Do Business Well

Under either scenario, the repercussions for the former franchisee would be drastic and negative publicity almost inevitable. Should it become clear, therefore, that the failure of the business is not the franchisee’s fault at all, but is due to poor site selection advice given by the franchisor, some form of compensation should be considered,although from a purely legalistic point of view, no binding obligation is likely to arise.

• Territorial mistakes. This is a truly problematic situation faced by those franchisors who feel compelled to offer territorial protection to their franchisees. This is almost unavoidable in the case of certain service franchises, where overlap would inevitably lead to infighting among franchisees. Retailers and fast food operators on the other hand have found that, more often than not, territorial restrictions are counter-productive. By way of example, two or three outlets of the same fast food brand have been known to co-exist in one large shopping centre. The franchisor knew that, had he failed to exploit the opportunity, the opposition would have moved in, literally.

The problem with territorial protection for service franchises is that at the time the initial expansion strategy is formulated, most franchisors find it difficult to realistically assess the true potential of any given area. New franchisors usually like to err on the side of caution and tend to give away large territories.

Assuming that the franchisee is sufficiently motivated to exploit the territory and establish additional units as this becomes feasible, this works well enough. But what happens if a franchisee has reached his comfort zone and is unwilling to expand, yet he remains protective of his territorial rights and will not allow the franchisor to place other operators into the protected territory? Apart from losing potential sales, the network could lose market share to third party operators who will be quick to exploit the vacuum that has been created by poor territorial planning.

The best way around this is to keep franchisees‘ territories relatively small to begin with. To soften the blow somewhat, this can be linked to an option in the franchisee’s favour to expand into neighbouring territories within an agreed period, and subject to carefully laid-down performance criteria being attained.

• Limitations on the freedom to act. In a legal sense, the franchisor will have the power to determine product policy and marketing strategy. Moreover, he is usually free to make any other decisions that affect the direction of the network as he sees fit. This notwithstanding, experienced franchisors will rarely take unilateral decisions, and with good reason. We have already said that franchisees like to beconsulted. In general, this tends to improve the quality of decision-making.

On occasion, however, it can limit the franchisor’s flexibility and cause the network to miss an opportunity for growth. An entrepreneurial franchisor (and aren’t they all supposed to be just that?) may find this difficult to accept, but on balance, it usually works to the long-term advantage of the brand.

Possibly related posts: (automatically generated)
Franchising Disadvantages Part 2

• Some Franchise Terminology
• The parties to the franchise agreement
• Is a franchise the optimal solution? From the prospective franchisor's viewpoint
• Franchising Disadvantages Part 1
• The franchise agreement
• Selling the Franchise
• Relationship Franchise Agreement - Operations Manual
• Business format franchise
• Preparations for franchising
• What does a Franchise Agreement cover?

3 Comments »