Business is about taking risks, not blind risk-taking but taking risks in a calculated manner. Challenges arise when a risk manifest itself and the entrepreneur is not ready to handle it. The scenario is amplified when entrepreneur is a franchisor, as the effect can cascade down to the network of franchisees and create problems for everyone.
Recently there was a case where a company used ‘franchise’ as a strategy to collect ‘fees’ or ‘investments’ and promised these investors or ‘franchisees’ lucrative returns. In the end the returns do not materialise and the franchisees lost millions of ringgit.
From a franchising perspective, a business must be already successful then only it can be offered as a franchise business. However, the success of the original franchise business is not a guarantee that the franchisee who takes up the franchise will also be successful. Hence we need to realize that the risks involved can appear within four scopes:
1. The franchisor
2. The franchise business
3. The franchisee and
4. The franchised outlet
As examples, the following are some of the risks that exist within the franchise business model:
1. The franchisor losing control over the franchise business due to non compliance by the franchisees and the franchisor is not able to take remedial actions.
2. There exist conflict between franchisor and the franchisee (personal or otherwise) due to difference in opinions or wrong perceptions of the issues at hand.
3. Resources and management efforts are diverted to other projects after experiencing initial success operating the franchise outlet. This applies not only to franchisees but franchisors as well.
4. Misconduct by franchisees will not only affect the franchisor but also other franchisees as well
5. Lack of sufficient capital will also magnify the risks of running the business both at franchisor and franchisee level
The risks can be categorized into three groups, firstly, personal profile risks, secondly risks related to the particular chosen business and finally, risks that are specifically related to franchising.
PERSONAL PROFILE RISKS
The risk of taking up a franchise business is magnified when the type of business chosen does not fi t the franchisee’s interest or passion. The misfit will lead to other issues and challenges cropping in the franchise arrangement due to dislike and aversive attitude in the proper execution of the franchise business.
Here lies the responsibility on the franchisor to ensure that the prospective franchisee fi ts in with the desired profile as defined by the franchisor. There have been cases of new franchisors awarding the franchise rights to relatives and friends without considering the ‘fit’ of the individual to the franchise business. Consequently, the franchisor finds it hard to handle these franchisees and the impact is on the franchise brand. Perception of the public and consumers is that the franchise business in not doing well without knowing that the problem is the franchisee who is a ‘misfit’ in the franchise business.
A business operates because there is a transaction between the seller and the buyer. This transaction occurs in an environment where other sellers also have offers of value to the buyer. In other words, there is seller, buyer, in an environment that has rivalry or competition amongst sellers and new products and services being introduced. There are also new players coming in the game. All of these elements generate risks that happen at the franchisor and the franchisee levels.
The franchisor need to be wary and formulate plans that will manage the competition; new products introduction by other franchisors; the new sellers (other direct or indirect franchise competitors). All these present business risks to the franchisor and the franchisees and the franchisees are not in position (and dependent on the franchisor) to respond to them. At the same time the franchisees need to respond to the local competition dynamics, failing which the risk is on the franchisee in losing out to competition through lost sales revenues and diminished brand position.
The most important element in the risks profile of a franchise business is the conflict situation between the franchisor and the franchisees. Compatibility of the franchisees to the business and the franchisor must be nurtured and enhanced to avoid any potential conflict between them. The nurturing requires a strong leader (the franchisor); common goals (vision and mission); realistic expectations and continuous engagement and communications is vital in order to achieve the necessary.
Another element is the franchise compliance factor in executing the franchise business processes. Compliance comes from the understanding of the rationale of why certain things need to be done in a certain manner – i.e. communication to ensure understanding is vital here.
As a routine development and management approach, there is need to assess risks involved in embarking on a franchise business. The factors involved will include:
1. The identification of specific risks and potential risks
2. Assess the nature of the impact caused by these risks
3. Assign the degree of impact (possibility of occurring and degree of seriousness)
4. Finding ways to overcome; handle; manage the risks (individually and cumulatively)
5. The assessment need to conducted on a regular basis as the risks profile changes in relation to the dynamics of the elements involved.
It should be remembered that risks are relative to the individual, the business, the franchise and the ability to overcome and emerging stronger and wiser than before. The impacts of any risks do not only involve the franchisors and the franchisees but also their families. As such the support of these family members is important in managing risks in a franchise business.
Marzuki Ahmad is the Managing Director and Principal Consultant of Franchise Channel (M) Sdn Bhd. He also sits on the Franchise Advisory Board, which is responsible in advising the Ministry of Domestic Trade, Co-operatives and Consumerism and the Registrar of Franchise on franchising matters. For more information, visit www.franchise-channel.com. Marzuki can be reached at firstname.lastname@example.org or tel: 03-61426722