What Should A Franchisor And Franchisee Know About Franchise Resale

1. What Should A Franchisor And Franchisee Know About Franchise Resale? A businessman that has a good idea starts his own business with a big or small scale of operations depending on the financial ability of the entrepreneur. With a number of trial and errors, the right product or service is developed and marketed to earn profits. Eventually, a franchisor makes the decision to turn his establishment into a franchise business. While it is relatively easier to see the popularity of a franchise and a steady demand for its franchise units, there is little clarity on the resale of franchise businesses. In fact, the resale of the franchise has been a taboo till the recent past. The negativity associated with it is such that most franchisors completely avoid the issue. It was looked upon as a failure and that nothing could be done in it. Now that some of the old franchise businesses have reached a certain level of saturation, the transfer of franchise agreement is looked upon in a new light. There is still a lot of old negativity but some positives are being noticed and discussed by experts on the franchise forums. www.frantastic.in 1

2. To understand how a franchise resale strategy is important, it is necessary to have a look at the various stages of a franchise business. The strategy is highly dependent on the stage of expansion that a business has reached. So let us begin at the beginning. Opening a franchise unit is never an easy decision but often the wisest one that could be made at that time. One needs a lot of resources including time and money for expansion. A businessman may find it very difficult to manage more outlets efficiently. The money needed to hire professionals and invest in new infrastructure may not be available. At the same time, looking at the brand equity of the product or service, other entrepreneurs may be interested in investing in the business. In such a situation, a business can consider selling franchises. The first condition for franchising is that the business should be franchise friendly. The first thing is to analyze the business. All the operations have to be optimized for productivity and cost-effectiveness. The financial calculations have to be actual and take into account considerations that arise due to different locations. Many changes are introduced and tested for feasibility. Once the model of business reaches a satisfactory level, it is ready for franchising. The second task is to strengthen brand equity. It requires a lot of marketing expertise to take a brand to a level where franchise units can benefit from it. In this age of multimedia, a lot of brands are competing to grab the attention of their target segments. It is not a cakewalk to develop a brand that will stand out from the rest and draw customers. Digital marketing is used to a large extent by all including competitors and one has to have a plan to beat the competition in the game of marketing. The third task is to ensure a support system for the franchise. A franchise will be expected to provide support for functions such as operations, marketing, supply chain management, software, and accounting. This is a complicated process and requires a lot of expertise. Franchisors often take the help of consultants to ensure that a good franchise support system is put in place to support the new franchises. Any shortcomings here will lead to a lot of problems with franchisees that have signed the deal and also with potential franchise candidates www.frantastic.in 2

3. that focus a lot on the support that they stand to receive from the franchisor. The fourth task is to conduct a final round of due diligence. An attorney can help with all the documents and compliance requirements. The clauses that are put in the agreement will govern the relationship and exchanges between the franchise and the franchisor for a long number of years. It is essential to foresee all kinds of possibilities and frame a document that will be in the best interests of both. After following all four processes, a franchisee may be selected and formally introduced in the system. Of course, a franchisee pays a www.frantastic.in 3

4. franchise fee for the use of trademarks and also agrees to pay various fees on a regular basis. Franchisees are generally people with a good experience and willing to start a business on their own. They see value in the use of a well-known brand that pulls business easily. The low risk due to a refined, and tried and tested business model is also an additional advantage. A franchisee learns a lot from the training and actual experience of running a business. This also gives him new ideas for business. After some years of doing the same thing over and over again under the control of the business owner, a franchisee with a true entrepreneurial spirit may start losing interest. He may want to start his own independent business. This loss of interest is not good for business at any level. During such a period of low motivation, business starts getting stagnant. There is no notable growth because of a lack of effort for marketing at the local level. This disengagement with business makes a franchisor wish for some enthusiasm that is natural to someone who is new to the business. Even if a franchisee is willing to withdraw from the business, he is bound by the fact that he has invested a lot in the business. In such cases, it becomes very convenient if the original franchise agreement carries an exit clause and resale strategy. This clarifies the conditions under which a franchisee can sell his unit to another person who is interested in the franchise business. There are many different factors that affect such a situation. It largely depends on the stage of business that has been reached. In the initial stages of franchising, it is not looked upon favorably. The resale of a franchise unit can send negative signals in the market and decrease the valuation of the business. Even otherwise, it means that all the effort put in the training and development of the franchisee is wasted and will have to be repeated. The customer base developed by the franchisee will also be lost. These changes cause too many disturbances in a franchise business that is still struggling to get a foothold in the market. www.frantastic.in 4

5. Some franchises have reached a stage where they have no more locations to expand. The only option left for growth left with them is to launch a new set of products or services. While it can click and a new source of profit can be created, it cannot infuse fresh energy in business development. In such situations, the franchise unit can be sold and the new entrepreneur is expected to bring in a fresh outlook on the business. The business is mature enough to know what ideas have potential and what ideas will fail. In any case, they can afford to experiment and fail. Their brand will not be affected by a random failure. Young people that have a better connect with the market can immediately see the weak links in the business. Such insight helps to correct the blind spots in the business or in a marketing plan. They are highly driven and it is easier to motivate them to try out new concepts. Their high levels of enthusiastic engagement with the business as a whole are infectious and prod other franchisees to action. Thus, we can see that franchise resale is not entirely problematic but it actually has the potential to solve certain persistent problems. www.frantastic.in 5