The Area Developer 2008 Multi-Unit Franchise Conference in Scottsdale earlier this year offered a vibrant kaleidoscope of franchise veterans gathered to share best practices. During the conference I had several discussions with franchisors that had used area representatives and area developers as an expansion strategy with varying degrees of success.
Here are some insights that emerged from these discussions on the mistakes that even the most experienced franchisors make when executing an area representative strategy.
In granting territories to area representatives, there is a temptation to set very aggressive franchise development schedules. Every franchisor wants to insure that territories are adequately developed. However, if the development schedule is too aggressive in the early years of a development schedule, bad things are likely to happen. By way of example, let me share an experience related to a development schedule scenario.
Jim is an area representative in Texas. His development schedule required him to open a total of 60 franchises. As he began developing his territory, the start-up was longer than anticipated. Concerned he would be in default of his development schedule, Jim awarded four of his first seven franchises to marginal candidates, primarily to meet the development schedule. Unfortunately, in the second year two of the seven franchisees failed and three more were struggling, which created validation problems. Jim was never able to overcome the failure of these early franchisees. He later defaulted on his area representative agreement and left the system.
The most important franchises awarded are the first dozen. It takes time to find "diamond in the rough" franchisees. A development schedule that is front-end loaded can backfire, as it did with Jim. A better strategy is to provide an area representative adequate time to find great franchisees and then ramp the development schedule up in later years.
The fear most franchisors have in back-end loading development schedules is that if too much time is granted and the area representative does not perform, valuable time is lost in developing the territory. However, if the right management structure is in place, red flags can identify problems and mid-course corrections can be made, and if necessary, the agreement can be modified or terminated.
In one of my early area representative agreements, I was one of 28 area representatives. One particular area representative named Dean was an experienced salesman that sold (not awarded) 40 percent more franchises than his agreement required. He was lauded for his sales success, receiving special recognition from management. However, this was only half the story. Within two years, most of his franchisees were struggling and creating enormous problems. The average unit sales were far below system averages, franchisees were unhappy, there were 10 resales in his territory, and a number of units closed.
The problem? He was a great salesman with little operational management ability. He reminded me of a dog trying to climb a tree. No matter how much enthusiasm a dog has, it is never going to be able to climb a tree without a ladder. Now a cat can zip right up a tree because cats have claws. Dean was a dog, not a cat. He did not have the claws to enable him to succeed operationally. No matter how hard he tried he could not execute on an effective support strategy for his franchisees.
The moral of the story? Area representatives are multi-faceted professionals. They must understand the franchise development sales cycle as well as have the ability to support franchisees. Do not get sold by a salesmen's salesman.
Many franchisors do not want to use an area representative growth strategy because it is viewed as being too costly since the royalty revenue stream is shared. However, if a regional growth strategy is properly executed, it can be far more profitable for a franchisor than a direct franchising model.
When area representation is embraced, another mistake franchisors make is not sharing enough of the royalty revenue with an area representative to execute a well-funded franchisee support infrastructure. Being penny-wise and pound-foolish in this area only serves to create problems in the future with under supported and poorly performing franchisees. Any gains a franchisor negotiates in keeping too much of the royalty will most likely be given back in future costs to support franchisees the area representative cannot afford to support.
The general consensus from the old pros is that area representation is a powerful growth strategy when properly structured and executed but can be a nightmare if it is not.
Join me for the next installment, where I'll be discussing "The Five Best-Kept Secrets in Implementing an Area Representative Growth Strategy."
Marvin L. Storm is Managing Director of Blackstone Hathaway, which specializes in using area representatives as a franchise growth strategy. He can be reached at 925-376-2900 x201 or firstname.lastname@example.org.
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