Franchise Operations

Why Aren’t Franchisees on the Board?

Franchisees are important — even crucial — to the corporations they represent. So why aren’t franchisees serving on the boards of these corporations?

Jonathan Maze asked this question in a recent piece in the National Restaurant News. He pointed out that former franchisees have taken CEO positions with some corporations, including Burger King. McDonald’s franchisee s are given the chance to vote on policy with McDonald’s, and many franchisors have a franchisee advisory board or franchisee council. So it’s probably not a simple matter of wanting to avoid giving franchisees a say.

Maze suggests, instead, that board members should have shareholders’ interests at heart, and franchisees may find that their interests don’t align with those of the corporate shareholders.

Franchise fees and royalties are based on the revenue, rather than the profit, that franchise locations earn.

Say your franchise takes in $3,000 per day. Your franchise royalty fees will be a percentage of that revenue, and should be treated as a cost off the top. Your profit, after you pay for labor, materials, overhead, and royalties, could be $900 — or $90. It depends on the industry you’re in and how lean an operation you run. And it doesn’t affect your franchise fees.

It’s easy for franchisees to think of this differently. If you think of the franchise royalty not as a basic cost of doing business but as the franchisor’s share of the profits, you might find yourself feeling resentful, especially as you’re growing your franchise or if you are in an industry where profit margins are typically small.

But the fees are not a share of the franchisee’s profit. The franchisor’s fees are part of their company revenue, and they should make the business profitable for the franchisor.

Even franchisees who understand the system and recognize the fees as costs can end up with a different position on some matters, though. Promotions, marketing, and other costs may pay off in the long run with significantly increased revenue, but they can cut profits at the beginning, even as they increase revenue. Franchisees can lose sight of that long-range benefit when they’re looking at shrinking profits and rising royalties.

Shareholders of the corporate parent want to see profits for the franchise. While franchisors will only continue to make profits if their franchisees stay in business and stay profitable, that doesn’t mean that every franchisee will always be seeing strong profits, even if the corporation is.

But things are changing, Maze says. One franchisee may be just another customer of the franchisor, one who is buying rights to the brand rather than a meal or a brake job, but the rise of multi-unit franchisees with their own investors has created a new breed of franchisees with a different point of view. What’s more, franchisees have hands-on experience.

Is this enough to give franchisees a place at the table? Time will tell. In the meantime, when you’re researching franchise business opportunities, you might look into the franchisee advisory boards of the franchises you’re considering. Large, established companies often have such boards, and they can be a sign of a company that listens to franchisees.

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