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I give this book the highest ranking of five stars. Why? Because this book is like no other in that it explains the metrics and drivers of the franchising model, an approach that is sorely needed in the franchise world. Every firm that sells franchises should read its contents to begin to grapple with the unique complexities of managing a franchise chain. And every owner-operator of a franchised store or potential franchisee should too.
As an editor for the web's #1 news site covering franchised and small businesses, I interview quite a few CEOs and leaders about franchise issues that they wrestle with. And I also am in the position where I read quite a few books on franchising. Most are self-help books, providing glossaries of franchise terms and advice for those needing a lesson or two from a Franchise 101 class. E.g. what is refranchising? what should be in a franchise disclosure document?
Then there are books in which consultants instruct would-be franchisors based on their own experience. That is to say, follow these five steps to organize your franchise salespeople for selling success, take my course to see whether or not franchising is right for you, or how a more driven CEO will make your franchise chain a success.
What’s missing from most of these books is the development of a strategy for franchising a business based on the economic drivers of franchise success. Scott Shane, professor of entrepreneurial studies at Case Western Reserve University, venture capitalist, consultant to franchise chains, and author of various books on small business and franchising, is the author of From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Business. In its pages one finds the building blocks of an actual business model, explanations of franchising for strategists, and identifications of drivers of a business based on a wealth of economic research.
Of the two choices, franchising a chain of ice cream shops or brokerages that sell through the Internet, which new franchising chain would you choose that best fits the franchise model and the chances for success? Shane answers in the book why the economics clearly say ice cream shops.
Franchising has its own set of problems that must be understood, managed and controlled. A new franchisor better understand franchisee free riding, loss of intellectual property, holdups (termination threats) and underinvestment. And no matter how much of a saint the franchising firm's founder thinks of himself as, there are built-in conflicts between a franchisee's self-interest and the franchisor's, such as obsolescing bargaining and collective control.
Some self-made entrepreneurs may be averse to such reading. After all, those words are a mouthful, the concepts strange. They may think that there's nothing that a great sales team and the right kind of franchise buyer won't solve. But these inherent conflicts call out for proper mechanisms, structure and management. If the franchise system is poorly conceived, no salesperson and no super selection of franchisees will save the franchisor.
Consider the franchise fee and royalty rate: many franchisors consider the process of setting these to be as simple as, “Hey, $50,000 sounds nice and even, as does a 10 percent royalty fee. Everyone else does it.” Their franchising consultant may have cut their franchise model out in cookie-cutter fashion. Unfortunately, those decisions may have just set the corporate train in the direction of bankruptcy because the royalty rate and franchise fee chosen do not fit the company’s strategy and economic realities.
For those who want to maximize the potential of their franchise system, this is the book for them. Its greatest weakness is that it uses studies to support its assertions. That approach makes it a somewhat academic read at times. But besides having the occasional two-by-two grids and charts showing lines and curves with diminishing returns, it also provides street-smart real world examples. These models and examples help identify which franchise route best maximizes stakeholder wealth. Even private equity investors who buy franchising firms will be enlightened.
From Ice Cream to the Internet helps the entrepreneur calculate when franchising is a good strategy for making money and when she is better off with a different strategy. It also helps to identify and quantify the risks of franchising and to fit the business model to a particular industry. It aids in evaluating when setting up a franchise is more profitable and strategic for a franchisor and when a company should set up its own nonfranchised chain in order to increase profits. Its information assists in deciding how many master franchisees, area developers and franchises to have. If a franchisor fails to think about the ratio between company-owned and franchised stores, he decreases income, loses control and increases the risk of failure.
This book is also essential for franchise buyers. It provides the keys to evaluating how healthy the franchisor is and how robust its management decisions are. The franchisor's hired executives need to have intelligent thought and calculations behind their management and franchising issues. Spouting off business "truisms" in answer to these strategic issues will not do. After all, entrepreneurs do not want to be in the unenviable position of investing and owning a franchised unit in a brand that a few years down the road will be out of business and defunct because they are based on false assumptions and bad hand-me-down myths.
Moreover, the book will help you understand where you will cross swords with your franchisors. Franchise store owner-operators may not like company competition, but franchising firms need company-owned stores. Scott shows how franchising systems that have no company-owned units are economically weaker, lack an innovative edge and are more poorly controlled. In essence, such franchisors forego money in the future for the gain of short-term franchise fees. So it helps to know what should be a franchising firm's mix of company-owned to franchised units in your sector for return on investment maximization and financial soundness.
Interesting and sometimes controversial studies are encountered as one reads the book. For example, academic studies of the failure rates of thousands of franchisors says that franchisors have better success rates if they are located in states that require the franchisor to register and provide franchise disclosure documents. And then there's the finding that franchising firms listed in famous publications as great investments do better than others – often not because they are really better, but because they are given an edge by being lifted up to stand out from the crowd.
This book will help potential or existing franchisees to judge how well their franchisor’s executives understand and manage their business. If a franchisor executive doesn't understand the concepts, it indicates a major weakness in the chain's leadership ability.
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