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On-Site Management

Is it really necessary to be a hands-on franchisee?
September 10, 2001
URL: http://www.entrepreneur.com/article/44204

To manage or not to manage, that is the question. Whether you've envisioned kicking back in a corporate office or manning the front lines of your franchise, your decision to be a hands-on or absentee owner has great implications for your business. Everything from employee relations to future growth could hang in the balance, so choose wisely.

But is one option better than the other? Franchise Zone asked Andrew A. Caffey, a Bethesda, Maryland, attorney and franchise specialist, for his perspective on these ownership options.

Franchise Zone:What are the benefits of being a hands-on franchisee?

Andrew A. Caffey: In some businesses, it's not just a benefit-it's an essential feature of success. I learned this many years ago from a franchisor who told me the reason he franchised was the business wasn't profitable if a mere employee was running the shop. Employees were actually stealing the inventory. The franchisee, on the other hand, has an interest in seeing the business profit and making sure none of the employees are sabotaging that profitability.

Other benefits include the close and careful management of employees, the ability to give special attention to customers, and the capacity to make everyday decisions about the business.

What are the drawbacks of being a hands-on operator?

If a person is successful in a single retail business and would like to expand that business with additional locations, he or she is going to have to share time between those businesses and cannot be an on-premises, full-time owner/operator for any one business. Something's got to give if the business is going to grow.

In the late '70s and early '80s, some franchisors were attempting to enforce a provision of the franchise agreement that required the franchisee to be a fully active, full-time, on-premises manager not removed from the business in any way. The upshot of those legal cases was that franchisors can enforce that requirement, that in some businesses it's an essential requirement of success. So that precedent was established in the early days of franchising, and some franchisors consider an on-premises franchisee so important, they require it by contract.

What benefits do absentee owners enjoy?

The ability to build multiple businesses over a fairly short period of time. In a lot of franchises, that absentee owner is a developer-the person lining up employees and managers, overseeing the build-out of the business and moving on to the next unit. Absentee owners can build rather quickly without having to spend a large portion of their day on-premises.

What about the drawbacks to absentee ownership?

Not staying close to the employees and the manager. An absentee owner doesn't know how the business is being operated, so, for example, a restaurant's tables and floors could be consistently dirty. A manager without an ownership position may not be motivated to keep things operating in the way the absentee owner would like. So enforcing standards becomes a problem.

And, in franchising, it's a particular problem, because franchisors obviously rely on their franchisees to keep up the standards of the business operation. The franchisor doesn't have a relationship with that store manager. In a franchise structure, it's essential that the franchisee be an active participant in the business.

What to Consider

Are there types of franchises where being absent from the premises absolutely wouldn't work?

Yes, such as businesses selling valuable inventory. I know in one franchise system, the franchisee was having particular problems because his employees were taking home some of the more valuable boxes of product that were cooked and sold in the restaurant. In businesses that run on relatively small margins already, that can be devastating to the profitability of the business.

In cases like that, is it beneficial for franchisors to require that franchisees be on-premises?

A franchisor has to think carefully about imposing a contractual obligation for personal involvement in these businesses because the contract has to be flexible enough to accommodate a lot of different circumstances of individual-unit owners and multiunit owners.

Franchisors benefit from a flexible requirement that encourages franchisees to be directly involved in on-premises supervision. I work with one franchisor that specifies on-premises supervision will be no less than X hours a week and that the owner live no more than Y miles from the store's location because they've found if the owner is on-premises for fewer hours than that, they run into big problems.

This is usually found in the franchise agreement when the franchisor considers it an essential part of succeeding in their businesses. After a franchisee complies and establishes a successful track record and, perhaps, receives a second or third or fourth franchise, they know the business so well at that point that they understand how to run a business without being there all day, every day. So the requirements have to be flexible to accommodate that.

Franchisors also have to be careful that this requirement isn't overbearing or limiting or that they're requiring more involvement than is necessary. It may be, for instance, perfectly adequate in a particular type of franchise business that the owner be on-premises four hours a day, with a good manager in place. In other businesses, the owner may have to be there virtually the whole time the business is open. But especially for a retail business with long retail hours, franchisors have to realize no one person can probably be there every hour the business is open.

What else should prospective franchisees consider if they're thinking about being hands on or hands off? What's involved in that decision employee-wise? Cost-wise?

That's pretty hard to answer in the abstract. Anyone evaluating a franchise should understand what's spelled out in Item 15 of the UFOC [Uniform Franchise Offering Circular], which directly addresses any contractual obligations the franchisee has to participate in. That item specifically discloses whether personal participation in the direct operation of the business is required, whether the franchisee has to enter into any kind of personal guarantee or confidentiality obligations and whether that franchisee has to require anything contractually of its managers or senior employees who supervise, or help to supervise, the business.

If you decide to be an absentee owner, how hands off should you be? Should you still be checking in? Would you have any hand in hiring?

That may depend entirely on the trust you have in the people managing your business on a daily basis. If you have great people in place who are experienced managers, that may free you up a bit more.

Are there certain businesses or industries that work better for a hands-off owner?

I have to say, none come to mind. Maybe that says something.