What comes first: The site or the franchisee?

A vexed question among franchisors of retail and some fixed-location service systems is what should exist first – the site from which the business is to operate, or the franchisee to operate the business?

This is the chicken-or-egg argument of franchising, and there are important considerations to take into account from both perspectives. This article considers the advantages and disadvantages in first selecting the site or the franchisee.

Mobile service systems are an exception
Mobile service systems generally don’t face the site versus franchisee dilemma to the same degree as retail and fixed-location systems. The practical difficulties of servicing a franchise territory with a company-owned operation goes to the very reason why mobile service businesses franchise to begin with. Such businesses will generally map territories, but rarely operate them without first appointing a franchisee.

For retail and fixed-location service franchises however, the factors listed in the table below are often considered in the site versus franchisee dilemma:

If the site comes first:

The decision to first secure a site before a franchisee is available may involve an assessment of the following:

The impact of competition
Franchisors which compete for customers will also compete for franchisees and sites. In locations where rival franchisors are both planning to establish operations, the first in the market may get a better choice of sites. Being the first can also give the brand first-mover advantage to create and satisfy demand, making it much more difficult and expensive for rivals to subsequently enter the same market at a later stage.

The unsolicited lease offer
Among developing franchises in particular, the “race for sites” arising from market competition can lead to less than satisfactory site selection decisions, particularly if the system has not yet developed a comprehensive and proven site selection profile. Developing and maturing high-profile franchise systems will often receive unsolicited site proposals from commercial property owners and their leasing agents. Many of these turn out to be unsuitable, but in sifting through these, franchisors find such offers to occasionally yield a gem.

On the other hand, new franchisors with limited property and site selection experience may be so taken-in by an apparently good property deal that they will be blinded to the unsuitability of the location or hidden conditions of the offer. Unsolicited lease offers should never be considered in the absence of a robust site selection policy.

Is it the right site at the right price?
A franchise site selection policy which has been established by detailed market research and an analysis of factors which contribute to the success of existing locations will largely determine if a site under consideration is the right site. Furthermore, the leasing deal for the site has to be economically viable for a franchised or company-owned business to profitably operate. If the site meets the selection criteria, but the rent is too high, or the fit-out costs or other considerations are beyond an acceptable range, the right site may not actually be a viable site.

To open or not to open?
If a franchisor has secured a site before it has a franchisee to operate it, the next question is whether to open and commence trading from the site. The answer will depend on the franchisor’s ability to fund the fit-out, stock and operating costs of the site, as well as provide the necessary staff to manage it. To open sites without a franchisee can be a very expensive and time-consuming way of growing a franchise network, but can also make the franchise more appealing to potential franchisees if there are existing and profitable company-owned businesses available for sale. This can provide controlled but sequential and incremental growth for a network, particularly if it is new to franchising.

However franchisors may also make a tactical decision to lease a site but not commence trading until a franchisee is available to operate the business. This may be due to insufficient financial resources or personnel available to launch the business as a company-owned operation. If the site lease has a generous rent-free period, the holding costs of the site may be negligible if a franchisee can be installed before the rent-free period ends. If not, the holding costs of the site may be quite severe and cause the franchisor to accelerate (and potentially compromise) its franchisee selection process to appoint a franchisee who will then assume responsibility for the leasing costs of the site.

If opened, how long should the site be operated?
If the franchisor chooses to open the site, how long should it be operated before it is taken over by a franchisee? As a rule of thumb, the site should be operated long enough for its operational teething problems to be resolved, and for sufficient market acceptance to be achieved for the site to trade profitably. A sale of the business as a going concern to a franchisee without these two factors to be adequately satisfied is likely to result in major problems for the franchisee, which in turn, will translate to high demands on the franchisor’s resources for field support, marketing assistance, and so on. Generally, it may take around six to 12 months for a company-owned site to meet these criteria before it can be sold as a going concern.

If the franchisee comes first:

Different issues arise if the franchisee is appointed before a site is available. This might include:

The impact of competition
As with the competition between rival brands for the best sites, there will also be competition for the best franchisees. Potential franchisees will often compare franchise offers for brands which occupy the same (or substantially similar) market niches. As a result, potential franchisees are likely to consider direct competitors. A franchisor may be inclined to appoint an outstanding candidate as a franchisee before a site is available in order to deny their competitor the opportunity to appoint the same franchisee. This reasoning also applies if a prime site is selected to deny a competitor the same opportunity.

New or existing franchisee?
The issue of site versus franchisee is often polarised in the context of new sites and new franchisees. To appoint a new franchisee without a site available means that the franchisee has to remain engaged with the brand until they are able to commence operating their business. However this can be less challenging if the appointed franchisee already exists in the system and is engaged with the brand on a daily business through an existing business. In this case, the franchisee has detailed operational experience, and is able to refine their business while waiting for an acceptable site to become available. The operational knowledge and experience of an existing franchisee may provide a running start to a new site that may allow it to achieve higher levels of performance sooner than compared to a site opened by a new franchisee.

How long is a candidate prepared to wait?
It is highly likely that an existing franchisee, who is already engaged with the brand and operating an existing business, is likely to wait longer for a site to become available than a new franchisee. The existing franchisee is already in business for themselves, and will generally have a preference for a new site in reasonable proximity to their current operations.

New franchisees however may be less patient. After making the decision to go into business for themselves and experiencing a roller-coaster ride of emotions in the process of assessing franchise offers and going through the selection process, they may be eager to continue that momentum and take the next step. If they are required to wait too long (possibly three to six months) before a site becomes available, there is a risk their engagement with the brand and interest may dissipate, or that rival franchise offers may look more appealing by comparison.

Unfortunately, this can result in greater pressure on the franchisor to find a site before the franchisee loses interest, and which may potentially compromise the site selection process. The result could be a sub-optimal site that may not be the best long-term location for the brand or the franchisee.

What does the franchisee do while waiting?
If it is an existing franchisee, they will continue to operate their existing business and not be too disaffected by waiting for a site to become available. New franchisees though, may feel that they are in limbo. They have made the mental journey to self-employment but without actually starting a business. To keep them engaged in the brand, the franchisor may require them to undertake training during this limbo period, but if the site takes too long to be found, the franchisee may need refresher training before commencing. Alternatively, the franchisee may complete their training and work for awhile in a company-owned or other franchise location to build their experience and skills. Others might continue in their existing occupation and not resign until the site is found and they can transition from work into training and then straight into the site. Managing the franchisee’s expectations and emotions during the waiting period, particularly for new franchisees, can present a real challenge to franchisors.

Who finds the site?
The responsibility to find the site lies with the franchisor in most systems. Even those who leave this up to the franchisee may find that their approval of a site found by a franchisee can be construed as an endorsement and create a potential liability if the site is not successful.

The site selection criteria is key to finding the right site. Franchisors who take responsibility for this process may still invite new or existing franchisees to help find a site so as to benefit from their local knowledge or contacts in the area in which the site is to be opened.

Difficulties can arise very early in the franchise relationship if the franchisee presents sites they believe to be acceptable to the franchisor, only to have the sites rejected and consequently the franchisee is forced to continue waiting in limbo before they can start their business (particularly for new franchisees). Managing the franchisee’s well-intentioned enthusiasm in this regard is essential for the franchisor, and the best way to do this is through highly-detailed site selection criteria which provide a clear basis on which sites are approved.

Conclusion

There are arguments for and against finding sites or franchisees first. The outcome will depend on the needs of the franchise system at the time, and their ability to resource those needs. The choice of site or franchisee first may also change as a system matures, and may even co-exist depending on the situational factors of the qualities of the franchisees and the qualities of the sites at the time.

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 18 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues. In his spare time, Jason is a passionate collector of military antiques.

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