Balanced franchise model, as all things should be
Where should a franchisor make money? From the franchisee or the product?
In a recent episode of our podcast “Between Data and Risk”, Dr. Siwiak and I dissected the franchise business model with the help of Bob Volpe. Bob is the founder and managing partner at Volpe Consulting & Accounting Services, a firm specializing in helping franchisees organize their operations and accounting, and advising them on achieving the best results.
During the discussion, Bob described the different issues that franchise owners encounter, which seem to fall into three categories. Some problems are just a fact of life. If it didn’t hurt, we wouldn’t be paid for it, right? Markets are volatile, clients come and go, and their tastes change. Some people find solving daily business issues exhilarating, and those usually thrive in starting and developing their firms, whether as startup founders or franchise owners, and I know there is a massive difference in personality required for the two, but that’s not the point here. The main thing is that running a business means solving the constant stream of these daily issues, and that’s a fact of life.
However, another kind of problem comes from the gap between the expectations of new franchise buyers of what they will receive versus what the franchise actually provides. Investment in a franchise seems to be perceived by some unfortunate souls as similar to investing in a bond: you pay in and then reap the benefits. True, there may be some risk, but it’s mainly the profits that count. Wrong! The franchise provides the brand, the product, and the processes, and maybe some support, especially in the initial period, but the running of the business is hard work. Any wannabee franchise owner who doesn't realize this is going to have a bad time.
Finally, especially given the rough economy at the moment, there seem to be problems related to or even created by the franchisors themselves. Cutting support to reduce costs, forcing franchisees to accept unfavorable terms changes, or even cutting catchment areas in half to increase their own profits from service fees at the expense of rivalry between their own franchisees are just some examples where the best interests of the franchisor and franchisee don’t seem to be aligned.
Consider, for the moment, the nature of the franchise fee, or license fee, as it’s often called, and what it’s for. The fee represents a payment to the person or organization that came up with and developed and product or a business that was so successful that it can now be offered in more locations than the original organization can or wants to service itself. For this fee, the franchise buyer gets a ready-made brand and business blueprint. However, it’s just a blueprint, which is worth nothing if it cannot be turned into a profitable venture. Since the franchisor decided on this business model, they didn’t want to run the individual locations themselves, so the turning of the blueprint into a profit needs to be done by someone else, the franchisee, who needs to pull up their sleeves and run the show. However, the franchisee will only do this sustainably if they can enjoy the profit from their labors. All this may sound like common sense, but, as we always repeat, common sense is not that common.
Imbalances in this franchisor-franchisee relationship will be detrimental to both. For the franchisee, the investment of time and capital is considerable, and choosing the wrong franchise or going into a franchise for the wrong reasons or with the wrong expectations can be a catastrophic decision. Some franchisors, on the other hand, may think there is always the next wannabee just waiting to take on the challenge of running a location but churning through franchisees is a surefire way to run your brand to the ground in no time.
This is exactly why it was very interesting to listen to Bob talk about his experiences and the services he offers. To me, it remarkably looked like a balancing act, ensuring that the franchises and franchisors he works with have a clear understanding of each other’s expectations and needs so that the relationships may be more like partnerships, developing the businesses rather than exploiting each other. Additionally, Bob’s company provides support in areas like accounting, which are usually not covered so well by the franchisors’ support packages, but which do carry some franchise-specificity, so generic accounting services may not be enough.
Overall, it’s a very interesting business model, which puts another layer of complexity over the traditional business-client relationship. After all, in some sense, the franchisee is just a client of the franchisor… Or are they?
To hear more about the franchise business model, listen to our interview with Bob Volpe on “Between Data and Risk” or watch it on YouTube.
To find out more about Bob and his company, visit Volpe Consulting & Accounting Services.
Also, make sure you check out the “Between Data and Risk” publication on Medium for a critical look at the latest ideas and technologies in business.
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