Chapter 5

CHAPTER 5:
FRANCHISOR MANAGEMENT
AND ORGANIZATION
CHAPTER OBJECTIVES
• To examine the Foundation of Franchising
• To discuss the process of Recruiting, Selecting
and Managing Franchisees
• To discuss the Methods of Monitoring in
Franchising
THE FOUNDATION OF FRANCHISING
(Sherman,1991)
1. A proven prototype location - The store must have been
tested, refined, and operated successfully and be consistently
profitable.
2. A strong management team – officers and managers who
understand the particular industry , the legal and business
aspects of franchising as a method of expansion.
3. Sufficient capitalization - to sustain the franchising program
in providing ongoing support and assistance to franchisees.
4. A distinctive and protected trade identity – includes
registered trademarks as well as a uniform trade appearance,
signage, slogans, trade dress, and overall image.
5. Proprietary and proven methods of operation and
management - to write in a comprehensive operations
manual, not be too easily duplicated by competitors.
6. Comprehensive training programs for franchisees -
company's headquarters and on-site at the franchisee's
proposed location at the outset of the relationship and
ongoing basis.
7. Field support staff - skilled trainers and communicators
and must be available to visit and periodically assist
franchisees as well as monitor quality control standards.
8. A set of comprehensive legal documents - Offering
documents must be prepared in accordance with applicable
federal and state disclosure laws, and franchise agreements
should strike a delicate balance between the rights and
obligations of franchisor and franchisee.
9. A demonstrated market demand - The franchisor’s
products and services should meet certain minimum
quality standards, and be proprietary in nature.
10. A set of carefully developed uniform site selection
criteria - secured in today's competitive real estate market.
11. A genuine understanding of the competition (both
direct and indirect) that the franchisor will face in
marketing and selling franchise to prospective franchises.
12. Relationships with suppliers, lenders, real estate
developers - related key resources as part of the
operations manual and system.
13. A franchisee profile and screening system - to identify the minimum
financial qualifications, business acumen, and understanding of the
industry that will be required by a successful franchisee.
14. An effective system of reporting and record keeping - to maintain the
performance of the franchisees and ensure that royalties are reported
accurately and paid promptly.
15. Research and development capabilities - the introduction of new
products and services on an ongoing basis to consumers through the
franchised network.
16. A communication system - to facilitates a continuing and open dialogue
with the franchisees and as a result reduces the chances for conflict and
litigation within the franchise network.
17. National, regional, and local advertising - marketing, and public relations
programs designed to recruit prospective franchisees as well as consumers
to the sites operated by franchisees.
Recruiting, Selecting, and
Managing Franchisees
Shane (2005)
Recruiting Franchisees
• 2 things need to be answered and done by the
franchisor:
 Why Do People Buy Franchises?

 Developing a professional franchise sales
force that knows how to generate a pool of
prospects
Why Do People Buy Franchises?
 People buy franchises to get access to a proven

system and to make money.
 how to recruit franchisees?
 To offer a valuable operating system (to provide
manual operation, to have successful prototype
outlet, to provide initial training and assistance)
 To offer an opportunity to make profit by providing
earnings claim disclosure (actual sales, income,
gross, or net profits) - earnings claims as a signal of
the company's trustworthiness.
Developing a professional franchise sales force
 to develop effective franchise sales force that knows

how to sell franchise as business opportunity.
 to have sales people with experience with the
system, product knowledge etc.
 to support sales force with the right documentary
materials (franchise system, prototype outlet,
earning claim forms).
 to provide good incentives (commission) to sales
force in order to motivate them.
Selecting Franchisees
• Franchisors often fail because they select the wrong
franchisees.
• Identifying the right franchisees— people with the right
background, skills, abilities, and attitudes.
• Selecting the right franchisees for a business is a lot harder
than selecting the right employees because franchising
involves signing a contract for many years.
• A very effective screening mechanism is needed.
• The most franchisors use are industry experience, startup
experience, net worth requirements, and psychological tests.
Industry Experience
 Some franchisors select franchisees with industry
experience and they do not want inexperienced
franchisees.
 Research shows that selecting franchisees with that
experience is very beneficial when the franchise
system is new.
 Experienced franchisees provide the new chain with
management skills that it might be lacking.
 Moreover, they provide knowledge of the market that
helps to sell products effectively to customers.
Startup Experience
 some franchisors to select franchisees is
entrepreneurial experience.
 However, many franchisors do not want to sell
franchises to people with startup experience,
arguing that experienced entrepreneurs are
more difficult to train.
Net Worth Requirements
• What is net worth? (Net worth = assets – liabilities)
• The franchisee's initial investment—the amount of money
that he or she needs to invest to create the franchised
outlet, including the cost of leases, equipment, and
inventory to operate a business.
• The high levels of initial investment required to buy many
franchises make franchisee net worth a third important
criterion used by some franchisors to select franchisees.
• Research shows that franchisees with low net worth tend
to perform poorly.
Psychological Attributes
• Psychological profiling is useful as a selection
criterion for franchisors for several reasons.
• Franchisees need to have the right
motivations to be successful.
• The characteristics such as tenacity and
maturity help them to manage employees and
serve customers.
 minimizing conflicts – the fact is that franchisees are legally
independent businesses whose objective is to maximize
profits whereas the franchisor’s objective is to maximize sales
across the entire franchise system. The franchisor needs to
look carefully at the sources of conflict and not allowed them
to see franchising as an obsolescing bargain.
 Generating value - despite the conflict is happened, but if the
franchisee can generate profits from the system, they will
remain. So, the franchisor needs to generate value for the
system by investing in monitoring , coming up with new
products and services, and by building brand name.
 Communicating Clearly - fair and honest with franchisees
about what benefits they will derive from entering into a
franchise agreement. Spell out exactly what franchisees'
obligations are to the system.
 Controlling Carefully - to monitor the franchisees
whether they are adhering to the terms of your franchise
agreement and to send franchise consultants to check on
franchisees and conduct field audits of their operations.
MONITORING METHODS
Shane (2005)
 field support -to act as a liaison between the franchisor and
franchisee. responsible for evaluating franchisees, identifying
potential problems, and implementing any necessary
corrective actions.
 External Service Audits - an outside agency to evaluate
franchisee operations @ "mystery shopping."
 Peer review - is conducted by and between franchisees in
the same franchise system. Results are confidential and not
shared with the franchisor. Franchisees visit locations, work in
the operation, review the back office, and interview
employees and customers.
 Analytical Tools – franchisors develop a set of
performance expectations based on the
performance company of company own
outlets. Performance of franchisee’s outlet can
be measured based on food costs and labor
costs.
 Customers Feedback – provides useful
information about quality, service &
cleanliness (QSC).
REVISION
• There are 17 foundations of franchising.
• Franchisor has obligation to recruit, select and
manage their franchisees.
• There are a few methods to monitor the
existing franchisees.

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CHAPTER 5:

 Why Do People Buy Franchises?

 People buy franchises to get access to a proven

 to develop effective franchise sales force that knows

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