Whether you are searching for a joint venture partner, an investor or a franchisee, it is important to make sure that before anything else, you get along. I believe that if the chemistry and understanding are there, all business issues can be resolved. My father always used to say: “If you don’t trust a handshake, don’t sign a contract,” and I still believe this wholeheartedly.
Contracts and formal agreements serve a primary purpose of clarifying doubts; should things go wrong or turn nasty later on, you have something to fall back on. You do not really look at the contract on a day-to-day basis during business relations with your partner, and I have found that often both parties go well beyond the points stipulated in the contract. You may do things for the other party that are outside the contractual norm just for the sake of maintaining the relationship; you do so willingly because of the good relationship you have with them.
Following good business chemistry, the second most important element in any business relationship is the goodwill of your potential franchisee. They may not always have the necessary knowledge to operate a franchise, but if there is willingness to learn, this may work in your favor compared to partnering with someone who has the knowledge but is not willing to implement it. Having considered the points above, you need to assess who is “technically” the best business partner to be your franchisee. Ideally, you would like them to have a proven track record in operating similar F&B concepts as, for example, operating fast-food outlets is nothing like operating a premium or casual dining restaurant. Not only are the requirements and the skills set to operate these types of outlets different but the caliber of staff you place in the front of house to deal with guests is also considerably different.
In addition to the professional abilities of your partner, you should also look at their financial capabilities. It is crucial for you to compare your business expansion plan against whether or not your potential franchisee has the financial prowess to grant such milestones. If the franchisee does not have the finances available immediately, you will need to define if, when and how they can acquire the necessary funds to grant such an expansion. At this stage, the following crucial questions need to be addressed: do I want to work with a franchise partner who doesn’t have the funds available immediately? Will the franchisee be able to obtain the required finance externally?
A word of warning — be very careful when choosing a business partner who does not have cash available to finance future expansion plans and relies on a future loan, as that could involve paying high interest rates or mortgages which will eat into the profitability of the business.
Another factor in choosing a franchise partner is whether you are dealing with an individual or a group of investors. It can be risky if you do not know the investor personally, as all the factors will be related to who ultimately calls the shots. Managers can change, while the owners in general remain the same. It is crucial to ensure that you build a personal rapport with the individual who is ultimately the final decision maker. Finding an ethical partner whose values are in line with yours is also key. There are many things that can go wrong or become misguided over a long period, so it helps knowing the actual investor or board director personally in case something of a “sensitive” nature crops up.
Last but not least, it is important to define your expansion strategy well before choosing a business partner or partners. Your expansion plan will determine whether you want to strategically have one partner for a full region or a different partner in each country. The advantage of having one partner per region is that it gives you less of a headache and demands fewer resources, as you will only have to train one franchisee and deal with a single contact for the entire region. In theory, when you have one partner and once all systems are in place, the expansion should be exponential and things should operate smoothly. On the other hand, the disadvantage of having one partner is if it turns out that you have not chosen the right one then you’ll be left with nothing in the entire region after putting all your eggs in one basket.
Dealing with separate partners in a region means you will require a bigger support team to manage all the partners, but you can also expand faster as each franchisee will be opening simultaneously. Having many different partners in a region also gives you the freedom to charge multiple individual country fees, rather than negotiating one lower single territorial fee.
In conclusion, before you approach a franchisee to expand your brand beyond a territory — or respond to a franchise request — my recommendation is to focus on your requirements and expectations regarding expansion then value the potential partner’s financial capability, business ethics, area of coverage and experience in the business. Once you have strategically shortlisted your potential partners based on the aforementioned criteria, meet them over coffee and see how the conversation goes.
Daniel During
Principal and management director
Thomas Klein International
Principal and management director
Thomas Klein International
