How Franchisees and Franchisors Can Master Their Relationship
In the world of business, the relationship between a franchisor and a franchisee is indisputably unique.
Some liken it to a partnership, but in fact, it’s nothing of the sort. In a partnership, interests of both parties are directly aligned. And while the best franchise systems work to actively align franchisor and franchisee goals, at the end of the day, the franchisor’s financial interests are met by increasing franchisee revenues, while a franchisee’s interests are met by increasing profits.
Others liken the relationship to a marriage. But still, it is unlike (most) marriages in that the franchisor has almost all the power -- at least when it comes to brand standards. It’s also nothing like a traditional employer-employee relationship. Franchisors govern by contract; they cannot hire, fire, or discipline franchisees the way they would with an employee.
So perhaps the closest analogy is in fact that of a parent-child relationship: A franchisee starts out dependent on the franchisor for everything, then gradually becomes more independent (and perhaps even grows rebellious), but is ultimately required to follow the rules that the franchisor sets.
Franchisors have both the right and the obligation to enforce system standards, but their franchisees are independent business owners who can call their own shots on day-to-day operational decisions that do not impact brand standards. Franchisors have to remember that.
This is why both sides need to come together, at the very start, to make sure their relationship gets off on the right foot and stays strong. In the end, the franchisor is creating a community in which franchisees and the franchisor team have many shared interests and needs. The community thrives if the franchisor can maintain trust, sound leadership, and transparency -- and if franchisees actively engage with the franchisor and one another to make the system stronger over time. In many of the highest-performing franchise systems, the franchisor’s principal role is as much about accumulating and sharing best practices from franchisees as it is about anything else.
Sound simple? It’s not. But with the right work and attention to detail, this relationship can truly thrive.
Let’s start with this basic fact: Everybody loses when the relationship goes sour.
A failing franchisee will cost more to support, and they’ll provide less (sometimes nothing) in royalties. They’ll often stray from the franchise’s system in an attempt to save money -- by, say, buying substandard products to cut corners. As a result, their customers will be unhappy and they’ll degrade the overall brand.
Happy and successful franchisees will do the opposite. They will tell their friends and family about their success, generating more franchise leads. They will spread the word on social media and elsewhere, increasing lead flow. They will usually follow the system -- and presumably, that will make them more successful. And generally speaking, the more successful they are, the less they will need from franchisors in terms of support (which reduces corporate costs), and the more they will pay in royalties. They will interact with the brand and contribute ideas. Happy franchisees rarely sue.
And, of course, they buy additional franchises.
So, how does this relationship get off on the right foot? The answer begins at the very beginning -- by defining the relationship on both sides. Think of it, again, like a parent-child relationship: Sometimes being a great parent means you cannot be a good friend. And the franchisor needs to be a good parent first.
One of the most important things a new franchisor can do is establish the boundaries of the relationship. The franchisee needs to understand that a franchisor’s role is to guard the system and the brand so all franchisees can continue to thrive. As such, the parent company needs to communicate and enforce brand standards, and be willing to discipline those who do not follow them. Franchisees also need to realize that not every decision a brand makes will benefit all franchisees equally. Sometimes the greater good of the system needs to supersede the desires of a few. It’s not possible to please everyone all the time.
At the same time, discipline cannot be meted out to franchisees as if they’re employees in a corporation. They’re not. If a franchisor tries to give a franchisee the “it’s my way or the highway” speech, only trouble will follow. If they try to dictate certain employment practices, it may create legal complications.
Franchisees are proud business owners, and as such, all communication with them should happen in a professional manner. While franchisors will want to be firm on issues involving brand standards, they will also need to be sure franchisees understand the nature of the standards and have an opportunity to give feedback. No major decisions should happen in a vacuum.
If a franchisee isn’t complying with the brand’s requirements, franchisors should explain why their actions are to the detriment of the business and perhaps other franchisees as well. They can show the franchisee how following standards can increase revenues, reduce operating costs, maximize profits, and enhance the resale value of the business. And rather than having all the information come from corporate headquarters, a franchisor should point to examples of best practices that have been put in place by other franchisees within the system.
The point is, even when tensions run high, both sides should focus on their shared goal: They want to be successful. And that means they need each other to succeed.
Establishing boundaries between franchisors and franchisees -- while a necessary first step -- will only carry you so far. Clear communication is the keystone of a productive franchisor and franchisee relationship. And it can be the toughest, most nuanced aspect to get right.
The ancient Greek philosopher Zeno said that we are given two ears and one mouth for a reason. The best communicators (and the best franchisors) use them in roughly that proportion. And they know communication must flow up as well as down.
The most successful franchisors diligently provide their franchisees with frequent, useful communication -- which means more than the occasional email, newsletter, or perfunctory visit from their field representative. Today, it is all too tempting to rely on the internet for communications, but depersonalizing the relationship is a big mistake. Time and again, well-intentioned emails or texts can be misinterpreted and create a firestorm. Do not make the mistake of believing an email can substitute for human contact.
Relationships are built with dialogue, and good franchisors are careful to create multiple venues for constructive two-way conversations, from annual conventions and regional meetings to advisory and advertising councils. But in addition to this kind of institutionalized communication, simple, day-to-day accessibility should never be overlooked.
If you’re a franchisor, and a franchisee calls you? Pick up the phone! If you missed the call and receive a message or a voicemail, respond the same day. On the flip side, be proactive in your communication. Every day, try to think of a franchisee you haven’t spoken to in a while -- and give them a call. Check in. Ask how you can help. Ask what they’re struggling with.
Of course, as a franchisor’s system grows, eventually they will lose the capacity to answer every call or personally respond to every concern. But person-to-person communication can still happen. Consider launching a dedicated franchisee support line, one where a human being answers -- never an automated attendant. Set up a technology platform to track all communications with franchisees. (Those records of calls and summaries of emails can be vital if a dispute ever arises!) Companies can also appoint one person as the communications manager -- someone who can ensure all system-wide messages and alerts use consistent tone, and contain accurate information.
Formalizing these systems is also a step toward conducting valuable research. Having spoken with hundreds of franchisors, I can say with some certainty that very few of them conduct any meaningful research on franchisee attitudes and opinions. Instead, they rely on their gut instinct. But gut instinct is often biased by our perceptions of the job we are doing and how people feel about us. In reality, franchisees may be guarded when talking with franchisors or their representatives; perhaps they believe candid comments will not yield positive results. They may prefer to avoid confrontation. Whatever the reason, franchisors may sometimes be surprised at how their franchisees truly view them.
That’s why communication has to be consistent. Franchisors need to hear what franchisees really think! So in order to get that real, valuable insight, franchisors should be actively soliciting feedback on a regular basis. Conduct formal surveys. Mystery shop to hear what your franchisees are saying. Listen for the stuff franchisees won’t say to a franchisor’s face! And if there’s a genuine problem or a consistent complaint, both sides need to pause and fix it.
So, we’ve established the importance of the relationship. We see that communication is the key to maintaining that relationship. And now it’s time to back up all that talk -- because a franchisor’s commitment to their franchisees should be obvious at every level of the organization. When franchisees see franchisors breaking their back to help them succeed, there is almost nothing they won’t do in return.
To truly build that kind of loyalty, two-way communication can’t just be frequent. It needs to be honest. Trust starts with transparency. Get caught in a single half-truth, and trust is destroyed forever.
Just as technological advances and the conveniences of the internet have made it easier, faster, and more affordable to communicate within a franchise system, they’ve also made it easier to embrace transparency. Intranet sites, blogs, chat rooms, emails, e-newsletters, real-time reporting, and online training have all unquestionably improved a franchisor’s ability to reach, train, and coach franchisees.
But the ubiquitous (and sometimes intrusive) nature of the internet can all too easily transform a franchisor from the friendly beat cop into a menacing Big Brother in the eyes of a franchisee. Real-time access to the franchisee’s POS system, remote video, and form-letter emails can substitute for dialogue -- and in the process create an us-versus-them environment.
Franchisors need to display trust -- trust that their franchisees are paying all required royalties, that they’re properly reporting revenues, and that they’ll adhere to brand standards and follow structured systems. But, of course, that’s not all. As Ronald Reagan often said, “Trust but verify.”
Verification doesn’t imply selfish intent -- it’s in the best interest of franchisees, as well, who suffer when brand standards are not met. They suffer when other franchisees cheat, leaving less advertising funds and royalties to support the franchisee community.
So where is the middle ground? That’s the real power of transparency.
If, for example, a franchisor uses a mystery shopper to uncover violations of standards and underreporting of revenues, the franchisees should know about this practice. Hide it and franchisees will forever distrust the brand.
Invest in ways to keep transparent communication channels open. A good franchise advisory council (FAC), for example, can play a big role here. A FAC is generally established by the franchisor and is designed to facilitate communication between the franchisor and franchisees, as well as among franchisees themselves -- it’s a way to foster involvement and leadership, plus build a valuable community of resources. FACs are paid for and supported by the franchisor, and operate under by-laws that address issues like communication, confidentiality, and purpose.
Some franchisors may balk at the idea of launching a FAC -- it can sound like a frightening way to open communication lines that could encourage franchisee unrest. But this thinking is flawed, and a little naive: It assumes franchisees will not find a way to communicate about any possible dissent without these tools. It is far better for the franchisor to hear about potential problems before they become major issues, and FACs provide that opportunity. The last thing a franchisor wants is their franchisees to have formed an association without them -- almost always a sign that something is wrong. When an independent association is built, it’s often done to share grievances, and those grievances are almost never pretty. Legal counsel may follow.
That’s why it’s so important to keep the conversation open, honest, and transparent. When franchisors demonstrate that they’re open to sharing information with franchisees and to hearing criticisms, there’s only one direction the relationship will move: forward.
Ray Kroc once said of his McDonald’s franchisees, “My best ideas came from my franchisees. Why? Because my franchisees were talking to my customers every day, and some of them were listening to what they have to say.”
Kroc knew that the way to succeed in franchising was to make his franchisees successful. Top franchisees, on paper, require less support than other franchise owners in their system. That may lead a franchisor to visit their locations less frequently and shift support resources toward franchisees who are struggling.
It might sound like a sensible instinct, but it’s a mistake to neglect top franchisees. The highest-performing franchisees are also paying more royalties and advertising fund contributions, and because they’re strong operators, it’s likely they have the potential to continue growing their business. If their franchise generated $1.5 million last year, the franchisor should help them grow the business to $1.6 million and beyond next year. They may need a different kind of support than other franchisees, but they don’t need less of it.
Those top-performing franchisees can also hold the key to expanding a system’s footprint -- and to do that, they need to feel particularly supported. For many business owners, the biggest step they ever take is not when they first open for business. Instead, it’s when they grow from their first unit (where they can oversee the business directly) and open their second.
This leap will require franchisees to understand that they are going to take a step backward -- hiring and training a manager to replace them in the first location, incurring additional cost -- so that they can eventually take two steps forward when they open their second location. Franchisors can help them recognize the trade-off. Yes, they may sacrifice short-term profitability, and perhaps will need to put off buying that new house, car, or boat. But in the long run, the franchisee will be building something more substantial that can run without their day-to-day involvement.
But for now, they’ll need to make a commitment to training. They’ll need to secure additional financing. And they’ll need to understand that their own skill set will need to grow and evolve as they transition from running a single location to multiple-unit management.
The best franchisors will institutionalize the hockey stick effect by working with franchisees from day one to begin growing their businesses. A brand’s field support team should not just be policemen, looking out for errors or missteps made by underperforming locations. They should also be focused on identifying and helping their best franchisees expand, working directly with owners to develop annual business plans, developing their management team, building their balance sheet for access to further credit, and adding the resources necessary to grow.
The lesson is simple: Without thriving franchisees, no franchise system can last. When a brand puts the franchisees’ interests first, it will attract the kind of raving fans that build successful companies.
There is a significant correlation between successful franchise systems and good franchisee relations. And while it is certainly easier to keep successful franchisees happy, it takes more than that. It takes trust. It takes leadership. It takes transparency. And most of all, it takes communication.
Good franchisee relations start and end with good communication. In our digital age, that’s easier to do than ever -- and it comes with benefits, for sure -- but in the end, people have relationships with other people, not their computers. So focus on building relationships in person, the same way you build relationships in your own life.
And remember, while the franchise relationship is contractual in nature, if either side is ever forced to bring out the contract and cite chapter and verse, they have already lost. The best franchise contracts are the ones you put in a drawer and never look at again. Let that be your starting point -- and go build your success together.