“Ten Ideas To Increase The Value Of Your Franchisee Business”		«BACK
	by Dennis L. Monroe
	from Franchise Times May 2005 Issue

The unique aspect of the franchisor business is that the franchisor controls and owns the concept and has numerous opportunities to create value through different business components.

The franchisee is limited to operating units and owning real estate; whereas the franchisor, in effect, has the potential for four or more businesses:

1. Traditional franchising where royalties are collected;

2. Owning corporate stores, which provides operating profit;

3. Supplying products and services to the franchise community, which may result in another profit center; and

4. Owning real estate.

The franchisor is in control of its own destiny. The franchisor controls all aspects of the franchise from drafting the UFOC, deciding corporate store locations and selecting the services or products provided to the franchise community.

Let’s look at 10 ways a franchisor can increase the value of its business:

1. Franchise Program. When the franchisor is developing its franchising program, it is crucial that the franchisor create a “development-friendly” approach. This approach will provide the broadest scope of opportunities for the franchisees and will also allow the franchisor to attract more sophisticated franchisees. There are several options available to create a development-friendly approach:

• Allowing personal guarantees on franchise obligations to burn off;

• Allowing the use of creative entity franchisees versus individual franchisees; and

• Allowing outside passive equity investors.

2. Key Management People. A franchisor can develop an inventory of key management people who are available to the franchise community for ownership opportunities. This approach provides the franchisor with assurance of strong operators. Additionally, the corporate employee is given the opportunity for entrepreneurial value through ownership participation. A number of systems have used this approach and have found it very effective to pair good operators with adequate funding.

3. Use of Flexible Development Agreements. Franchisors often put too tight of a schedule on a franchisee’s development. Development rights have significant value to the franchisee, and predictable new site development has even a greater value for the franchisor. Therefore, flexible development agreements will bring a tremendous value to the franchisor and avoid the cost of defaults under overly aggressive development agreements.

4. Franchisor Created Financing Programs . This column has often addressed franchisor finance programs. If the franchisor can facilitate financing for the franchise community (particularly for upgrades, remodels, and capital expenditures regarding various franchisor initiatives for the franchise system), this will enable the franchisee to stay in step with what the franchisor thinks is best for the system. Franchisor assistance can take different forms:

• Direct loans;

• Franchisor persuasion to potential lenders to provide funding to the franchisees; and

• Some type of credit enhancement guarantee by the franchisor of franchisee loans. All of these financing forms are beneficial to moving a franchise system ahead, creating value and increasing the royalty stream.

5. Development of Corporate Stores. One of the best ways a franchisor can bring value to the business is to develop corporate stores and retain certain geographic areas it believes to have strong development potential. A franchisor should have a good mix of franchise stores and corporate stores. Some experts suggest a mix of 1/3 corporate and 2/3 franchise or ¼ corporate and 3/4 franchise stores. The optimum percentage varies and depends on the resources of the franchisor in developing corporate stores. Corporate store development should be an integral part of the franchisor’s business plan.

6. Purchase of Stores from Franchisees. A franchisee acquisition program can be particularly effective if you have franchisees with substantial territories that are either underdeveloped or underperforming. The acquisition strategy is a way for the franchisor to provide the franchisee with an exit strategy and yet acquire underperforming assets to provide for higher performance levels. When franchise stores are acquired by the franchisor, there are generally no royalty payments; thus, profitability immediately increases. Many large franchisors are using franchisee acquisition plans as a way to boost earnings.

7. Develop State of the Art IT and Internet Reporting Systems for the Franchisee Community. An effective reporting system allows for real time monitoring of store level performance. Additionally, a state of the art reporting system will:

• Facilitate the franchisor with earnings claims information. (Earning claims can greatly assist in the selling of new franchises.);

• Create happy franchisees by providing real time internet access and individual store polling through the store point-of-sale devices; and

• Allow the franchisor to effectively monitor its system to see which franchisees are problematic and how these franchisees can be assisted.

8. Providing Development Services. A franchisor can bring real value to its system by providing a development product that assists the franchisees with new store development. The franchisor uses its skill set for developing stores and taking this skill set to the franchise community to provide a high-level corporate development process for franchisees that may not have any type of development team. These services are charged for, and a profit is made. The concern in this approach is the franchisor is overstepping its bounds as it relates to guaranteeing the success of sites. The other philosophy is that if a site is bad, anything a franchisor can do to prevent a bad site is in everyone’s best interest and will avoid franchisee litigation and hassles.

9. Real Estate Ownership by the Franchisor. Real estate is a crucial component of most franchise systems. Real estate provides wonderful financing vehicles for the franchisor if it owns either corporate stores or if the franchisor is leasing to the franchisee community. Control of real estate can be a source of rent, investment and ultimate control.

10. Franchisee Support Cost. The overall value of a franchisor company is based on the level of net royalty income, i.e., gross royalties less the support cost. As franchise systems grow, the percentage of support cost to royalty stream should decrease. A franchisor must use best practices and market comparisons to determine reasonable support cost. It is important to provide good support, but excess costs will reduce the net royalties; thus, decreasing the value of the company.

While there is no single technique to increase the value of the franchisor business; there are a number of techniques that, when implemented together, will bring a real increase in value for the franchisor.