procedure is initiated by a Dispute Letter, sent by either the franchisor or
the franchisee to the other party and the Conflict Prevention and
Resolution. If accepted by the recipient, the Conflict Prevention and
Resolution Procedure requires the parties to attempt to resolve their
differences through negotiations.
Franchise Relationship Management is a critical component of fran-
chisor operations. Positive franchise relations can enable a successful
franchise program to prosper, while poor franchise relations can sap
franchisee morale and stifle enthusiasm among franchisees. When there
is a lack of trust between a franchisor and its franchisees it will become
difficult for prospective franchisees to obtain a positive validation
of the franchise program from existing franchisees. If a prospective
 Franchise Relationship Management 153

franchisee contacts an existing franchisee to obtain feedback on fran-

chisor support and assistance, a poor relationship between the franchisee
and its franchisor can elicit negative responses. When the state of fran-
chise relations is positive, there is a sense of balance within the franchise
system. Both parties are achieving their objectives and working in a
supportive manner to grow the franchise brand.

Summary
We discussed FRM which is a strategy that should be implemented by all
franchisors regardless of size. An FRM strategy should be based on
supporting franchisees and managing conflicts between a franchisor and
their franchisees. We presented how an effective way to establish positive
franchise relations is by the franchisor enabling effective and timely
communication with their franchisees and measuring franchisee perfor-
mance using KPIs. We discussed how measuring franchisee satisfaction
levels have been demonstrated to be an effective way to identify which
franchisees are achieving satisfactory financial results and those that may
require assistance. Also, we stated that franchisors can promote positive
franchise relations by empowering franchisees to provide feedback to the
franchisor through a FAC or Independent Franchisee Association which
enables franchisee representatives to participate with their franchisor in
important decision-making. A marketing or advertising committee that
includes franchisee representatives can also boost the level of positive
franchise relations. Finally, we discussed how disputes can arise between
a franchisor and its franchisees and why there should be a process to
avoid disputes from escalating into litigation. A dispute resolution pro-
cess can be used to lead to a fair outcome for both parties and help to
avoid costly litigation between the franchisor and its franchisees.

Notes
1 Wincent, W. S. (2019). The basics of franchising. The relationship.
International Franchise Association Newsletter. https://www.franchise.org/
franchise-information/the-basics-of-franchising-the-relationship
2 William, R., Meek, B. D., Sramek, M. S., Baucus, R., & Germain, R. (2011).
Commitment in franchising: The role of collaborative communication and a
franchisee’s propensity to leave. Entrepreneurship Theory and Practice, 35(3),
559–581.
3 Badrinarayanan, V., Kyung-Min, K., & Taewon, S. (2016). Brand resonance in
franchising relationships: A franchisee-based perspective. Journal of Business
Research, 69(10), 3943–3950. McCoy College of Business Administration,
Texas State University, Silla University, South Korea.
4 Higginson, D. (2019). Building a culture of information sharing improves
operations, boosts franchise relations, and saves time. International Franchise
Association Bulletin.
154 Franchise Relationship Management

5 Wiggin and Dana, LLP (2001). Effective relationships with franchisee asso-
ciations – Legal and practical aspects. ABA Forum on Franchising. https://
www.wiggin.com/wp-content/uploads/2019/09/effective-relationships-with-
franchisee-associations.pdf
6 Sparks, J. (2010). Quiznos settlement among largest in franchise history. Blue
Mau Mau. https://www.bluemaumau.org/story/2010/08/16/quiznos-
settlement-finalized-among-highest-penalties-franchise-history
Chapter 10

Franchise Trends

Thus far, we have described how to qualify a business for franchising,

and how to build, develop and support a franchise system. We also have
explained how to successfully perform franchise relationship manage-
ment, which is important for maintaining equilibrium and harmony
between a franchisor and its franchisees. Each of these components must
be properly executed to achieve success as a franchisor. Attempting to
develop a flawed franchise model, can be as disabling to franchise system
development, as failing to monitor and support their franchisees.
Since the rise and development of the franchise industry that began in
the 1950s, there have been several significant trends and events that have
impacted the franchise industry.

The Franchise Rule

In the 1950s and 1960s, as franchising was experiencing significant
growth the popularity of franchising resulted in significant franchise
fraud and abuse which led certain states to enact franchise relationship
laws designed to prevent franchisee abuses. These actions by certain
states led to the Federal Trade Commission enacting The Franchise Rule
in 1979 which set forth various regulations that franchisors must follow
when selling franchises including the use of the Franchise Disclosure
Document (FDD). These regulations continue to govern the offer and
sale of franchises.

The Great Recession

Another occurrence that impacted franchising was the Great Recession of
2007–2009 which became the longest recession since the Great Depression.
Accounting firm PwC reported that after years of steady growth the fran-
chise industry lost 400,000 jobs in 2009. This was a significant economic
event which upset the ongoing growth of the franchise industry and re-
presented a unique economic impact on franchising. The Great Depression
DOI: 10.4324/9781003034285-10
156 Franchise Trends

led to poorly operated and marginally attractive franchise brands to drop

out of franchising. Franchisors implemented more sophisticated franchisee
recruiting strategies including targeting more qualified franchise prospects
which could lower the risk of franchisee failures.
In this chapter, we discuss how current trends in franchising will lead
to future changes to key components of the franchise business model.
These changes defined below include technological innovations including
Artificial Intelligence (AI), Digital Technology, and Robotics. Also, we
discuss how the use of AI will provide more effective franchisee re-
cruitment processes. We will present examples of how the use of AI,
Robotics, and Digital technology in residential services, home care, and
food franchises is being deployed by franchisors to increase productivity
and the quality of products and services.
Our discussion involves more efficient ways to audit and support
franchisee performance that will continue to evolve as franchisors seek
ways to improve their methods for retrieving KPIs and to quickly identify
top franchise performers along with those franchisees who require sup-
port. Technology will enable franchisor staff to retrieve franchise data
and conduct virtual franchise site visits more easily. Finally, the struc-
tures and future role of private equity (PE) firms continue to occupy an
increased role in the franchise industry. This affects franchisor expansion
strategies, operational plans, and franchise owner exit strategies. PE can
create more powerful franchise systems which can enable franchisors to
grow and operate more efficiently with ample investment capital and
business intelligence.

The Role of Technology in Franchise System

Development and Operations
Franchisors are increasingly turning to the use of technology to improve
their operational elements. At the franchisor level, technology is being
used to automate franchisee recruitment and development tasks. At the
franchisee level, automation has been applied to simplify and enhance
the customer experience and increase franchise employee productivity.
The technology that’s being introduced by franchisors consists of:

• Artificial Intelligence (AI) is the use of computer systems to execute

tasks that typically require human intelligence such as visual reading,
speech recognition, decision-making, and language transformation.
• Robotics is the use of robots (machines) to perform tasks that are
performed by human beings.
• Digital transformation is the practice of using digital technologies to
design or convert current operational processes and consumer
practices to meet changing business and market needs.
 Franchise Trends 157

These technological applications have been introduced and utilized in a

number of elements in the franchise business model.

Franchise Development and Technology

Although a successful franchise system is built on a foundation of
franchise training, support, marketing, and positive franchise relations;
franchisors from the beginning of their franchise operation pursue
franchise development as a top priority. Franchisee development re-
presents the process franchisors utilize to attract, qualify, and transact
future franchisees. As the franchise industry continues to expand into
more business concepts, recruiting qualified franchisee candidates for
system development has become intensely competitive. Although a suc-
cessful franchise program can assist in the franchise recruitment process
it is essential that franchisors utilize the appropriate tools to attract,
qualify and engage the franchise candidates they seek.
As franchising has evolved over the past several years there have been
several significant changes in the franchise development process driven
by the increased use of software and technology. For example, adapting
and infusing technology into franchising has eliminated countless
manual processes including intaking prospect data to respond to their
questions. As a result, recording relevant prospect information manually,
like sorting out which franchise prospects are interested in a particular
market or territory has been eliminated. Software is being used to sort
franchise prospects into various categories based upon specific personal
characteristics including occupation, financial profile, and location. This
can enable franchisors and franchise brokers to reach out to those pro-
spects who most closely match the franchisee profile. More accurate and
intensive franchisee prospect screening software utilized by third parties
provides franchisors another tool for increasing the precision when
qualifying franchise candidates.
Jeff Lefler, founder and CEO of franchise market research firm,
Franchise Grade explains that a recent concept in franchise development
is an online one-stop portal for people seeking a franchise opportunity.
To attract the attention of potential franchisees, franchisors will need to
recruit prospects in more ways than just advertising in trade magazines
or relying on franchisee referrals like in the past. Rather, franchisors
need to ensure their online presence is optimized, with influencers and
testimonials that can help get them in front of the right franchise
candidates.
A one-stop franchise portal consists of a single prospect entry point,
where prospective franchisees can explore and compare their potential
investment. Artificial Intelligent (AI) –powered algorithms can make
158 Franchise Trends

recommendations and help with the matchmaking process, based on the

person’s specific needs, objectives, skills, and abilities. Once the person is
matched to a specific franchise opportunity and indicates their interest,
this system can communicate to the franchisor and cue the engagement
process. This technology eliminates the need for prospective franchisees
to jump from one website to another to find the information they need
because it would be in one central place. Lefler states that a growing
variety of technological solutions is found in almost every corner of an
evolving franchise system and embracing this technology will help to
increase franchise brand profitability and competitiveness. Franchisors
will still need to have influencers, which are reviews and testimonials
touting their franchise, websites able to display the data on computers as
well as mobile devices, updated social media, and live streaming.
As franchisors continue to embrace the use of technology in its fran-
chise development programs, they will utilize predictive analysis for
franchise system investments. This includes objective performance data
and benchmarking against other competitive franchise opportunities.
Franchisee candidates with access to objective franchise performance
data will minimize franchisee investment risk. In addition, this in-
formation would enable franchisors to learn how they compare with
other franchise investment opportunities and where improvement is
needed. Franchisors need to embark on this paradigm shift because ad-
ditional data is needed to support franchise system growth.1

Franchise Operations and Technology

Technology has been introduced into various components of franchise
operations by numerous franchisors. From residential services to fast
food to homecare, more and more franchisors are looking to technology
to increase franchisee productivity and enhance the customer experience.
An example of the future role of technology in franchising is exemplified
by franchisor, Neighborly, based in Waco, Texas, the parent company of
27 home service brands and more than 4,300 franchises in 9 countries
and 8 corporate support centers. Mike Bidwell, president and CEO of
Neighborly states that they are pursuing predictive analytics, which is the
use of data, statistical algorithms, and machine learning techniques to
identify the likelihood of future outcomes. This can be a tool to optimize
opportunities to enhance their franchisees’ growth.
In the food category, Tracy Skeans, COO of YUM Brands, the mega
franchisor which operates Habit Burger Grill, KFC, Pizza Hut, and Taco
Bell, stated that the restaurant job of the future will require strong people
skills and the ability to leverage technology and be digitally savvy.
Skeans said Yum increased its investments in technological tools to make
the restaurant jobs easier and more fulfilling. The future of the restaurant
 Franchise Trends 159

is going to be younger employees who’ve grown up in a digitally native

way, no one is going to sit and look at a binder to be trained anymore.2
BrightStar Care one of the leading home care franchises uses a pro-
prietary technology called the Athena Business System (ABS). It includes
time and attendance of caregivers, who use a mobile device to clock in
and out. The franchise operator gets an alert if the caregiver is late which
enables the franchisee to let the client know their caregiver is on their
way or send another caregiver. Also, when patient assessments are done,
the system will instantly generate an electronic plan of care so clients,
family members, and nurses can view it. Finally, the system generates five
questions for each visit. If any of the questions are answered affirma-
tively regarding a patient’s condition the agency’s nurse is automatically
notified. It creates management by exception that helps to prioritize a
nurse’s time by responding to the most needy client immediately.
Another increased use of technology in franchising is evidenced by
McDonald’s which acquired Apprente, a 2-year-old startup in 2019.
Apprente specializes in voice-based conversational technology. After that
transaction, McDonald’s entered a strategic relationship with IBM to
build AI-powered customer care solutions and voice recognition appli-
cations. IBM was reported to be acquiring MCD Tech Labs to further
accelerate the development of AI automated order taking.3
Franchisors can employ technology to help grow their franchisee busi-
ness. Reis & Ivry’s Frozen Yogurt Robot is a fully automated franchise that
uses machines to serve the yogurt. The franchisee can lower employee
turnover and reduce certain expenses that come with owning a yogurt
shop. The machines can be installed in high-traffic areas across the country,
from shopping malls to college campuses, without having to lease a store
front to place them in. Robotics is also being used in several industries.
Large quick-serve restaurant franchisors continue to introduce and test
robots who can flip hamburgers and perform other labor-intensive tasks.
Various forms of technology can benefit franchisor expansion because it
can mean less work for franchisee employees. This can enable a franchisee
to buy and operate multiple franchise units. Also, by operating more ef-
ficiently, franchisees can free up valuable time, so they can focus on
managing additional business’ locations.

Franchisee Performance Evaluation and Support in

the Future
When a new franchisee launches their business, they are responsible for
the operation and performance of their franchise. However, in most
franchise systems the franchisee also relies upon their franchisor for
periodic evaluations of their franchise performance and the delivery of
support services. The role of technology especially AI, Digitalization and
160 Franchise Trends

Robotics will continue to play an increased role in franchise development

and operations. As this trend continues it will alter how franchisors
currently measure individual and collective franchisee performance and
support their franchisees.
As technology continues to play a greater role in franchisee perfor-
mance evaluations and support services, franchisors should be cognizant
of these impending changes and adapt their operations accordingly.
This can enable franchisors to effectively compete by demonstrating
to franchise prospects that their franchise operates on the forefront of
technology.
Keith Gerson, President of Franchise Operations for FranConnect, a
leader in franchise management performance systems states that enhanced
franchise data increases visibility and supports formal franchisor perfor-
mance plans for franchisees. He states that one of the biggest differ-
entiators among franchisors will be the use of software that increases
visibility across the franchisor’s span of control and allows for detailed
analysis of franchise performance, both individually and as a network.
These solutions will aggregate all the key performance metrics into a
single, easy-to-digest dashboard. Utilizing this intelligence Gerson sees the
introduction of what he refers to as the “Franchise Success Coach (FSC).”
This person would access KPIs, to monitor their franchisees, develop ac-
tion plans and track progress. To achieve this objective, the franchisor will
need to evolve its hiring, training, and ongoing development of these
“FSCs” into true performance coaches and mentors.
According to a comprehensive 2021 study conducted by Franchise
Business Review, the top drivers of franchise performance (based on
input from 28,056 franchisees) consisted of 5 categories, marketing and
promotional programs, innovation and creativity, effective use of tech-
nology, system-wide communication, and training and support pro-
grams.4 Gerson states that the delivery of the five key drivers will be
dependent on franchisees’ engagement and execution. The goal for
franchisors is to find ways for franchisees to perform better and with
fewer obstacles. The knowledge gained through this research can then be
applied during coaching sessions with franchisees.
Although franchise brands have various approaches to franchise
business planning, the most successful franchises brands are leveraging
technology to establish structured programs that utilize both data and
coaching to achieve desired results. As previously stated in this chapter,
AI and Machine learning are finding their way into franchising, parti-
cularly in operations management. In the future, many brands will elect
to keep their coaching virtual and those in the food sectors such as quick-
serve and sit-down restaurants will hire food safety auditors to visit
franchise locations in person.
 Franchise Trends 161

The Future Role of PE in Franchising

Since 2010, PE firms have played an increasing role in the franchise in-
dustry. PE firms have noticed the attractive appeal of investing in franchise
systems due to the unique features of the franchise business model.
Successful franchise systems are highly scalable with dedicated franchisees
who have a financial stake in the franchise system and work hard to provide
a steady income stream. These features allow PE firms to bring capital and
management expertise to certain franchise brands to facilitate their growth
and earnings potential. The majority of PE firms desire investing in larger
franchise brands however some firms will invest in franchises with a
minimum of 75–100 locations. Many PEs invest in back-office support,
marketing, franchise development, new market entry, product develop-
ment, and technology and raise supply chain efficiencies.
As the first author, I authored an article in 2018 that reported on the
increased activity by PE firms and the recent acquisition of the 3,600
Sonic Drive-In fast-food chain by Inspire Brands which owned Arby’s
and Buffalo Wild Wings. At the time it was reported that Sonic had been
facing intense competition from fast-food giants, McDonald’s, Burger
King, and Wendy’s. Three years later the role of PE groups in acquiring
and investing in franchise brands is expected to increase even more.5
PE’s role in the franchise industry includes food franchises, homecare,
fitness, residential services, and automotive services. For example, in
2019 there was more than $450 billion invested in six hundred
healthcare-related PE deals. In the last 10 years, the number of PE-based
deals has increased by 45%, which has increased the valuation of certain
home care companies by increasing operational efficiencies and investing
financially in more resources.6
According to Bain & Company, a PE goal is to achieve a return on
investment that beats the stock market which typically sees annual returns
of 5%–10% depending on various sources. The returns are slowing down,
but the broad category it dubs “consumer” still returns 1.5–2 times equity
and beats the market by low single digits.7 PE firms’ investments range
from a single franchise brand to investing in multi-unit franchise brands.
Recently, more PE groups have turned their focus to investing in
franchisee-owned companies that own multiple franchise brands or multi
franchises of the same brand. For example, in 2020 FRANdata reported
that Bandon Holdings, one of the biggest franchisees in the Anytime Fitness
system, received a majority investment from PE firm Fireman Capital
Partners to help fuel its growth. In addition, one of the largest Pizza Hut
franchisees was acquired for $190 million by Olympus Partners.
Due to the increased PE investment in franchising, there remains the
possibility that a PE firm can have a negative impact on a franchise
brand. As a PE firm invests in a franchise with the goal of generating a
162 Franchise Trends

financial return within a certain period of time, it could encourage an

increase in franchisor system growth. This could result in the franchisor
signing borderline unqualified franchisees and encourage existing fran-
chisees to invest in another franchise despite lacking the required capital
or management skills to operate multiple franchises.
Alicia Miller, a former franchisee and current Managing Director of
Catalyst Insight Group, which advises PE groups and franchisors, states
that PE investors continue to gain influence, if there is a need, PE will
improve the systems they acquire, adding experienced managers and
improving unit-level profitability When investing in similar franchise
systems there are cost efficiencies through reductions in corporate staff
and outsourcing key functions such as call center support. As PE firms
need to eventually sell the business upstream to another investor or take
the company public, achieving growth targets within a period of 3–8
years is paramount.
Miller believes that certain franchise founders unwilling to invest in
infrastructure or push for fast franchise development may be attractive
to a PE firm that can use their expertise and capital to address these
shortcomings. PE typically uses high leverage when acquiring the target
(paid by the target, not the PE firm). We will thus see more debt-laden,
PE-backed franchise brands, earlier in their lifecycles. High valuations
also force PE to move more aggressively to justify those valuations by
pushing harder for growth. Brands that are unable to find a PE partner
or find a PE-owned platform in their market segment before their
competitors, will find it much harder to grow and attract capital. This
may force the vast middle brands to address the issues that have been
handicapping the brands’ growth and success.
Current PE activity in franchising indicates that it will continue to play
an increased role in the franchise industry in the years ahead. This can
provide an opportunity for qualified franchise systems seeking to accel-
erate growth and earnings and cause more franchisors to seek to sell their
franchise equity for a fair price.

The Pandemic of 2020–2021

The Pandemic of 2020–2021, considered one of the most impactful
events in the past 100 years, has had significant impact on the franchise
industry. Franchise research firm FRANdata reported that 10,875
franchises closed permanently. The closures were led by the Hospitality,
Restaurant, and Retail food sectors, followed by Personal Services, and
Commercial and Residential Services. Unlike independently operated
businesses, royalties and continuing fees which are built into the fran-
chise financial model enabled franchisors to provide financial relief to its
franchisees by suspending, reducing, or forgiving those fees. This enabled
 Franchise Trends 163

the survival of countless franchisees despite the impact from the

Pandemic. Each of these events had a significant impact on franchising to
varying degrees. Currently, there are trends taking place within and
external to franchising that will have a future impact on franchising.
The recent Pandemic led certain franchise sectors to seek ways to
overcome its impact. For specific franchise categories such as fitness and
gyms, the solution was to implement virtual workout sessions for
members. For other franchises, it meant accelerating planned changes to
minimize the loss of customers and lower operating costs.
Franchise hotel brands accelerated the use of robots to deliver items
ordered through room service to a guest’s door. A boutique hotel near
Apple’s headquarters has a robot butler that can move between floors to
take items such as toothbrushes, chargers, and snacks to guests. These
digital systems make it easy for hotel staff to deliver items to guests, as well
as offer a futuristic digital experience to people who stay at the hotel. More
franchise hotel chains are using technology including online check-in and
check-/out, mobile keys, and cloud-connected keyless hotel locks.
In the franchise food categories, which account for 45% of franchise
industry revenues, franchises such as Chick-fil-A closed indoor access to
its restaurant but added faster customer drive-thru ordering plus pickup
and delivery services. No franchise sector has felt more impact and im-
plemented more changes because of the Pandemic than food franchises.
There is little doubt that franchising and especially food franchises will
continue to undergo change as they evolve in the years ahead.
John Gordon, of Pacific Management Consulting Group, specializes in
the restaurant industry. Gordon states that an important consideration
going forward for food is the actual size and location mix of the fran-
chisee location. This is particularly true with restaurants, which, even
with delivery and carryout, serve guests in a concentric circle around
their locations. Gordon adds that the leading global restaurants have
begun to modify their store profile, opting for service windows, more
drive-thrus, curbside pick-up, and more customer access, while down-
sizing traditional dining room seating.
There have been trends in franchising that have led to permanent
changes in the franchise industry. These changes range from how the
franchise industry is regulated to the introduction of technology in the
franchise business model. Certain changes may be transitory while others
will have a long-lasting impact on franchising.

Summary
In this concluding chapter, we presented current trends in franchising
and how these trends will evolve and change the franchise industry in the
years ahead. The introduction and use of technology by franchisors have
164 Franchise Trends

started to transform franchise development, franchisee performance

evaluations, and franchise oversight and support. Also, we explained
how these changes, supported by newly introduced technologies will
enhance the customer experience and increase franchise employee pro-
ductivity. We discussed how the increased role of PE investment in the
franchise industry will lead to more consolidation among certain fran-
chise brands and empower other franchise to grow larger. Finally, we
presented the impact on franchising brought about by the Pandemic of
2020–2021 and the changes made by franchisors that enabled franchise
brands to survive.

Notes
1 Teixeira, E. (2017). Using Applied Technology to Improve Franchise
Development. https://www.franchising.com/articles/using_applied_technology_
to_improve_franchise_development.html
2 Rugless’R (2021). Restaurant worker of the future. Nations Restaurant News.
https://www.nrn.com/technology/restaurant-worker-future-needs-heightened-
digital-and-people-skills-expert-says
3 Tangermann, V. (2021). McDonalds partners with IBM to replace drive-thru
employees with AI. Yesterday. https://futurism.com/the-byte/mcdonalds-ibm-
replace-drive-thru-employees
4 May, 2021. The top drivers of franchise performance. Franchise Business
Review. https://tour.franchisebusinessreview.com/posts/the-top-5-drivers-of-
franchise-performance-new-research/
5 Teixeira, E. (2018). Franchise fast food continues consolidation as fast food
chain sonic is acquired. Forbes. https://www.forbes.com/sites/edteixeira/2018/
09/26/franchise-fast-food-industry-continues-consolidation-as-sonic-drive-in-
chain-is-acquired/?sh=6ed57fd3481d
6 Nelson, B. (2020). Home care and private equity: Examining investment and
quality of care. Axxess. https://www.axxess.com/blog/financial/home-care-
and-private-equity-examining-investment-and-quality-of-care/
7 For private equity, growth is everything. (2019). Franchise Times. https://
www.franchisetimes.com/franchise_finance/for-private-equity-partners-
growth-is-everything/article_491ab1bd-5866-5aaf-b55f-394e9b8d5337.html
Index

Page numbers in Italic refer to figures; and in Bold refer to tables.

accounting firm, independent 101 California Closets 15

Ace Hardware 16 Cancro, Peter 92
Action Coach 16 Captain D’s 15
ADP or Paychex 127 Catalyst Insight Group 162
agency theory 2–3 categories, of franchise: category
agreement, renewal 40 growth, analysis 45; fastest growing,
Alternative Dispute Resolution (ADR) from 2015 to 2020 46, 47;
151; arbitration 151; mediation 151 performance data and franchise
arbitration 151; differences between category growth 44–46; top
litigation, mediation and 152 category growth, from 2015 to 2019
artificial intelligence (AI) 156, 45, 46
157–158, 159 Century 21 Real Estate 16
Athena Business System (ABS) 159 CertaPro Painters 133
Automobile Dealer Franchise Act, Chart of Accounts 94
1956 7 Chick-Fil-A 24, 55
automotive sector 15, 18 Chief Executive Officer (CEO) 91,
A&W Root Beer 4 92, 93
Chief Financial Officer (CFO) 91, 94,
Begleman, Steve 58 95, 96
Bidwell, Mike 158 Childcare category 45
Bonds Franchise Guide 110 Christian Brothers Automotive 15,
BrightStar Care 159 123, 124
Bright Star Home Care franchise 107 Circle-K 16
Brown, John Y. 5 Coalition of Franchisee Associates
Buffalo Wild Wings 15 (CFA) 8
Burger King 5, 15, 24, 148 Coca-Cola 22, 23
business format franchises 10 Cohen, Mitch 32
business plan, franchise: about market Coldwell Banker 16
82; brand strategy 82; competitors, commercial and residential services,
details 82; Executive Summary 81; sector 15, 18
financial projections 82; Franchise company attributes, for franchisability
Concept 81; franchise development determination: brand equity 60;
82; Franchise Leadership 81; company-owned units operating
product features and benefits 82 60–61; existing guidelines or
166 Index

manuals, business operation 61; process 113–114; recruiting

franchise trademarks 60; marketing candidates, toolset used for
plan, of existing business 61; 106–111; targeting territories
multiple company operations, 103–105; technology use, and
advantage 61; repeat customer franchise development 157–158; VP
rate 61 Franchise Development role 96, 97,
competitive intelligence (CI) 34–35 112–114
complementary branding 29 Digital Technology 156
conflict management, tools 142, 143; Director of Franchise Operations
best practices, sharing 147; (DFO) 91, 98–99
communication, effective/good Discovery Day 117–118
143–144; documented franchisor drip campaign 111
operating principles 146; franchise Dunkin’ Donuts 5, 23, 55
committee role 146–147; franchisee
satisfaction levels, measure emerging franchises performance 43,
144–145; franchisor FRM 51–52; 10-year review of over 1,119
leadership role 146; key 49; analyzed 43–44; and category
performance indicators (KPIs) use differences 43–44; data, importance
144; Propelled Brands case 146 44–45, 48; data and franchise
Contact Relationship Management category growth, importance of
(CRM) software 111 44–46; franchise system, outcomes
continuing fees 38–39 of 43; franchise system growth,
COVID-19 1 measure 44, 46, 48; geographic
Crumbl cookies 107 dispersion 44; growth from 2010 to
Cunningham, John 59 2020 50; investment amount, and
risks 50–51; poor franchise growth
Dairy Queen 5, 15 48; top category growth from 2015
Deluca, Fred 92 to 2019 45, 46; top five franchises,
development, of franchise 30–31; in five different franchise categories
multi-unit franchisee model 71–72; 46, 47
single-unit franchisee development Entrepreneur magazine 15, 45
model 71 evaluation process, of franchise
development process, execution 103, venture 53, 67; company objectives,
104; candidates’ questions/concerns examination of 55–57; feasibility
addressal 114; CRM use 111–112; analysis, internal/external 57–61,
Discovery Day, objectives 117–118; 62–67; importance of 53–54; initial
engagement process 114; franchise thought experiment 55; major
agreement, provision of “deal- aspects of 53, 57;
breaker” 115; franchise application planning–performance
112; franchise candidate, relationship 53
engagement with 114–117; external feasibility analysis 62, 64,
franchisee profile, creation 66–67; cash flow 63–64; factors
105–106; Franchise Information impacting, franchise program 66;
Form (FIF) 111; franchise franchise categories, comparisons
transaction, finalizing 118; 62; franchisee profitability, expected
international franchising 118–119; 63–64; franchising, in competitive
leads and inquiries, processing/ category 62; industry practices and
qualifying 111–114; non-negotiable trends 62–63; new concept
terms, in franchise agreement franchise, without competition
115–116; qualifying franchise 62–63; pro forma income statement,
candidates 112–114; qualifying and cash flow projection 63–64, 65;
 Index 167

return on investment (ROI), site selection 36–38; territory

estimated franchisee 63, 64; 35–36; theoretical frameworks 2;
unanticipated barriers 64, 66 trade/service 22–24; training 25–27;
types of, as per IFA 10; U.S.
Falcon Holdings LLC 7 economy, impact on 1, 11; vendor
FASTSIGNS 16 purchasing programs 32–34
Federal Petroleum Marketing Practice Franchise Business Review 122
Act, 1968 7 Franchise Central 106
Federal Trade Commission 25, 75, 77, franchise consultants 84
83, 101 Franchise Coordinator (FC) 91, 96–98
Federal Trade Commission (FTC) Franchise Disclosure Document (FDD)
Rule, 1978 7–8, 78, 155 8, 25, 27–28, 45, 71, 75, 124, 149;
Feng-Jiang system 4 22 categories in, items 75; financial
Financial Services 16 performance, representation 78–79;
First Light Homecare 127 franchise agreement 76; franchisee’s
Fox Rothchild 45 obligations, for operating 77–78;
franchise advisory council (FAC) franchiser obligations 78;
147–149 franchising business model 76;
Franchise Agreement (FA) 27, 79; importance 75; initial franchise fees
advertising fund fees, deferring 116; 76–77; initial investments,
balance interests, of franchiser/ estimation 77; royalty, and other
franchisee 80–81; default and fees 77; territory, description 78
termination provisions 115–116; Franchise Disclosure Model 30
franchisee defaults 80; franchisee franchise documents, major:
insurance requirements 80; Disclosure Document 75–79;
franchisee territory, size of 116; Franchise Agreement 79–81;
franchise opening 80; franchise Franchise Business Plan 81–82;
Personal Guaranty, cap or limit of Operations Manual 72–73
116; franchise term 80; franchise franchisee owners’ associations (FOA)
territory 79; grant of the franchise 147–149
79; initial franchise fee 115, 116; franchisees: advantages/disadvantages
initial term of 115, 116; negotiable 13–14; training, importance
items 116–117; non-negotiable 124–126
terms in 115–116; right of first Franchise Grade 110, 157
refusal, for adjoining territories The Franchise Handbook 110
116–117; royalties and fees, Franchise Information Form (FIF) 111
payments 80, 115; Transfer and franchise investment, defined 50
Assignment section in 117; Franchise Management Portal
see also Franchise Disclosure (SurePayroll) 127
Document (FDD) Franchise Mediation Program,
franchise attorney 83 1994 152
franchise business model 10–11; 21st Franchise Navigator 106
century, growth in 5–6; competitive franchise relationship management
intelligence (CI) 34–35; (FRM) 140, 153; additional FRM
development 30–31; franchiser tools 145–147; conflict management
support 31–32; franchise term 142; Conflict Prevention and
39–40; higher sales 1; history of Resolution procedure 152; Denny’s
4–7; initial franchise fee and franchise system 148; feedback and
continuing payments 38–39; suggestions, impact 148; franchise
intellectual property (IP) 21–22; advisory council (FAC) 147–149,
marketing 28–30; operating system 153; franchisee, phases of 140, 141;
24–25; operations manual 27–28; franchisee organizations, benefits of
168 Index

148; franchisee owners associations 1960s 7, 155; regulations, and

(FOA) 147–149; franchise litigation, associations 7–8; successful,
major cause of 150; Franchise components for 122; systems by
Mediation Program, 1994 152; number of locations 17;
franchisor strategy, critical technological innovations in
component 140, 152–153; (See (technology in franchise
Independent Franchisee Association system); theoretical frameworks
148, 149, 153; International 2–4; trademark, and brand 22–24;
Institute for Conflict Prevention and Value of Franchising, Oxford
Resolution 152; litigation, or Economics 1
lawsuit 149, 150; sources of conflict franchisor–franchisee relations
142; tools for managing conflict (See franchise relationship
142–145 management (FRM)
Franchise Rule (in 1979) 155 franchisors: advantages, and
Franchise Search 91 disadvantages for 11–13; support,
franchise system development importance of 31–32, 122, 138;
(See development process, execution support, includes (See support and
franchise units, advantages/ services, franchisor)
disadvantages of buying 13–14 FranConnect 160
Franchise Update Media Group 94 FRANdata 1
franchising (franchises) 1–2, 17–18, FranWise 27
155; 15 largest, U.S. international Fridays 15
brands 9; advantages of 11–13; full-service restaurants 15–16, 18
behavioral assessment tool 106;
business format 10; categories, Gerson, Keith 160
growth 45; contractual arrangement GNC 16
2; cost-reduction advantage of 4; Goldberg, Eddy 94
defined 2; development, process Google Ad Words 109
30–31; disadvantages/problems in Gordon, John 163
12–13, 14; employment, and jobs 1; government contracts 133–134
as essential growth strategy 18; Great Clips 16
evolution of, McDonald’s and KFC Great Depression 155–156
5; by franchise sector as of 2020, Great Recession, 2007–2009 155–156
percent of 18; fundamentals of,
essential components of model Hilton Hotels 16
(See franchise business model); Hobby Town 16
history of 4–7; IFA, and CFA role 8; Holiday Inn 5, 16
impact in, the United States 1, 11; home care franchisor 104
industry statistics (See industry Hooters 15
statistics, franchise sectors); hospitality sector 16
influences, on daily activities 11; Huddle House 129
initial fee, and continuing payments
38–39; international 9–10; versus Ice, Kona 38
licensing 3; major sectors 15; industry statistics, franchise sectors
opening, successful grand 127–129; 14–15; automotive 15; commercial
Pandemic, impact from 162–163; and residential services 15; full-
pre-franchise disclosure laws 8; service restaurants 15–16; lodging,
private equity (PE) firms, in future and real estate 16; personal/business
role 6–7, 161–162; product services 16–17; quick-service
distribution, disadvantage of 10–11; restaurants 15; retail food 16; retail
publicly traded mega-franchise products, and services 16–17
companies 6; rapid growth in 1950s/ InGage Consulting 122
 Index 169

initial franchise fee 38–39 launching, franchise business/program

intellectual property (IP) 21–22; 69, 85; consultants, and attorneys
nondisclosure, and confidentiality role 82–84; development model,
21–22; primary forms of 21; rights, choice of 71–72; essential franchise
protection steps 21, 22 documents for 72–82; franchise
internal feasibility analysis 57–61; agreement (FA) 79–81; franchise
brand equity 60; company business plan 81–82; franchise
attributes, determining disclosure document (FDD) 75–79;
franchisability 60–61; company- incorporating, new company 70–71;
owned units operating 60–61; operations manual 72–75; securing
company staff, capabilities 60; logos and, trademarks 70; website
existing guidelines or manuals, domain name, securing 70
business operation 61; financial Lefler, Jeff 157, 158
capital 57–58; franchiser leader, licensing 2
traits 59; franchise trademarks 60; litigation, franchise 149; Alternative
management competence 58–59; Dispute Resolution (ADR)
marketing plan, of existing business 151–152; arbitration, mediation
61; multiple company operations, and, differences 152; avoiding and
advantage 61; repeat customer rate managing 149–150; example of,
61; resource availability 57–60 dispute leading to 150; Item 3 of
International Franchise Association FDD 149; preventing disputes from
(IFA) 1, 8–10, 11, 76, 83, 110, 115, escalation 150–151; Quiznos
119, 152 case 150
International Franchise Association lodging (Hospitality sector) 16, 18
Franchise Opportunities Guide 110
international franchising 9–10, MAACO 15
118–119; 15 largest, U.S. brands 9 marketing, for franchise 28; activities,
International Institute for Conflict and strategies 29–30;
Prevention and Resolution 152 complementary branding 29;
IP protections 21–22 franchisees, contributing to 29–30;
IT support/services 101, 102 franchisor support in (See marketing
strategies, by franchisors); full
JAN-PRO 133 participation 30; minimum fixed
Jersey Mikes 92 dollar amount, for advertising 131;
Jiffy Lube 15 objectives of 29; as outsourced
Johnson, Howard 4 service 99, 101
marketing strategies, by franchisors
Kelly, A. O. 18 129–130; advertising fund usage
Key Performance Indicators (KPIs): to 131; government contracts
evaluate/compare, financial 133–134; marketing program,
performance 137–138; franchisee implementation 130; National
monthly gross margin percent 137; Account (NA) program 132–133;
franchisee profitability 137; gross pricing, mandated versus suggested
sales 137; monthly sales growth retail 132; Property Stewards 131
137; usage of, and franchise type Marriott Hotels 16, 24
137–138 Massey, Jack C. 5
KFC 22, 23 McDonald’s 5, 15, 23, 24, 76, 92, 148
Knepper, Barry 94 McDonalds Black Owners
knowledge areas 59 Association 148
Kroc, Ray 5, 92 mediation 151; and differences
Kung Fu Tea website 108 between litigation, arbitration
Kushell, Doug 91 and 152
170 Index

Merle Norman Cosmetics 16 franchisor’s: additional marketing

MFV Expositions 110 staff 91; blueprint for establishing
Midas 15 86; of established mature system 88,
Midas Muffler 5 90; important step, for developing
Miller, Alicia 162 franchise 86; National Accounts
Miller, Keith R. 148 Director 91; possible configurations
Morgan’s Foods, Inc. 7 of 86; service areas, outsourced 86,
Mosquito Joe 148 88, 99–102; startup 87, 88; three
Mr. Rooter 15 examples of 87–91; top
multi-unit franchisee companies 5 management team members 86,
multi-unit strategy 71 91–92; see also (top management
Murphy Business 16 team (TMT)); typical mid-sized
88, 89
National Account (NA) program outsourced services, franchisor:
132–133 independent accounting firm 101; IT
Neighborly 158 support 101; marketing 99, 101
NerdsToGo 16 ownership strategy: “plural form” of 4
NPC International 7 Oxenfeldt, A. R. 18

objectives, of company 55; company Pacific Management Consulting

revenues and earnings, retaining 56; Group 163
control, important consideration 56; Pandemic of 2020–2021 162–163
fast growth of locations 56; growth Paul Davis Restoration 15
strategies 56–57 Pay Per Click 109
O’Connell, Mary Ann 27 Performax Franchise Advisors 32
one-stop franchise portal 157 performance (See emerging franchises
opening program, franchise: Chick-Fil- performance
a example 129; executing successful personal, and business services
127–128; franchisor–franchise 16–17, 18
relationship, start of 127; grand Pestmaster Services 134
openings, and promotions 128–129; Pickett, Paul 26
positive customer experience 128; Pinckney, Mitch 35
post-grand opening assistance 129; Pizza Hut 55
soft opening 129 Planet Fitness 16
operating system: adherence to 24–25; Point-of-Sale register 138
elements of 24; refers to 24 Pop-A-Lock 16
operational services 126–127 Potbelly Franchising 15
Operations Manual: consist of, several print advertising 110–111
separate manuals 27; contents, and private equity (PE) firms 6–7, 161–162
issues addressed 28; sample, table of product distribution franchises 10–11
contents 73–75; standards and profile, franchisee 105–106; business
procedures in 27; see also Franchise experience 105; personality
Disclosure Document (FDD) characteristics 105; Skills, Values
operations support/evaluations, and Behavioral Assessment 106;
franchisor 134; face-to-face contact, timetable, to open 105–106; updates
benefits 136; franchisee to 106
dissatisfaction, reason 136; publicly traded franchises 6
franchisor field representatives
135–136; franchisor site visit QSR franchises 15, 17, 18
134–135; key performance Quiznos 150
indicators (KPIs) use 136, 137–138
organizational structure/capabilities, Rainbow International LLC 15
 Index 171

real estate sector 16, 18 Subway and Starbucks, comparison

recruiting franchise candidates, between 55
methods 106, 110–111; advertising suggested retail pricing (SRP) 132
portals for 108–109; blogs 109; Sun Capital 7
brokers use, advantage 108; support and services, franchisor 121,
Franchise trade shows 110; 138; advertising fund, franchisee
Franconnect Sales Index Webinar 131; financial performance (KPIs)
Study, methods 110; Internet for 137–138; franchisee training,
109–110; marketing materials use importance 124–126; for franchise
for 107; print media for 110; opening 127–129; importance of
Twitter and/or Facebook 109; 122; insufficient, and consequences
website pages, products or services 122; mandated versus suggested
107–108 retail prices (SRP) strategy 132;
Red Roof Inns 16 marketing, implementing program
Re/Max 16 129–130; National Account (NA)
resource availability: company staff, program 132; operational services
capabilities 60; financial capital 126–127; operations support, and
57–58; franchiser leader, traits 59; evaluations 134–138; pre-opening
interpersonal communication, and assistance 123; site selection
selling skills 60; knowledge base 60; assistance 123–124
management competence 58–59 SurePayroll 127
resource scarcity 2 Sylvan Learning Centers 16
retail food, and beverage stores 16, 18 systems, of franchise 16; by number of
retail products, and services sector 16, locations 17
18; business services 16; personal
services 16–17 Taco Bell 15, 55
Roark Capital Group 6 Tastee Freeze 5
robotics 156, 159, 160 technology in franchise system 155,
Rosen, Richard 36 163–164; artificial intelligence (AI)
Rosenberg, William 8 156, 157, 159; Athena Business
System (ABS) 159; digital
Sanders, Colonel Harland 5 transformation 156; franchise
Sentinel Capital 7 development and 157–158;
ServePro 127 Franchise Success Coach (FSC) 160;
Service Master 15 increased use, in operations
seven7-Eleven 5, 9, 16 158–159; McDonald’s, increased
Seven & I Holdings Co., Ltd. 9 use of 159; PE investment, increased
Shanahan, Edwin 148, 149 role of 161–162; performance
Sheraton hotels 5 evaluations, and support services
Singer Company 4 role 160; Reis & Ivry’s Frozen
site selection, franchise: critical/ Yogurt Robot 159; restaurant jobs
importance of 36–38; factors to 158–159, 163; robotics 156, 159,
consider 37 160; Sonic Drive-In fast-food
Skeans, Tracy 158 chain 161
Slavin, Craig 106 term, franchise 39–40; agreements,
slogans, of franchise 22–23 renewal stage 40; franchise, to be
Small Business Administration 134 sold 40
SMB Franchise Advisors 58 territory, franchise: effective
social media sites 101 development strategy 104–105;
Speed of Service 138 Exclusive, Protected, or Open
Subway 15, 92, 148 35–36; importance of 36; Open
172 Index

Territory models 36; various cost U.S. Commercial Service and

aspects of 104 International Franchise
Thomas, Dave 92 Association 119
top management team (TMT) 86,
91–92, 102; Chief Executive Officer Vehicle Tracking Solutions (VTS) 59
(CEO) 91, 92, 93, 94; Chief vendor purchasing programs 32–34;
Financial Officer (CFO) 91, 94, 95, purchasing cooperatives 34; services
96; Director of Franchise included 33; supplier purchasing
Operations (DFO) 91, 98–99; programs 34; vendor, types 33–34
Franchise Coordinator (FC) 91, vendors: recommended or approved
96–98; responsibilities 93, 95, 97, 33–34; required 33
98; Vice President (VP) Franchise Vice President (VP) Franchise
Development 91, 96, 97 Development 91, 96, 97
Tractenberg, Craig 45 Visiting Angels 16
trademarks 22–23
trade shows, MFV Expositions 110 Wall Street Journal 106
training program: consist of 25; Wendy’s 5, 92, 148
curriculums 25; franchisee, Wild Birds Unlimited 26
segments 124–126; importance World Franchise Council (WFC) 119
26–27; iterative process 25–26;
Kelly’s franchise 125; scheduled YUM Brands 158
training 26; well-structured,
assortment of topics in 125–126 Zwisler, Carl 119
24-Hour Fitness 16

The UPS Store 16