Ask The Experts

Should I Buy A Franchise With No Territory?

I am considering buying a franchise and had expected the franchisor to provide me with an exclusive geographical territory. Apparently this franchise does not grant territories. Why not, and would it sensible to proceed without this safeguard?

Not all businesses and franchises lend themselves to having clearly defined territories. Whilst an exclusive territory can give you comfort that no other franchisee will compete with you in the territory, it can also be an impediment when it comes to growing your business over the longer term. Businesses and markets change all the time and so in some types of business you need the flexibility to respond.

The types of businesses which would typically not have an exclusive territory are some service franchises and retail/food concepts. Some examples of reasons for this are:

• Customers come from anywhere to the franchise, and so it is not possible to define who you can or cannot service.
• The type of customer being serviced makes it impossible to clearly define geographic areas.
• The population and demographic characteristics of your area may make it impossible to draws lines on maps ( Central Auckland, for example, is a bit like this)
• The franchisor may centrally distribute work, and so the territory concept may be inappropriate.
• The potential number of customers so large that that it is unlikely that franchisees will compete with each other.
• The franchisor has a single-unit ownership strategy and requires absolute focus on one outlet by a franchisee at all times. The possibility of operating more than outlet in an exclusive territory is not an option.
• Flexibility to respond quickly to changes in the market or business operation. It is difficult and time consuming to amend agreements to change territory rules at a time which may be important to the survival of the franchise business.

Because it is not unusual for franchises to operate without an exclusive territory, it is not a reason to discount a franchise opportunity. It is important to understand the reasons for the strategy. Talk to other franchisees to see if it has caused problems and satisfy yourself that there are clear and fair guidelines and mechanisms for dealing with competition between franchisees or even with the franchisor. Also consider whether there is in fact an advantage to you in not having an exclusive territory. If having an exclusive territory is of absolute importance to you then either see if the franchisor will change or find another franchise. DP

Finding A Reputable Consultant

I have a successful company which I have grown slowly and steadily over the past ten years. I would like to expand further and have been told by a consultant that I should franchise it. He wants a lot of money upfront to prepare the franchise package - how can I tell if he is reputable and that the work will be useable?

Let's first discuss why you would consider using a franchise consultant to help you franchise your business. There are three main reasons: time savings (you don't have to go through a learning curve); benefit of experience (knowing what works and what doesn't); the impact on your business (downtime is minimised). A good consultant will save you time and money overall by having 'been there and done that' many times.

The costs involved in establishing a franchise are considerable, so it is crucial when engaging a consultant to choose carefully. Listed below are some key matters to consider when engaging a consultant:

• Do you feel you can work well with the consultant? You will be spending a lot of time with them and sharing your secrets of success. A good and trusting working relationship is very important.
• Find out and confirm what experience the consultant has had. Ask for plenty of references and follow them up. Ensure you speak to people who have already franchised using the consultant's advice - how good was it?
• Find out what reputation in the industry the consultant has by asking other industry people.
• Obtain a detailed written proposal for work which sets out what work will be done, when, how much it will cost, a time frame for completion and when payments are required.
• Obtain more than one price and proposal and understand the differences between each. The elements and principles of franchising do not differ much between businesses. It is the type and complexity of different businesses which create the differences in the work required. Cheapest is also not always best.
• Avoid large upfront payments and deals which do not provide the opportunity for termination as a result of non-performance or sub-standard performance. Payments should be structured more or less to coincide with work done.
• Be wary of deals with small fees but requiring success payments upon the sale of franchises. You are engaging a professional advisor, not an entrepreneur. It's okay to have some element of risk sharing, but deals with a large sales component can create an environment for cutting corners and a less than professional approach to the work of creating an ongoing successul franchise.

DP

How Much Must I Tell The Franchisor?

I bought my franchise three years ago and it has been very successful. Every week I fax the franchisor a simple form detailing my turnover figure, and every fortnight the 4% royalty figure is direct debited from my bank account. This seems very fair. Now the franchisor has introduced a new form which asks for a lot more information, such as the level of sales I am making in each area of the business and the number of promotional vouchers I got back last week. Apart from taking me more time to fill this in, I am concerned how the information is being used. Surely my performance is my own affair?

Congratulations on three very successful years so far. In my book, the franchisor's new initiatives probably give you more reason to celebrate than to be concerned. It sounds like your franchisor is becoming more sophisticated in their operations. This should lead to benefits for the entire franchise.

From what you say it seems that you do not currently measure the level of sales that you are making in each area or the number of promotional vouchers you get back. Putting the franchisor aside, you need this information to drive your business more effectively. Running business on instinct alone is not smart - and usually ends up in missed opportunities.

Given that your day is already full and that you have too many competing priorities, you express an understandable reaction. Establishing effective measures and using them to drive your franchise is a firm predictor of further success. It does not have to be complex or overwhelming.

By what measure have you been successful? What if you found out that your level of success with promotional vouchers was only half the average in the group? What if you knew the level of sales in the outlet in the next town was significantly higher?

There is a direct relationship between how effectively any business measures, the management they apply and the results they achieve. You have many distinct advantages as a franchisee. Not only can you see your own results, you have the opportunity to learn from and compare within the group. You can gain from others' experience, replicate their successes and avoid their mistakes. Surely at least a part of the reason you paid good money for your franchise was to increase markedly your opportunity for success?

Go looking for 'measure, manage, measure' cycles in running your franchise. No need to wait for the franchisor to request the information. Measuring key information will provide you with insights that will cause you to at least adjust what you do.

Recently a franchise company I know well asked their franchisees to estimate what their average sale value was. They estimated it to be between $65.00 and 80.00. After two weeks of measurement, the result showed a surprising $42.80. Their thinking changed.

What are the key areas for you? Your franchisor has identified some. What about average sale value, level of repeat sales over time, % of customers who rate your service excellent? Don't overwhelm yourself with measures - select one or two, lock those in, use them, learn from them and then add another.

Finally, given that you are happy with the franchise that you are involved in and your track record, talk to the franchisor about any concerns you have. Be sure that the franchisor is going to use and share the data gathered in a manner that is appropriate in your particular franchise.

Here's to another three years of even greater measured success. AM

The Panel

The panel of experts for these questions comprised Alan Marriot, former judge for the New Zealand Franchise Awards and franchisor, and formerfranchise consultant David Pearson.