This is a true story that unfolded over the last few weeks among some of the people known to me. Last month, a close friend told me that he’s interested in taking up a franchise of an up & coming beverage brand. Given my ability to quantify decisions with metrics, and my ability to make holistic assessments, he thought I should be part of his decision-making process. Disclaimer: My friend and I are absolutely new to the business of franchises.
Five days after our first discussion, we had almost all the numbers we needed. Everything from projected costs, to probabilistic Net Present Value over 5 years (contract period). In this scenario, two metrics became extremely important: the minimum revenue of the first year and the minimum growth rate from the second year onwards. But numbers are just one part of the story in any business decision. The question we truly had to ask ourselves was: Can we actually generate the minimum revenue per week necessary for our investment to be profitable, at the prescribed locations? We didn’t know the answer to this.
Hence started our series of visits to the proposed locations, meetings with other franchise owners of the same brand, and meetings with the franchise owners of other brands. We learnt so much about franchise business in those two short weeks: Multi-store franchise, Cluster franchise, Regional Master Franchise, FOCO & FOFO models, the risks under each model, the limitations of operations, the distribution of Marketing Budgets, the significance of a Brand’s marketing plan for the franchise owners. It felt as if our learnings were enough for us to start our own Franchise Investment Consulting Firm.
Now that we knew the risks involved in a franchise business, we knew exactly what terms we had to negotiate with the CEO of the Beverage Brand. (We understood there was some flexibility). There is so much juice to this story but in the interest of privacy of the involved parties, I would exercise a bit of restraint.
The meeting/negotiation was meant to last for 30 minutes, but it dragged on for 4 hours because the management of the Beverage Brand and we had different opinions on how the future would potentially unfold. And we could not agree on how the revenue would be shared between the Brand the and franchise owner.
And this is where this story took a turn. My good friend, the smart cookie that he is, (also a seasoned Sales professional) recommended something interesting: Why not have an outcome-based contract?
Now, outcome-based contracts are nothing new. Also called Contingent Contracts, they have been in use for a very long time in the logistics industry. Companies have been hiring CEOs with compensation structures based on their overall performance. And more recently US and EU companies have been implementing this for Indian IT services companies to avoid unnecessary implementation of expensive solutions that would otherwise just inflate the top lines of the said IT companies.
A very popular Harvard Business Review article titled “Betting on the Future: The Virtues of Contingent Contracts” very nicely sums up the magic of even just recommending a Contingent Contract. One of the advantages of doing so is that it reveals to a great clarity whether your opponent truly believes in the outcome, based on which he/she is negotiating, or does he/she believes in it simply to close the deal. The article is based on the following premise:
“Differences of opinion about future events don’t have to be bridged; they become the core of the contingent contract.”
To those in the business of Sales function, and/or those who are regularly involved in negotiations in some form or other, I highly recommend the HBR article. It’s a brilliant piece of work. And coincidentally, it was part of our most recent course “Negotiation Analysis”, as part of our Executive MBA at the Indian School of Business.
In our franchise investment scenario, it truly levelled the playing field between us and the Beverage Brand. The discussion ended with my good friend not making the deal, since the other party was not willing to bet on the future outcome that they believed in. It ended up saving my friend a sizeable amount of investment. We, of course, will never know if this was a good decision or otherwise, for the next five years. This was the magic of Contingent Contracts we experienced in the last few weeks.
[S Anwar is the Founder & CEO of SafeMeds.in, primarily involved in Product Management and General Management. He is currently pursuing Executive MBA from Indian School of Business, Hyderabad. His detailed profile is available at www.sanwar.in]