by Rudolf A. Kotek
The benefits and services furnished by a Franchisor must have continuing value to Franchisees relative to the cost of the franchise. Franchisor faces several obstacles in achieving a general perception among its Franchisees that the value of the services furnished by the Franchisor, are equal to the fees they pay. Fees payable to a Franchisor typically increase with increases in franchise revenue. The scope and frequency of the services furnished to maturing Franchisees may remain level or decrease and Franchisees may perceive a declining need for and value of the services furnished by their Franchisor.
This problem can be compounded by the tension inherent in a fee based on gross revenues. The Franchisor’s interest is perceived to be to maximize profits.
Services designed to increase sales may not be perceived by Franchisees as likely to increase profits, especially when the sales enhancement program involves a capital investment by the Franchisee or higher operating costs. Even a high level of benefits and services will not always overcome disaffection of some Franchisees with the franchise network. Over time, some Franchisees are likely to lose interest in the franchised business or be satisfied with a low level of market penetration.
The profits of a franchised business may be invested in other businesses, leaving the franchised business with insufficient capital, and the attention of a Franchisee may be diverted to other business interests. Though no level of service or benefit may entirely prevent such problems, the Franchisor that fails to maintain valuable services and benefits will encounter Franchisee disaffection including breakaway Franchisees on a greater scale.
A franchise network is at some risk when it loses an effective Franchisee. Each Franchisee is a potential competitor when the relationship ends. The Franchisees know the Franchisor’s business. It is difficult and expensive to enforce covenants not to compete. Confidential information of the franchise network are difficult to protect and vulnerable to disclosure and use by competitors.
Rudolf Kotik is the founder of RK Franchise Consultancy Inc, which developed more than 350 Filipino Companies into Franchise Systems. Email: rk@rkfranchise.com; Websites: www.rkfranchise.com, www.franchise.ph,
