Home Supporting structure To own or not to own corporate establishments: that is the question! | Awareness

To own or not to own corporate establishments: that is the question! | Awareness

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Franchisors regularly ask us whether or not it is preferable for them to maintain and operate corporate establishments, i.e. establishments in their network that belong to them (directly or through subsidiaries controlled by the franchisor).

Before launching a new franchise network, it is always strongly recommended that the franchisor have tested his franchise concept in some of his establishments.

A franchisor who has followed this recommendation already owns, even before granting his first franchise, one or, better still, a few corporate establishments.

Subsequently, is it preferable for the franchisor to continue to own and operate such corporate establishments or for the franchisor’s network to consist only of establishments belonging to franchisees?

Here are some of the advantages and disadvantages of owning corporate establishments:

Advantages:

  • The franchisor retains 100% of the profits made by its corporate establishments;
  • Corporate establishments can serve as training centers both for franchisees and for employees of the franchisor and franchisees;
  • Corporate establishments can also serve as test and demonstration centers for the franchisor’s new products, services and initiatives;
  • The fact that the franchisor owns corporate establishments demonstrates its confidence and interest in the success of the establishments in its network;
  • Ownership of corporate establishments by the franchisor also allows the franchisor to better understand the reality of the franchisees with regard to the operation of the establishments in its network;
  • Ownership of one or more social establishments is likely to increase, in many circumstances, the confidence of franchisees in the competence and good intentions of the franchisor. From a jurisdictional perspective, franchisees will lend additional credibility to a franchisor who operates and owns one or more corporate establishments in a given market. From an intent perspective, consider, for example, the introduction of new products or promotions. When the franchisor owns a corporate store, they can use it to test new promotions and product assortments before rolling them out to the franchise community. This greatly contributes to allaying the mistrust of certain franchisees, who might otherwise consider that the franchisor is using franchisees as “guinea pigs”, without taking any risks themselves (particularly in the case of promotions consisting in granting discounts or freebies to the general public from the inventory of franchisees).

Disadvantages:

  • The franchisor must make the necessary investments himself for the establishment and operation of his corporate establishments;
  • The franchisor must ensure the sound management, including day-to-day management, of its social establishments, which requires additional resources different from those required for the management of a fully franchised network;
  • There is a risk that franchisees may feel that, in various situations (including procurement, advertising or the implementation of new and interesting initiatives), the franchisor favors its corporate establishments to the detriment of its franchisees. It is therefore necessary that at all times, the franchisor refrain from treating its corporate establishments more favorably than its franchised establishments. In particular, corporate establishments should contribute, in the same way as franchisees, to the network’s common advertising fund;
  • When the franchisor operates one or more corporate establishments, whether he likes it or not, these will often be perceived by franchisees as the “measure” or benchmark. This leaves little room for error for the franchisor, especially when temporarily taking over a franchisee’s business to operate it as a corporation. Indeed, if a corporate establishment is not efficient or, occasionally, does not respect the norms and standards imposed by the franchisor, this establishment will oppose the franchisor as a “reference” to justify the failures of a franchisee in the event of a slowdown or less rigorous compliance with the norms and standards of the franchisor. The franchisor will therefore often have to devote considerable human and financial resources to ensure the impeccable operation of each corporate establishment. Indeed, the franchisor will be judged on the basis of its weakest social link.

Various studies conducted in the United States and Australia between 1990 and 2005 have shown that, in general, franchise establishments achieve better financial results than corporate establishments.

On the other hand, the same studies also show that companies establishments are more effective in implementing change and more successful in meeting franchisor quality standards.

One of these studies also came to the conclusion that, from a purely economic point of view, the formula enabling a franchisor to achieve the best possible profitability was that around 2/3 of its network was made up of franchise establishments and 1/3 of the company establishments.

In 2014, Australian psychologist, author and franchise expert Greg Nathan reported the following results from research his team conducted of 35 franchise networks operating a total of nearly 7,000 establishments, 18% of which were businesses ( either operated by the franchisor itself, or by a subsidiary of the franchisor):

  • Sales from corporate stores increased by an average of 6% when they were converted to franchised stores. Conversely, franchise sales establishments decreased by an average of 4% when they were converted to corporate establishments;
  • Franchised establishments show better profitability than corporate establishments, mainly thanks to better control of labor costs, which are on average 10% higher for corporate establishments;
  • The state of the establishment before the conversion (from company to franchise or from franchise to company) has a significant impact on its performance after conversion. For example, poorly managed franchise establishments have seen their sales increase following their conversion to corporate establishments. On the other hand, well-managed franchised establishments saw their sales decrease following their conversion to corporate establishments;
  • Support for corporate establishments represents a significant cost for a franchisor. According to Greg Nathan, supporting a corporate set-up requires four times more time and resources from the franchisor, particularly for human resources management and employee training;
  • Although there is every indication that franchised establishments generate more sales and show better profitability than corporate establishments, many franchisors successfully operate corporate establishments that are very profitable when they are well managed.
  • Finally, Greg Nathan noted a certain paradox in terms of compliance with franchisor standards, customer satisfaction and marketing. While corporate establishments were more compliant with franchisor standards, programs, and systems, making them easier to manage, franchisees are more engaged and proactive in their efforts to grow their customer base and improve loyalty, but oppose a some resistance to the franchisor’s programs that they do not feel effective for these purposes, which presents a real management challenge for the franchisor, but also ultimately leads to better results.

Although no Canadian studies have confirmed this, it is likely that these conclusions also apply to Canada.

Ultimately, the decision to maintain corporate establishments depends on the franchisor’s structure, resources and business plan. Therefore, there is no single answer for all franchisors.

For some franchisors, owning companies establishments is occasional or temporary, for example due to the exercise of a right of first refusal when a franchisee wishes to sell his business or a purchase option when terminating a franchise contract. In such cases, the franchisor may acquire and operate one or more franchised establishments in order to improve their performance or modernize them (particularly in terms of layout, furniture and equipment) before reselling them to a new franchisee. .

However, in certain sectors of activity (for example, the pharmaceutical sector in Quebec), the law regulates this question by prohibiting a franchisor from owning, directly or through a subsidiary, a franchised business.

Fasken has all the experience and resources necessary to help you structure and manage your franchise network, whether in Quebec, in other Canadian provinces, in the United States or elsewhere in the world.