is said to be a . Like any other relationship, problems do exist, so with franchise. Tensions existing between a large number of franchisors and their franchises can lead to disagreements, conflicts, and even litigation. According to (2011) which is a Centre for and , franchise problems in franchise relationships can arise from differing expectations of a franchisor and franchisee. These may include the qualities, discipline and responsiveness each brings to the franchise relationship. Franchise problems about financial issues can arise if franchise fees are not paid on time, or franchisor support and training (for which the franchisee pays) is considered to be lacking or inadequate. Potential negative franchisor actions include terminating franchise agreements; reducing promotional and sales support; and creating unnecessary red tape for orders, information requests, and warranty work. Potential negative franchisee actions include terminating franchise agreements; adding competitors’ product lines; refusing to promote goods and services; and not complying with franchisor information requests (Berman & Evans, 2006).
An entrepreneur then must be proactive rather than reactive which means anticipating problems beforehand instead of solving it when it comes. Through careful planning and placing safeguards in each department, an entrepreneur can prevent these problems from happening or if not, minimize its’ impact the moment it will occur.
Berman & Evans (2006) also said that to impede possible fraudulent franchises, franchisees should get hold of full prospectuses and financial status reports from all franchisors being considered; and they should survey existing franchise operators and customers. By first evaluating full prospectuses and financial status reports, an entrepreneur can properly evaluate the proposed investment proposal so as to ensure that it can bring great benefits rather than lose great amounts of cash. Surveying existing franchise operators and customers can also help an entrepreneur minimize costs by finding a good location and possible suppliers, assess the degree of restrictions he/she has to face and know how large the target market would be and study the market’s behavior as well. Perhaps the most critical question to consider in evaluating a franchisor relates to the franchisor’s training program. Intensive training programs, including on-the-job training at an existing outlet are provided by many reputable franchisors. Some even provide refresher training after the franchisee has been operating for some time (Siropolis, 1990). The main objective of these training programs is to supply entrepreneurs with management skills they need to run a franchise profitably. Otherwise, the typical inexperienced franchisee is likely to founder and fail. Entrepreneurs should make sure their franchise contract tells exactly how and where training will take place. As what Duckett (2010) stated, training is the very essence of franchising- training franchisors to build networks; training franchisees to build businesses; and training the staff of franchisees to deliver products and services to their system's required standard.
However, another potential drawback exists; the franchisor is judged by the actions of his or her peers. A successful franchise unit can lose customers if other units of the same franchise fail. Boone and Kurtz (2010) advised that a strong, effective program of managerial control is essential to offset any bad impressions created by unsuccessful franchises. Keeping a franchise system successful would mean ensuring consistency in all the major things each retail unit does. Consumer confidence and all the systems and procedures are also essential. Franchises that operate internationally must also learn to adapt in some ways to local cultures. One of Kentucky Fried Chicken’s most successful franchisees is in Malaysia. In addition to having good distribution through its stores, this franchisee raises and processes its own chickens to maximize the quality of its product. Thus vertical integration of operations and sourcing eliminates a lot of intermediaries in addition to providing extra quality control (Keegan et al., 1995).
Another concern is that it is not easy to convince to make people invest; a franchisor may need to be known. Daniels et al. (2007, p. 499) quoted, “Usually, known franchises’ name is a guarantee of quality that attracts customers. Commonly, for lesser known franchisors to enter foreign market, some company-owned outlets serve as a showcase to attract franchisees.” Thus, it is a competitive advantage to the franchisor for his business to be well known so as to attract more prospective franchisees and make them invest to the business. To attract more-qualified franchisees, purchase arrangements must be more flexible.
For prospective franchisees, there’s need to prepare a business plan of their own to guide them in both choosing the franchise that is right for them and convincing the franchisor that they are right for the system. Many franchisors consider the business plan to be the most important criterion in deciding whether or not to award a franchise. As Hayes (2010) noted, the business plan needs to demonstrate that the franchisee has fully researched local competition and that it understands the market. Whilst the cash-flow forecast tells a lender what will happen, the business plan explains how it will be achieved. A well prepared business plan is vital in helping an entrepreneur secure the financial assistance he/she may require from a bank. As added by Bibby (2010), franchise feasibility analysis is another important element in the franchise equation because it truly defines the honesty, integrity, reliability, and motivation of the entrepreneur and/or the consultant involved. If the elements required to franchise a business are not present, the entrepreneur should not be starting a franchise. Of course, the franchise consultant, if incompetent, will not have the ability to properly evaluate the situation. Or worse yet, if morally corrupt, the consultant may see a problem but not disclose it. It is tragic, and probably criminal, to know that some franchise consultants will inflate the prospective franchisor’s ego by telling him ‘he has a great franchise concept’ or he will be ‘very successful in franchising’ when he has not even learned about, or indeed, even ‘seen’ the business in question.
Another very common problem in franchising is communication. “Communication is at the core of every franchisor-franchisee relationship,” says Steve Whiteside, an entrepreneur and consultant for franchise organization. It is thus essential for franchisors to build rapport the moment they meet their franchisee for the first time. Once trust is applied to the relationship, effective communication follows and so on. Together with a proper support from the franchisor, hands-on franchisee, focus, patience and being optimistic, then the franchisee will somehow be successful. As Jip (2007) pointed out that in a franchisor-franchisee relationship, it is deemed important that the information going in and out is being prioritized. If problem occurs, discussing it formally and professionally is necessary. It is also important to consider the franchisee’s satisfaction by having more balanced partnership between franchisor and franchisee. This is to maximize the prospects for financial success for both parties.
In a wider perspective, the solutions presented above are not enough when professional matters are to be considered. Below are the approaches to professionally handle the common franchising problems.
Kursh (1969) suggested that an entrepreneur must be aware of the following warning lights which are listed below when dealing with franchise offers to uncover fraudulent investment proposals:
1. Be wary of the deal that offers a seemingly unbelievable profit on an equally astonishing small investment.
2. Watch out for the fast-talker who insists that you must sign in a contract and make a down payment without giving you a chance to investigate his business, product, or service.
3. Don't be misled by the pitchman who tries to convince you of his integrity because a reputable publication has been running his advertisements.
4. Be especially on guard against the "franchisor" who appears to be willing to make every possible concession to you in a contract, especially if he does not offer similar concessions to others.
He also suggested doing the following investigations:
1. Make inquiries at the company's bank of reference.
2. Get a Dun and Bradstreet report- a public company that maintains a database of over 190 million companies globally providing information on businesses and corporations for use in credit decisions.
3. Try to visit the company's home office and take a good look around.
4. Never, if at all possible, sign a contract without consulting professional counsel, an attorney- or at least a certified public accountant who won't analyze the contract's legal aspects, of course, but who could recognize some faulty features in the alleged profit margins.
5. If you receive a franchise offer through the mails, don't hesitate to ask the Postal Inspectors whether they happen to have some evidence of any shady dealings involving the company or its officers.
6. Visit established franchisees. But be sure you see them at their place of business. If you have any doubt about them, ask them which bank they do business with and then check the bank.
Some franchisees may feel rigidly controlled by the franchisor but it doesn’t mean that there’s no need for any assistance from the franchisor when setting up the franchise. Thus, it is important for the entrepreneur to examine carefully the amount and kinds of assistance given for the original franchising fees and the portion of sales receipts or profits that must be paid to the franchisor. This is so because not all franchisor provide much assistance as what Bearchell (1975) warned. Entrepreneurs should also make sure to take pains in estimating what a franchisee will cost, for franchisors often fail to tell entrepreneurs the full story. It is also necessary for the entrepreneur to ask the franchisor for its disclosure statement. This will enable the entrepreneur to compare one franchise with another, understood what to expect from the franchisor, and estimate the risks and costs involved. The entrepreneur should rely on a lawyer to get through the fine print of the franchisor’s disclosure statement and who is also familiar with the legal workings of franchising. This will inform the entrepreneur more about his or her legal rights before the franchise contract is signed. The lawyer can also advise the entrepreneur about legal obligations to the franchisor. But possibly the lawyer’s most creative role is to recommend changes in the contract that would be of great benefit to the entrepreneur’s interest (Siropolis 1990).
This further entails that the prospective franchisee understands fully the franchisor's business, current network performance, background, future ambitions, and overall standing in the marketplace. As suggested by Martin (2010), a relevant business plan template will contain the following narrative part:
- Background to the business
- Background to the market
- Executive summary
- SWOT analysis of the strengths and weaknesses of the business
- Competition
- Development strategy
- Local marketing
- Funding and
- Exit strategy
The financial section will provide pre-formatted profit and loss statements showing the relevant income and cost headings with guidance on assumptions that will need to be made to put specific values. In addition, there will be associated spreadsheets for cash flow. There may also be a balance sheet with headings for the assets and liabilities (Martin, 2010).
Another important thing to conduct is a feasibility analysis which would be beneficial for franchisors to successfully develop enough domestic penetration. An objective franchise feasibility analysis by a recognized expert will highlight the strengths and weaknesses of the underlying business model (Franchise Foundations, 2011). A potential franchisor expanding their business must conduct a feasibility study in order to:
(a) assess current and emerging competitors,
(b) analyze current business conditions,
(c) the acknowledgement of legal or licensure prerequisites for conducting business,
(d) an analysis of current consumer demands,
(e) and any other crucial developments in the franchise industry that may help or hinder the success of an individual’s franchise opportunity.
A franchise feasibility study will analyze, grade and prioritize the company on a variety of these and other factors. An objective franchise feasibility analysis will also document what steps, protective measures and documents need to precede the expansion effort (Franchise Foundations, 2011). Many of these can be done in-house by existing personnel with a little outside expertise. This will result in the most efficient use of time and resources. It will also produce the most professional and user-friendly results.
After being successful domestically, expanding the business internationally is then achievable but there are important points to remember. Dealing directly with franchisees or by setting up a master franchise and giving that organization the rights to open outlets on its own are some ways how a franchisor may penetrate a foreign country. Sub-franchisees then pay royalties to the master franchisee then remit some to the franchisor. Master franchise system is pertinent for companies who have no confidence towards evaluating franchisees and when it would be expensive to oversee and directly control franchisees’ operations (Daniels et al., 2007).
To ensure success in international markets, franchisors must improve their understanding of the diverse cultural forces at work around the world. Sometimes, a concept will not fit a foreign cultural style at all. For example, a well known American bagel franchisor sold its rights to development in Lima, Peru, without realizing that Peruvians did not eat breakfast (Bardley, 2005). Adaptation to local cultural norms will often be necessary. An American restaurant franchisor allowed its Egyptian franchisees to develop special food products for the menu during the Muslim holy month of Ramadan. In Saudi Arabia and Qatar, where local customs requires the seclusion of women in public places, this franchisor had to alter their restaurants to include "family areas" that women could visit (Chan, 1994). Hence it is important to know the factors of culture of a target market.
Problems and conflict can occur in any commercial relationship, and franchising is no different. Thus, fundamental to the smooth running of a franchise business relationship is a business model that is profitable for both the franchisor and the franchisee. If this is a one-way street, franchise problems will be inevitable. There are still cases when a franchisor and a franchisee end up seeing each other in courts despite the fact that they have already built enough trust and rapport. Thus, after normal dispute resolution procedure that will at first attempt resolution informally, a formal written notice then will be made which will generally include the nature of the dispute, and desired outcome to resolve the dispute, and a timeframe for this to occur. In Australia, under the Franchising Code of Conduct, serious disputes that cannot be resolved between the franchise parties themselves should be referred to mediation (, 2011). But to further avoid a thing like this to happen, Berman and Evans (2006) relate that operating arrangements should take into account individual circumstances. Therefore, more franchisors will adopt, or at least experiment with restructured franchise agreements. This restructuring will affect both the terms of purchasing a franchise and the ongoing franchisor-franchisee relationship. As what Bank of America’s Small Business Advisory Service said, “The extra things that the franchisor agrees to do... can be one of the best aspects of a good franchise relationship” (Kursh, 1969, p. 34).
Conclusion
As a rapidly growing opportunity of growing a business domestically and internationally, business franchising presents its own unique set of problems that need to be anticipated, addressed and should immediately be solved. Through intensive research from various references such as books, magazines, journals and the internet, the researchers identified the most common problems faced by both the franchisor and franchisee and these are: an entrepreneur may become a victim of fraudulent franchises; difficulties when setting up a franchise especially when franchisors do not provide essential assistance to the franchisees; franchisors’ not developing enough domestic penetration first is one problem why many franchises fail abroad; and tensions existing between a large number of franchisors and their franchises can lead to disagreements, conflicts, and even litigation.
Detecting problems like these is always the first step required to successful solution. Many franchisors fail here – they are either unable to detect the real cause for the problem or don’t address it in an appropriate way. With the purpose of this paper to present various ways on how to solve these problems especially in a professional manner, the researchers emphasized the following solutions: acquiring all legal documents and conducting careful investigations and survey of existing franchise operators and customers; keeping a strong, effective program of managerial control in a franchise system; preparing a business plan and feasibility analysis to succeed domestically and internationally; having an improved understanding of the diverse cultural forces at work around the world to ensure success in international markets; building rapport between the franchisor and the franchisee the moment they meet for the first time in order to build trust; and in cases when conflicts between a franchisor and franchisee cannot be solved informally, a formal written notice then will be made which will generally include the nature of the dispute, and desired outcome to resolve the dispute, and a timeframe for this to occur.
There are much more potential problems a franchisor and a franchisee could face. Rather than seeking readymade solutions, franchisors should learn how to prevent problems from occurring and how to tackle the issue in the best possible way. The strongest weapons in battling problems are the ability to detect problems early on, to teach the team to take action as soon as the problem arise, help all franchisee unit to perform as best as they can. Therefore, being proactive rather than being reactive can greatly help an entrepreneur; he has to do the reacting ahead of time by anticipating what the future will be, and to react accordingly before it actually happens. But in cases of unexpected problems that already caused much problem to a business, it is important to remember not to jump to any conclusions before reaching the root of the problem.
References
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Hayes, C. (2010, April-May). Common problems in loan applications. Franchise World, p. 7. London: Highlands House.
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