Franchise companies and area developers can grow rapidly while still making a profit, but the importance of proper site selection is a key factor for success.
Site selection should not simply be a matter of finding a franchisee and taking the site you want. Rapid, sustained growth means that site selection should be part of a whole approach to franchise growth.
A sustainable franchise system builds not from the concept out, but from the customer in. Non-franchised businesses that grow rapidly tend to be focused on their customers. Franchisors, on the other hand, up to now have focused on the business of franchising first, and seemed to have distanced themselves from both their customers and their balance sheet.
Franchising should be viewed as a way to reach and serve the customer more than anything else. Donâ€™t look at yourself as earning revenue through royalties. Rather, look at earning revenue from your customers through a different distribution channel and focus on ways you can control your growth and expenses.
This concept provides an important foundation from which good business practices are much more likely to follow. If a franchisor or area developer sees its franchisees or units as the conduit to its customers, rather than simply sources of a royalty or revenue stream, then they must conclude that they need to be much more involved at making that distribution network function, grow, and reach more customers. They must be more involved in ensuring the success of each unit.
If you believe you are not in the business of generating royalties or revenue, but rather in the business of delivering your end product or service to your customers through a franchise network, then placing pins on the map will not be the primary means of selecting new locations.
Those who look upon their franchising activities more as a distribution model (as opposed to a royalty or revenue stream) take a different approach to how they grow and control that distribution network. For starters, they choose which market they will grow in very carefully based on data and knowledge of their customers, as opposed to where they receive interest from prospective franchisees. Their recruitment process is based more on finding the best candidates to distribute their product or services, rather than on who comes first to the table with deposit monies.
This approach extends to how they control their real estate activities. Unlike the majority of franchise operators or area developers, they do not let their franchisees or operators select sites, negotiate with landlords, or be a party to the tenant leases. They view real estate as one of the most important components of their operation.
As in all good distribution models, they view real estate as both a way to control where and how their product or service is delivered, as well as a way to generate an additional revenue stream. The best franchisor example of this is McDonaldâ€™s. They choose to plug franchisees into their model at the correct times and in the right places, rather than simply selling a franchise and hoping the franchisee can pick the right location, negotiate a good lease, and permit them to control the site by being the tenant on the lease or owning the property. As far as Iâ€™m aware, McDonaldâ€™s as a company has been profitable from the beginning. It is no coincidence that it is both one of the (if not the) most successful franchise companies of all time, and one of the most successful real estate owners in the world.
Finding and securing the correct location before the franchise is granted, sold, or awarded is a key factor for successï¿½"and a great tool for selecting the right franchisee. By controlling site selection activities, the franchisor or area developer picks the best site for the right reasons and then offers it to a successful candidate. Candidates can choose not to accept a location for a unit, but they cannot dictate where it will go.
If the franchisee rejects the location, then the location goes to another candidate. This takes months off the time it takes to get a new unit up and running. If McDonaldâ€™s franchisees were in control of the site selection process, I would suggest that they would be perhaps 15 years behind in their growth from the place they are today.
Controlling site selection, rather than leaving it to the franchisees or real estate brokers, allows the franchisor or area developer to generate a new revenue stream as well. By eliminating the brokers, you can earn the sizable commissions that come from being your own agent. You may not be able to call it a â€œcommissionâ€ per se, as only licensed individuals under most local jurisdictions are entitled to them. However, you can collect what is known as a Tenant Placement Fee (TPF). These TPFs, which the internal real estate departments of franchise companies charge to landlords, can be sizable profit generators and help the franchise system grow much more quickly with more successful locations.
The energy needed to grow profitably is no more than that which most franchise companies or area developers expend on traditional, less-profitable growth models. All that is needed is a shift in focus from growth at all costs to customer-driven, controlled growth. It takes no more effort to grow profitably than it takes to grow quickly, if you view franchising more as a distribution model rather than as a way to build a royalty or revenue stream quickly. Creating your system to recognize this will be the first and perhaps the most important step in becoming a fast-growing and profitable brand.
Jeremy D. Behar is the CEO of Cirrus Tenant Lease Services, a franchise consulting firm specializing in lease negotiations and lease administration for multi-unit franchisees.
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