LITMIR.BIZ

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franchisors may specify uniforms and other brand standards related to how a franchisee’s staff looks (think tattoos, beards, piercing, cleanliness), franchisors don’t generally provide any other human resource requirements. Who a franchisee hires, how much they are paid, what benefits they receive, which hours they work, and how they are promoted and disciplined are all the sole responsibility of the franchisee. Because human resources are the sole and exclusive responsibility of the franchisee and not the franchisor, franchisors and franchisee are generally not considered joint-employers and are not liable for each other’s actions or inactions.

       Social franchising

      Social franchising is the newest form of franchising. Social franchising is the application of business-format franchising’s techniques and methods to the delivery of products and services to address the needs of people who live at the base of the economic pyramid (BOP). The term BOP refers to the estimated three billion people in the world who live on less than $2.50 per day. Social franchise systems generally focus on the lack of access to basic needs such as safe drinking water, adequate food supply, authentic drugs, quality healthcare, education, sanitation, and energy. These products and services have historically been delivered primarily by governments, churches, and NGOs with mixed results.

      According to Julie McBride, senior consultant for social franchising for MSA Worldwide, “Social franchising breaks the cycle of poverty by helping local entrepreneurs develop and expand businesses that solve social needs while at the same time generating profits for the local business owners and creating jobs in the communities they are serving.”

      NGOs provide a beneficial and important service in bringing critical products and services to the poor. But traditional methods used to provide this type of support are less sustainable than those found in social franchisors. Traditional methods typically lack the level of brand standards found in franchising, and NGOs usually don’t typically focus their resources on training and supporting local operators as do social franchisors.

      The social franchise model is emerging as a powerful tool for the international development community because of its potential to scale (expand). All the elements found in commercial franchising – including agreements, manuals, training, headquarters and field support, consistent supply chains, brand standards, and enforcement – are also found in a social franchise system.

      A significant problem facing both social franchisors and NGOs is the frequent inability of consumers to afford the products and services, and the necessary reliance by the system on donations and other financial contributions. Because most NGOs use a top-down structure (the opening of locations), this often leads to an insufficient focus on ensuring that local product and service providers can sustain the standards found in commercial enterprises like social franchising.

      Evolution in social franchise systems is generally driven by the same reasons found in commercial franchising – changes in consumers and competition. In an NGO, changes are frequently caused at the direction of donors and the unique products and services they want the NGO’s system to deliver. This, above all else, is one of the reasons that NGOs are not able to achieve the sustainability found in franchising.

The Roles and Goals of Franchisors and Franchisees

      The franchisor and franchisee are in distinctly different businesses – they merely share a brand. In a franchise, the franchisor licenses to the franchisee an operating system, and the franchisee provides the products and services to consumers.

      As a licensor, the business of a franchisor is to develop, license, support, and expand an indirect system of distribution of its branded products and services. As required under the law, it is the franchisor’s responsibility to establish brand standards and enforce how the franchisee meets those brand standards sufficient to protect consumers. In contrast, the business of a franchisee is to independently manage and operate their business to the brand standards established by the franchisor.

      In this interdependent relationship, the franchisor generally has no contractual right to manage or supervise the day-to-day business affairs of its franchisees, and its rights to enforce its standards are limited to those agreed to in the contract between the parties. The franchise relationship effectively runs on trust, as the ability of a franchisor to enforce its brand standards is ultimately limited to its right to default and terminate noncompliant franchisees – a relatively high bar under the law.

       Looking at the world through franchisor lenses

      Who a franchisor is may vary. It can be a large or small company with a long history of successful operations or it can be a startup with little or no experience. Some examples include the following:

      ❯❯ Roark Capital is a private equity firm with over $6.5 billion in equity capital. Some of its portfolio companies include 1-800 Radiator, Anytime Fitness, Arby’s, Auntie Anne’s, Batteries Plus Bulbs, Bosley’s, CARSTAR, Carvel, Cinnabon, CKE Restaurants, Corner Bakery Café, Econo Lube & Tune, Great Expressions Dental Centers, Home Service Stores, Il Fornalo, Jimmy John’s, Maaco, Massage Envy, McAlister’s Deli, Meineke, Merlin, Miller’s Ale House, Moe’s Southwest Grill, Naf Naf, Orangetheory Fitness, Pet Supermarket, Pet Valu, Primrose Schools, Pro Oil Change, Schlotzsky’s, Take 5 Oil Change, and Waxing the City.

      ❯❯ Foumami, Dat Dog, Beverly Hills Rejuvenation Center, and Americas Escape Games are small and relatively new to offering franchises.

      ❯❯ Firehouse Subs, Sport Clips, FASTSIGNS, Bright Star, and 7-Eleven are larger, well-established franchisors.

      All great franchisors provide their franchisees with a uniform operating system and train and support them to independently manage and operate their business. When looking at franchising, consider that new businesses don’t usually fail because their products or services are of low quality – they fail because of unknowns and lack of resources. Established franchisors have made and survived their mistakes, and that is one of the benefits of working with established companies – you can generally avoid a lot of the minefield of blunders that startup businesses usually face.

      Franchisors don’t set standards, nor do they provide assistance, out of the kindness of their hearts. It is important to them that their franchisees deliver a consistent, sustainable, and replicable quality of products and services to consumers. They need the system to grow, prosper, make profits, and achieve a solid return on investment at every level, and to achieve that they design their systems so that franchisees can easily execute to their brand standards. If they do that well, franchisees can make money, stay in business, expand, and pay fees. The franchisor’s brand value grows as more people shop at its branded units – and because of everyone’s success, additional investors will want to become franchisees.

       The franchisee’s end of the bargain

      When you invest in a franchise, you are not buying a franchise. You can’t because all the franchisor is providing to you is a license allowing you to use its brand name and methods to operate your business, and you only get those rights for a specified period of time.

      As a franchisee, you own the physical assets of your business: the land, building, equipment, and so forth. You are not buying the franchisor’s brand or systems, and in some franchise system, the franchisor may even retain the right to purchase your assets when the franchise relationship ends.

      It may not sound like much of a deal, but here’s what you get when you join a well-established franchise system:

      ❯❯ Brand standards and enforcement by the franchisor

      ❯❯ A proven and successful way of doing business

      ❯❯ A recognized brand name

      ❯❯ Training and ongoing field and headquarters support

      ❯❯ Research and development into new products and services

      ❯❯ Professionally designed local, regional, and national advertising and marketing programs

      ❯❯ Often, a chance to invest in additional franchises

      ❯❯ A shortcut around the common mistakes of startup businesses

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