HOW FRANCHISING TRANSFORMED ITSELF: Keep up with changes in franchising.

Author:Litalien, Benjamin C.

The history of franchising includes the unique relationship between the franchisor and their franchisees. For decades, the franchise relationship was based on developing trust between individuals. Most franchise companies were started and owned by an entrepreneur, and the typical franchisee was an individual or couple. Many long-term personal relationships developed over the years between franchisors and franchisees. It was a simple approach that served franchising well through decades of strong growth. Yet, the relationships in franchising have become more distant and complex due to shifting market forces. There are three shifts that have changed franchise relations for good, requiring all who work in franchising to revisit the approach to fostering good franchise relations.

Multi-Unit/Multi-Concept Franchising

During the 1990s, franchising began to undergo fundamental changes as successful single-unit franchisees increasingly began acquiring additional locations, and soon discovered that leveraging their assets into multiple units changed their role and their returns. Moving from "behind the counter to behind a desk," multi-unit operators gained more influence within the franchise systems and with the franchisor.

As franchise systems continued to mature, multi-unit franchises soon found availability of existing units within their brands diminishing. This led to multi-concept franchising, where multi-unit franchisees began acquiring franchises from other systems. Franchisors now had to deal with "joint custody" of franchisees. It caused franchisors to take stock in the relationships with their multi-unit/concept franchisees to consider their loyalty to the brand. It was clear that the fundamental relationship was going through significant change.

Awakening Wall Street

As dramatic shifts were taking place with franchisees, franchisors began to undergo some changes. Wall Street awakened to the financial realities of the franchise model, showing that the long-term contracts, steady cash flows, and brand equity that developed through the years was an attractive combination. This led many financial firms to begin identifying potential franchise companies for investments.

This caused founders to leave the brands and be replaced by professional managers, many of whom had never worked in franchising before. This made the familial type relationship between the franchisor and the franchisees become more distant and corporate. While much good has...

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