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Nov, 02 2015

Hedging the risk of a franchisee

Thinking from an investor's perspective, there are many facets where a franchisee needs franchisors to walk through. There is no dearth of investors or potential franchisees from a financial viewpoint, but there are questions that need viable answers

And to answer those questions, a franchisor will have to pitch in and step into the shoes of a franchisee, this will help in bridging the gap. Read on to know more…

PRIMARILY, there are four categories of brands or investors

1. A concept: A brand where a great concept is available, but the investor would be associated with High risk & requireshuge support, in a way a franchisee would be an angel investor

2. One Store Brand: A brand that is just one store young will be at higher risk but with the right support system it can mitigate the risk

3. Regional Brand: These are the brand who are very strong in some regions with an existence of 10-15 outlets/stores, but have negligible presence or consumer awareness in other regions.

4. National Brands: These brands are well established and have a national or global presence where in a franchisee can sustain withminimal franchisor support as well.

Although, having said all these, on a larger landscape every brand should keep focus on methods or ways to hedge the risk associated with the franchisee. Some of the key areas where a franchisor can help the franchisee are:-

  • Finance: Probably a franchisor can share certain cost at the initial stage
  • Participation: A franchisor can participate in the franchisee business on a very personal level, like handholding for some time to build the confidence. Or assisting in providing HR for critical positions, and offering an ongoing support
  • Marketing & Advertisement:  This is a very important aspect of any business which brings together a lot of mileage in every franchisee's business
  • Processes:  Last but not the least is process improvement & implementation to effectively maximise the operational throughput which is best known to the franchisor.
  • Among other options there can be minimum guarantee offer, stock deposit sharing, target based reimbursement or other secure policies to lower their risk.

To summarise, effectively every brand/franchisor should be ready with the solution and proper support measure to understand how to ease the risk of a franchisee. There is an indisputable question that always looms around in a franchisee's mind “what if the model does not work out?”. A Brand/franchisor should be ready with an ANSWER!!

Pranjal Sharan is a Strategy Consultant - Francorp

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