ASPECTS OF

FRANCHISEE
RECRUITMENT

Angus Macmillan

INTERNATIONAL FRANCHISE RESEARCH CENTRE

SPECIAL STUDIES SERIES NO.8

FEBRUARY 1996

PUBLISHED BY UNIVERSITY OF WESTMINSTER PRESS

ISBN 1 85919 022 7
THE INTERNATIONAL FRANCHISE International Journal (MCB University
Press). Additionally, Franchise Growth And
RESEARCH CENTRE (IFRC) 1993-2007
Failure In The U.S. And The U.K.: A
University of Westminster, London, UK.
Troubled Dreamworld Revisited received the
Best International Paper Award in 1997,
"The International Franchise Research
again from the Society of Franchising. This
Centre (IFRC) is committed to
paper was later published in Franchising
improving the understanding of
Research: An International Journal.
franchising. This is achieved by the
publication of impartial research and
Close links were fostered with universities in
by the encouragement of informed
Rome and Pisa (Italy), Haute Alsace
debate."
(France) and Boston, Minneapolis and
Texas (USA), with a view to research
Franchising operates in a dynamic environ-
collaboration. Professor Pat Kaufmann of
ment, with new issues and challenges
Atlanta, Georgia, addressed our inaugural
emerging, including: globalisation, coping
annual strategy seminar, in 1994. Overseas
with competition, disclosure, industry
speakers in subsequent years included
regulation, managing relations with
Cheryl Babcock, Director of the Franchising
franchisee associations, franchisee
Institute, University of St. Thomas,
recruitment & market saturation.
Minneapolis (1995), Professor Rajiv Dant,
University of Boston (1996), Professor
Against this backdrop, the IFRC was
Francine Lafontaine, University of Michigan
established in 1993 by Professor John
(1997), Professor Claude Nègre, University
Stanworth (Director of the Future of Work
of Haute Alsace (1997), Colin McCosker,
Research Group at the University of
University of Southern Queensland (1998),
Westminster), supported by Brian Smith (ex-
Professor Frank Hoy, University of Texas at
BFA Chairman, franchisee, franchisor and
El Paso (1998), Professor Jack Nevin,
author), and Chair of its Steering Group.
University of Wisconsin-Madison (1999),
Professor Tom Wotruba, San Diego State
FOUNDER MEMBERS
University (1999), Professor Bruce Walker,
University of Missouri, (2000), and,
Founder members and sponsors included:
Professor Wilke English, University of Mary
Barclays Bank, the British Franchise
Hardin-Baylor (2000).
Association (BFA), Dyno-Rod, Franchise
Development Services Ltd., Lloyds Bank
IFRC members were active supporters of the
(now Lloyds Group), Mail Boxes Etc.,
International Society of Franchising, and
Midland Bank (now HSBC), Prontaprint,
hosted the ISoF 2005 conference in London.
Rosemary Conley Diet & Fitness Clubs,
Royal Bank of Scotland, The Swinton Group,
The IFRC ceased its research activities in
and Wragge & Co.
2007, when John Stanworth took retirement.
PUBLICATIONS
Web versions of IFRC Special Studies
Series Papers 1993-2001 (listed overleaf)
Their support enabled the IFRC to publish a
number of reports, including its Special
Many of the earlier papers have been re-set,
Studies Series Papers, journal articles,
to allow a successful conversion to Acrobat,
book chapters and conference papers.
and are now available online.
Two IFRC papers received three awards
John Stanworth, Emeritus Professor,
over a period of 12 months (1996-97). The
University of Westminster
first being Business Format Franchising:
http://www.westminster.ac.uk/schools/
Innovation & Creativity or Replication &
business
Conformity ?, which received the Best
International Paper Award in 1996, from the
David Purdy, Visiting Fellow,
Society of Franchising. This paper also
Kingston University
received the Outstanding Paper of 1996
http://business.kingston.ac.uk/sbrc
award from Franchising Research: An
December 2010

International Franchise Research Centre Special Studies Series Papers 1-16 Web Versions 2010 p.1
LIABILITY DISCLAIMER
The information and analysis in each report
is offered in good faith. However, neither the
publishers, the project sponsors, nor the
author/s, accept any liability for losses or
damages which could arise for those who
choose to act upon the information or
analysis contained herein.
IFRC Special Studies Papers 1993-2001
10 London: A Capital City For Franchisee
Recruitment, (Mills, Stanworth &
Purdy), 1997
11 The Effectiveness of Franchise
Exhibitions in the United Kingdom,
(Chapman, Mills & Stanworth), 1997
12 Franchising: Breaking Into European
Union Markets, (Stirland, Stanworth,
Purdy & Brodie), 1998

Web versions published online December 13 Succeeding As A Franchisor,

2010, via http://www.scribd.com/:
1 The Blenheim/University of
Westminster Franchise Survey:
Spring 1993, (Stanworth & Purdy),
1993
2 Improving Small Business Survival
Rates via Franchising: The Role of the
Banks in Europe, (Stanworth & Stern),
1993
3 Targeting Potential Franchisees:
Industry Sector Backgrounds and
Declared Areas of Interest, (Purdy &
Stanworth), 1994
(Stanworth & Purdy, published jointly
with Business Link London Central),
1998
14 Direct Selling: Its Location in a
Franchise Typology, (Brodie &
Stanworth), 1999
15 Unravelling the Evidence on
Franchise System Survivability,
(Stanworth, Purdy, English &
Willems), 1999
16 Survey: Professional Services For
Franchising In The U.K., (Stanworth &
Purdy), 2001

4 The Impact of Franchising on the

Development Prospects of Small &
Medium-sized Enterprises (SMEs) in
Europe, (Stanworth & Purdy), 1994

5 The Blenheim/University of
Westminster Franchise Survey: A
Comparison of UK and US Data,
(Stanworth, Kaufmann & Purdy), 1995

6 Developing a Diagnostic
Questionnaire as an Aid to Franchisee
Selection, (Stanworth), 1995

7 Franchising as a Source of
Technology-transfer to Developing
Economies, (Stanworth, Price, Porter,
Swabe & Gold), 1995

8 Aspects of Franchisee Recruitment,

(Macmillan), 1996

9 Business Format Franchising:

Innovation & Creativity or Replication
& Conformity ?, (Stanworth, Price,
Purdy, Zafiris & Gandolfo), 1996

International Franchise Research Centre Special Studies Series Papers 1-16 Web Versions 2010 p.2
PREFACE
Franchisors, more than anyone, realise the
importance of good franchisee selection. Get
it wrong, and you have unwittingly introduced
a problem - albeit one which may not become
apparent until much later. On the other hand,
by selecting the right franchisees, the
franchisor lays the groundwork for a high-
quality, well-motivated franchise network.
The research undertaken by Angus Macmillan
explores the question of franchisee
recruitment, and draws comparisons - based
on that research - between the ideal and the
reality. Some of the research findings confirm
what those of us involved in franchising have
known anecdotally for many years. However,
some surprising issues - such as whether
candidates look at franchising or the
particular business sector first, when they
decide to join the ranks of the self-employed -
emerge from the research. For many
franchisors, these topics should give pause
for thought.
To a banker specialising in franchising, one of
the aspects of franchising which can cause
anguish to all concerned, is the 'rush to recruit'
by some franchisors. This problem is
especially prevalent with newly-established
franchises, and - at the other extreme - with
those established franchisors which may be
experiencing trading difficulties, and where
the speedy recruitment of new franchisees
may be a matter of financial survival. In both
these cases, the banks are often faced with a
franchisor in a hurry to get his latest
franchisee recruit financed. Cutting corners on
the viability assessment of the franchisee's
business plan can compound the initial
difficulty, and ultimately all parties - the
franchisee, the franchisor and the bank - can
be left with a long-term problem.
That is why franchisee selection is critical to
all of us involved in the franchise sector, and
that is why I believe Angus Macmillan's
research into this important topic is worthy of
careful study.
Graham Rose
Head of Franchising
The Royal Bank of Scotland
International Franchise Research Centre - Special Studies Series Paper No.8
ABSTRACT
The growth of franchising in the UK as a form
of business activity has been remarkable over
the last 20 years or so. The recruitment of
quality franchisees to tried and tested
franchise systems is key to this process.
Several theoretical arguments are proposed in
the literature about why successful
businesses should choose the franchising
route to growth and expansion, yet there is
very little specific advice offered about what
represents best practice in the recruitment
process, other than vague warnings about
maintaining standards and finding the right
people.
This paper looks at the methods of
recruitment of franchisees by franchisors
appearing at the National Franchise Exhibition
in Birmingham in 1994 with a focus on their
marketing activities, the selection process and
the structure of fees linked to recruitment
costs. Conclusions in each of these areas are
drawn from the responses by exhibitors to a
postal questionnaire, which were cross-
referenced with the relevant literature and
subsequently used to help devise the
questions for interviews with six of the leading
figures in franchising in the UK, to test out the
findings and obtain further views.
In addition to the identification of best practice
in each of these areas, this paper suggests
that too many companies enter franchising
too quickly and with an underdeveloped
package of benefits to offer franchisees,
contributing to a generally poor picture of
franchising in this country. It is proposed that
it is only by raising standards, the level of
knowledge and the reputation of franchising,
that the industry is likely to convince larger
and more experienced companies about the
benefits of franchising to their business. The
hypothesis being that this, in turn, would
attract significantly more and better qualified
franchisees into the franchising sector. In this
connection, the dissertation concludes with an
overall assessment of the way forward for the
franchise industry and offers several
suggestions where further research may be of
value to franchising.
1
ACKNOWLEDGEMENTS

I would like to thank all the staff of the Franchise and Licensing Department at The Royal Bank of
Scotland for the assistance and support provided for this project, particularly Arlene Langlands,
Pauline Frame and Derek Smith for their unstinting efforts and hard work in the production of this
report. Similarly, I would like to acknowledge the assistance and ideas provided by both Professor
John Stanworth and David Purdy of the International Franchise Research Centre at the University
of Westminster, particularly on the content of the questionnaire and analysis of the survey. Lastly,
I have to thank Blenheim Exhibitions and Conferences, for providing an analysis of those visiting
the Autumn National Franchise Exhibition at the NEC in Birmingham in 1994 from the completed
registration cards.

Angus Macmillan is the International Franchise Manager for The Royal Bank of Scotland,
Edinburgh.

2 International Franchise Research Centre - Special Studies Series Paper No.8

HIGHLIGHTS
■ Lead generation - Franchisors see
franchise exhibitions as a clear leader in
the generation of potential franchisee
‘leads’. Exhibitions are followed, in order,
by national advertising, franchise maga-
zines, local advertising and word-of-mouth.
As franchise companies mature (5 years
and over), customers, employees and
relatives of current franchisees become
sources of franchisee recruitment.
■ Prior experience of prospective
franchisees - Franchisors’ preferences for
people without prior experience of self-
employment, or in the operational line of
the franchise, become stronger over time.
In the case of the latter, the managers of
even young franchisor systems express a
preference for an absence of prior direct
experience whereas, for the former (prior
self-employment experience), the propor-
tion preferring such experience drops from
around half in systems of less than 2 years
old to less than 20% in firms of more than
10 years of age.
■ Market segmentation - Most franchisors
appear relatively unaware of the
segmented nature of the population of
potential franchisees and the priority
ordering of their decision-making. For
instance, they are generally not aware that
potential franchisees are, in fact, less
concerned about issues of business format
(i.e., franchised or independent) than the
business sector of the franchise.
■ Enquiry-to-sales conversion rates -
Sales conversion rates appear generally
better for the younger, inexperienced
franchises. Whilst this may be related
partly to lower buy-in costs and greater
choice of available territories, it also
appears to be linked to lower levels of
selectivity. Many franchisors appear driven
by cash flow needs and operate low
recruitment standards.
■ National recruitment - The vast majority
of franchisors studied were recruiting
nationally, regardless of sector or length of
time in franchising. Older franchises were
only slightly more inclined than their
International Franchise Research Centre - Special Studies Series Paper No.8
younger counterparts to supplement this
with local advertising.
■ Franchise fees - Franchise fees appear to
be set in a largely ad hoc fashion, driven by
‘what the market will stand’.
■ Lack of finance - Many otherwise suitable
potential franchisee candidates drop out of
contention due to a failure to raise finance.
Joint ventures and deferred purchase
arrangements might be considered by
franchisors in the case of otherwise worthy
candidates.
■ Start-up weaknesses - Many companies
set out to franchise their businesses with
insufficient experience in terms of
company-owned outlets and without due
regard for pilots.
■ Franchisee set-up costs - A review of the
prospectus/marketing brochures indicated
that less than 25% of the exhibitors
produced meaningful detail on start-up
costs and financial projections for the first
two years of trading. This was particularly
evident for the youngest companies selling
franchises.
■ Short-term bias - Too many are lured into
franchising with the expectation of short-
term gain, and the revenues generated
from the sale of franchises, without due
regard to the long-term consequences for
their franchisees.
■ Earnings claims - Some franchisors
make wildly inaccurate claims in respect of
franchisees’ earnings potential available in
rather obscure and untested franchises.
■ Coping with franchisees - The manage-
ment of franchisees can be problematical.
Expert opinion suggests that it is not
uncommon for both the best performing
and the worst performing franchisees to
present challenges to franchisors.
Franchisors are recommended to identify
‘high flyer’ franchisees and channel their
talents towards system improvements via
innovation.
3
1. INTRODUCTION FIGURES

1.1 Origins of Franchising................................ p.5 1 Number of Franchised Units in U.K.:

1.2 Types of Franchise Relationship................ p.5
1.3 Reputation of Franchising
in the UK................................................... p.6
1.4 Latest Figures for Franchising
in the UK................................................... p.7
1.5 Why Purchase a Franchise ? ..................... p.8
2. RESEARCH METHODOLOGY
2.1 Introduction ............................................... p.9
2.2 Objectives ................................................. p.9
2.3 Approach................................................... p.10
2.4 The Sample............................................... p.10
2.5 The Postal Questionnaire .......................... p.11
2.6 Interviews.................................................. p.12
2.7 Limitations of Approach ............................. p.12
3. MARKETING OF THE FRANCHISE
3.1 Introduction ............................................... p.13
3.2 Establishing the Business
Concept for Franchising............................. p.14
3.3 The Franchise Offer................................... p.15
3.4 The Communication or
Promotional Mix ........................................ p.16
3.5 Conversion Rates...................................... p.18
3.6 Areas for Most Improvement...................... p.20
3.7 Chapter Conclusions ................................. p.21
4. THE SELECTION PROCESS
4.1 Introduction ............................................... p.23
4.2 Factors in the Selection Process................ p.24
4.3 Self-Employment and
Prior Line Experience ................................ p.26
4.4 Why Candidates Drop Out and
Consequences of Poor Selection ............... p.29
4.5 Chapter Conclusions ................................. p.30
5. STRUCTURE OF FEES &
RECRUITMENT COSTS
5.1 Introduction ............................................... p.31
5.2 Setting the Level of Fees........................... p.33
5.3 Estimated Costs of Recruitment ................ p.34
5.4 Geographic Expansion .............................. p.35
5.5 Chapter Conclusions ................................. p.36
6. CONCLUSIONS AND RECOMMENDATIONS
................................................................. p.37
1984-1994.................................................... p.7
2 Business Format Franchising in U.K.
Total Turnover: 1984-1994 ........................... p.8
3 Franchising Employment in U.K.................... p.8
4 No. of Franchised Outlets:
By Time in Franchising................................. p.11
5 No. of Franchised Outlets:
By Franchise Sector ..................................... p.11
6 No. of Company Outlets:
By Time in Franchising................................. p.15
7 Lead Generation, 1st choice:
By Time in Franchising................................. p.16
8 Lead Generation, 2nd choice:
By Time in Franchising................................. p.17
9 "Running a Franchised Outlet is like ...":
By Time in Franchising................................. p.18
10 Estimated Conversion Rate:
By Time in Franchising................................. p.19
11 Areas for Most Improvement:
By Time in Franchising................................. p.19
12 Sector or Format:
By Time in Franchising................................. p.20
13 Sector or Format:
By Franchise Sector ..................................... p.21
14 Franchisee Success and Failure................... p.24
15 Most Important Factors in Selection Process:
By Time in Franchising................................. p.25
16 No. of Franchisees Recruited in the
Past 2 Years: By Time in Franchising ........... p.25
17 Do Franchisors Prefer Candidates
With Prior Self-employment Experience:
By Time in Franchising................................. p.26
18 Do Franchisors Prefer Candidates
With Prior Self-employment Experience:
By Franchise Sector ..................................... p.26
19 Do Franchisors Prefer Candidates
With Previous Line Experience:
By Time in Franchising................................. p.27
20 Do Franchisors Prefer Candidates
With Previous Line Experience:
By Franchise Sector ..................................... p.27
21 Why Do Candidates Drop Out:
By Time in Franchising................................. p.28
22 Up-front Franchise Fees:
By Time in Franchising................................. p.32
23 Up-front Franchise Fees:
By Franchise Sector ..................................... p.33
24 Estimated Cost of Recruitment:
By Time in Franchising................................. p.33
25 Estimated Cost of Recruitment:
By Franchise Sector ..................................... p.34
26 Area of Geographic Expansion:
By Time in Franchising................................. p.35

4 International Franchise Research Centre - Special Studies Series Paper No.8

CHAPTER 1 - INTRODUCTION
1.1 Origins of Franchising
Harris (1993), suggests the origins of
franchising go back to medieval England
where 'franchises' were granted for the
collection of taxes for the Crown. Stanworth
and Smith (1991), believe franchising in a
recognisable form in the UK, can be traced
back to the 'tied-house' system used by the
brewers as long ago as the early 1800’s and
which remain in widespread use today. In the
USA, where franchising as a form of business
activity has grown in real significance in recent
times, it is commonly traced back to the end
of the Civil War and to the Singer Sewing
Machine Company, when they established a
distribution and maintenance system, giving
financially independent operators exclusive
selling or servicing rights within defined
territories.
In the last few decades the internationalisation
of franchising has grown unabated, led
principally by American franchise companies.
By the 1990's, around 400 American franchise
systems were operating 37,600 outlets
worldwide and their success encouraged the
development of many local imitators to
provide competition. In an increasing number
of countries the shift from manufacturing to
services, the process of urbanisation, rising
disposable incomes and expanding consumer
markets, have provided similar conditions to
those which fuelled the earlier franchising
surge in the United States.
Dandridge and Falbe (1994) suggest that we
have passed through a period in which small
organisations were little more than a remnant
of earlier times, doomed by the economies of
scale which gave the advantage to large
organisations. Pilling (1991), suggests that
the important adaptive capacity of small and
new enterprises is now accepted and we can
see the symbiotic and interdependent
relationship between small and large
organisations changing from the traditional
arms-length arrangement towards longer term
more co-operative associations. These
factors, together with the changing patterns in
the way work is organised and the perceived
advantages of being affiliated to a franchise
network for an increasing number of people
International Franchise Research Centre - Special Studies Series Paper No.8
looking at self-employment, provide the
foundation for the continued development of
franchising in both this country and abroad.
1.2 Types of Franchise Relationship
The range of businesses that are franchised
are quite diverse and therefore it is useful to
examine how franchises can be divided into
different groupings. Early attempts at this
considered the following divisions appropriate
(Stanworth and Smith 1991):
■ manufacturer-retailer - where the retailer,
as franchisee, sells the product directly to
the public e.g. car dealerships, petrol
service stations
■ manufacturer-wholesaler - e.g. soft drink
companies who license independent
bottlers as franchisees
■ wholesaler-retailer - e.g. where a co-
operative of retailers form a wholesaling
company to act as franchisor and then
contractually oblige the retailer to purchase
through the co-operative
■ trademark, trade name, licensor-retailer
franchise - where the franchisor has a
service or product which is marketed under
a common trade name, generally by
means of a standard operation e.g. fast
food outlets.
The remarkable growth in the last 20 years of
business format franchising in the UK, as the
last grouping has become more popularly
known, has largely rendered this sub-grouping
system redundant. Business format fran-
chises in turn have tended to be categorised
by the size of initial investment as follows:
■ Job franchise - where the franchisor is
creating a well paid job for the self-
employed man, e.g. Dyno Rod.
■ Business franchise - normally a larger
investment involving business premises
and employing additional staff e.g.
McDonald's Restaurants.
■ Investment franchise - relatively large
investment where return on investment is
the prime incentive e.g. Holiday Inn Hotels.
5
A further alternative classification system was
introduced in the NatWest/BFA Survey of
1992 and termed a 'structural' approach.
Under this arrangement each franchise was
classified according to the following key
characteristics:
■ is the franchise property based or is it
mobile/home based ?
■ is the franchise in the retail/domestic
sector or in the business-to-business
sector ?
■ is the franchise mainly product or service
based ?
In general, the qualifications which writers
have found it necessary to use in this context
and the unwillingness of franchisors to readily
identify with a specific grouping, highlight the
difficulties of using only one type of
classification in franchising.
1.3 Reputation of Franchising in the UK
The general reputation of franchising is a vital
component in the successful recruitment of
franchisees. For this reason, it is extremely
important that franchising is not confused with
less reputable areas of business, such as
pyramid selling or multi-level marketing
schemes, where there is a question mark over
the end product/service actually provided to
the consumer.
Recognising this point and given the lack of
specific legislation on franchising in this
country, a small number of leading franchise
companies formed the British Franchise
Association (BFA) in 1977, to help ensure
franchising developed in an ethical manner.
The BFA operate through a code of ethics
based on the following objectives:
■ to develop and continuously improve
standards of good practice in franchising
■ to accredit franchisors who meet those
standards
■ to promote good franchising, as
represented by accredited franchisors, to
the general public, the business
community, government and the media
6 International Franchise Research Centre - Special Studies Series Paper No.8
■ to provide to the general public, as
prospective franchisees, information and
education to help them make effective
judgements in choosing the best franchise
for them.
Membership is accredited against wide-
ranging criteria including the following:
■ a financial record showing a sound
business
■ a record of at least one successful
franchised outlet and no significant record
of failures
■ a franchise agreement and structure
conforming to the European Code of Ethics
■ offer documents and brochures which
reasonably represent the performance of
the system.
This has led to three separate forms of BFA
membership today, recognising the
developmental nature of franchising and a
further category for the professions, known as
the affiliate category. There are currently
some 150 members and 50 affiliated
members.
The different perspectives on what makes
good practice in franchising alluded to earlier,
make it an interesting area of study. There is
one point, however, on which there does
seem to be common agreement and that is,
that the obligations of the two parties i.e.
franchisor and franchisee, should be detailed
in a written franchise agreement. In effect, this
is the legal contract covering the rights and
obligations of both parties. Self-evidently
therefore, the franchise agreement is an
important document. It is generally drafted
slightly in favour of franchisors, in order to
safeguard their intellectual property interests,
but not too much to put franchisees off, and
legal advice must be taken by franchisees, to
ensure they fully understand the implication of
non-adherence to the contract. A good
franchisor must maintain a balance in the
application of the franchise agreement, in the
satisfaction of the needs and particular
characteristics of a franchisee and in the
protection of the integrity of the franchise
network (Gauthier 1995).
 Fig 1 - Number of Franchised Units in U.K.: 1984-1994 (000's)
30
25
20
16.0
15 15.0
10.9
10
9.0
7.9
0
1984 1985 1986 1987 1988
1.4 Latest Figures for Franchising in the UK
The range of businesses that are fran-
chiseable and the potential offered by
franchising as a business concept, means
that change has been one of the few
constants during the last few years. Despite
the recession of the 1990's, the 1994
NatWest/BFA Franchising Survey provided
encouraging signs for the future. A surprising
total of 414 active franchise systems in the UK
were identified in this survey. The anecdotal
experience of the writer would suggest this
figure is on the high side and this view is
echoed by Smart (1994; Executive Director of
the BFA), in a franchise article, when he
indicated that a more realistic figure for active
franchise systems, certainly those with real
potential for significant development in this
country, is perhaps closer to 200.
In short, the 1994 NatWest/BFA survey
estimated there to be around 26,400
franchised units operating in the UK, or
19,400 excluding dairy milk roundsmen (see
Figure 1).
The valuable contribution of franchising to the
economy in recent years is shown in Figure
2. System-wide sales were estimated to be
around £5.5 billion.
International Franchise Research Centre - Special Studies Series Paper No.8
26.4
24.9
18.3 18.6 18.1
16.6
1989 1990 1991 1992 1993 1994
The employment generated by franchising is
also an important part of its contribution to the
economy (see Figure 3). The figures in the
1994 Survey indicate that 175,900 people are
employed directly through franchise outlets,
with a further 16,400 being employed at
franchisor head offices and other locations.
Furthermore, it is estimated that 25,000
additional jobs are dependent upon the
franchising industry.
The 1994 NatWest/BFA figures, however,
exclude the licensed distribution sector of
products and trade names (public houses,
petrol stations and motor dealers) which are
moving increasingly towards the elements
which make up business format franchising.
To some extent this is surprising, as in
practice, there is no sharply defined boundary
for franchising amongst practitioners, the
professional advisers or government. Indeed,
in the US these sectors, known as trade name
or product franchising, are included in
franchise industry statistics. Given the size of
these sectors in the UK, if the figures were
included in the survey, a total value for the
franchise related sector of more than £52
billion is brought out. When expressed as a
percentage of the total retail sales for 1994 of
£153.9bn, business format franchising
contributes 3.6% of retail sales, whereas, the
7
 Fig 2 - Business Format Franchising in U.K. Total Turnover: 1984-1994
£6bn
£5.5bn

£5.2bn
£5bn £5.0bn
£4.7bn £4.8bn
£4.5bn

£4bn
£3.8bn

£3bn

£2bn £2.1bn
£1.9bn

£1.3bn
£1bn £.9bn

£bn
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

figure would rise to 34% if the related sectors
are added. The latter percentage is the same
as that regularly quoted, i.e. 34% of retail
sales, for franchising in the USA.
1.5 Why Purchase a Franchise?
reasons for this including:
■ the down-sizing of many large companies
forcing many middle/senior executives to
re-evaluate their future with many looking
at forms of self-employment

During the last 15 years the number of self-
employed people in the UK has grown from
less than two million to around three million
(Daly & McCann 1992). Business format
franchising during this period has actually
outpaced this growth. There are a number of
■ the encouragement of an entrepreneurial
culture by government through measures
intended to raise the status of the self-
employed and by offers of tax incentives
and financial support to small businesses,
and

Fig 3 - Franchising Employment in U.K.

Unit employees (average 7.7 per unit) ................................................. 149,400

Franchisees (allowing for multiple units) .............................................. 12,300
Spouse/partners (if actively involved and not counted in the employee 4,200
total)
Employees at system headquarters/other locations ............................. 16,400
Dairy employment ............................................................................... 10,000

TOTAL 192,300

8 International Franchise Research Centre - Special Studies Series Paper No.8

■ the influx of American concepts spawning
'me too' imitations in this country,
particularly in sectors such as fast food,
instant print and car hire and rental.
The first consideration for a potential
franchisee is the decision on whether they
wish to enter the ranks of the self-employed.
The decision to do it alone or under the
umbrella of a franchise follows later
(Mendelsohn 1995). For the prospective
franchisee, the purchase of a franchise
certainly does not offer a guaranteed route to
success, but the evidence suggests that it
offers an opportunity to find a route into
business with a better prospect of success.
For instance, many of those who begin a
business venture lack the knowledge of how
to establish and run it and it is only by trial and
error that they discover the most cost-
effective way of running their business. Some
will succeed but, for the majority, the money
will run out before their problems have been
resolved and profitability achieved. One of the
principal problems is that it is difficult to obtain
the appropriate advice and support, i.e. the
new business is on its own (Mendelsohn
1994). It should, however, be different for the
new franchised business. For example, a
franchisor with a proven concept, successfully
piloted in one or more locations, will have
ironed out any wrinkles in the system, thereby
removing the development risk and provide
training, pre-opening assistance and ongoing
support to reduce the risks further.
Although the reported survival statistics in
franchising by the industry indicate a
significantly lower risk of failure, the industry is
not without its critics. The principal reason for
this appears to be the cynicism with which
people view the statistics which is linked to the
general hype that tends to surround
franchising. During 1993, for instance, it was
estimated that around 10% of franchised
outlets in the UK changed hands or ceased
operations, however, turnover of this kind can
disguise failure. For example, if a franchisor
decides that a territory or outlet is not working,
they can normally help the franchisee to exit
gracefully, by recouping all or part of their
investment and those franchisees selling their
business at a loss, will not be recorded as
failures in the statistics (Stanworth 1993).
Furthermore, it could also be argued that a
International Franchise Research Centre - Special Studies Series Paper No.8
potential response bias could occur, when
relying on franchisors to report failures,
particularly when favourable statistics are
useful to them in attracting new franchisees
(Kezios 1992).
Despite the increased economic significance
of franchising in the UK, the literature is both
patchy and poorly developed, (Felstead,
1993), and many fundamental questions
remain virtually unexplored even today. The
recruitment of quality franchisees has, and
continues to be, absolutely key to the
successful development of franchising in this
country and yet it has received little attention
in empirical research terms. This study was
prompted by this fact and is primarily
concerned with recruitment in the business
format franchise sector only.
CHAPTER 2 - RESEARCH METHODOLOGY
2.1 Introduction
This chapter describes the approach used to
explore the research subject and the potential
limits of the methodology. The postal
questionnaire, for example, was designed with
several questions in mind, which were linked
to simultaneous research on potential
franchisees at the same exhibition,
undertaken by the International Franchise
Research Centre of the University of
Westminster. The intention here being to
compare the responses of franchisors and
franchisees to certain of the key issues
relating to the research topic. Similarly, with
regard to the small number of interviews that
took place, interviewees were only asked to
give their opinions and the results were not
intended to be conclusive, only indicative of
the likely response from the type of
organisation of which they belong to.
2.2 Objectives
The main objectives of this study were to look
at aspects of franchise recruitment with
particular regard to the identification of best
practice in:
■ the marketing of the franchise
■ the selection process
9
■ the structure of fees and recruitment costs.
Although unintended at the outset, this leads
to making proposals on the way forward for
the franchise industry as an important by-
product of this research.
2.3 Approach
There are four main sources of information
used in this dissertation:
1. review of literature and current academic
research and writings both in the US and
the UK
2. postal questionnaire survey of franchisor
exhibitors at the National Franchise
Exhibition
3. structured, qualitative interviews with six
leading and influential figures in
franchising
4. occupational experience as International
Franchise Manager with one of the leading
banks in franchising in the UK.
The principal method of study was a postal
questionnaire to exhibitors at the Autumn
National Franchise Exhibition in Birmingham
in early October 1994. Following an analysis
of the responses, a series of short, structured
interviews were carried out with six leading
figures in franchising to test whether or not the
findings matched with the interviewees' views
and to explore certain subjects further.
2.4 The Sample
Blenheim organise two National Franchise
Exhibitions each year. The first of these in the
Spring is held at Olympia, London, and the
second in the Autumn at the National
Exhibition Centre, Birmingham. Each attracts
around 10,000 paying visitors, a large
proportion of whom supply a completed
registration card and questionnaire on entry,
covering such matters as the amount of funds
available for investment and the business
sectors of interest etc. Each event is widely
publicised with advertising in the trade, local
and national press and on local radio.
An exhibition steering committee consisting of
representatives from Blenheim, the BFA,
10 International Franchise Research Centre - Special Studies Series Paper No.8
franchisor companies and the professional
community, ensures the smooth running of
the exhibition and acts as a 'listening post' for
appropriate feedback. This suggests that the
Birmingham Exhibition is the most popular
exhibition event in this country with both
exhibitors and visitors. An entrance fee, in the
region of £10, is levied and previous research
shows that many people travel considerable
distances to attend the Birmingham
Exhibition. This suggests that the act of
attendance is usually not undertaken lightly
and is probably a useful gauge of serious
intent to purchase a franchise (Stanworth &
Purdy, 1994).
Franchisors in turn pay around £8-10,000 for
the privilege of exhibiting and thus marketing
the benefits of their franchise to visitors. They
are accredited by the BFA, who are the main
sponsor for the exhibition. The costs
associated with exhibiting will represent a
significant portion of the marketing budget for
recruitment purposes for most exhibitors. A
small number of foreign franchisors and
professional advisers that were exhibiting i.e.
banks, accountants, lawyers and consultants
were excluded from the survey.
The choice of sample frame, however, was a
difficult decision. An alternative sample, for
example, could have been taken from the
listings in the annual directory of any of the
three major franchise publications in this
country (Franchise World, Business
Franchise and The Franchise Magazine). In
the event, it was considered that any sample
frame based on this population of around
250-300 in each case, would have been a
more speculative approach given the lack of
up-to-date information provided on
recruitment in these publications. The
exhibitor list at the National Franchise
Exhibition in Birmingham on the other hand,
was seen as evidence of current commitment
and active interest in recruitment and the high
response rate of 70% is seen as a vindication
of our choice, when compared with the
response rate on most postal surveys. This
significantly reduces the error component
associated with absolute sample size.
For record purposes, Figures 4 and 5
hopefully illustrate that our sample covers a
fairly broad section of franchisors in the
 Fig 4 - No. of Franchised Outlets: By Length of Time in Franchising

67%

80%
70%
60%
73%
25% 50% Proportion
of Sample/
40% Sub-sample
32% (Time in
30%
Franchising)
8% 20%
23% 10%
18%
0%
50 or more 15% 30%
25-49 >= 10 years
5-9 years
10-24
2-4 years
0-9 Franchise outlets < 2 years
All

franchising community, in terms of their distribution of the questionnaire. Comment

number of franchised outlets, analysed by
both length of time in franchising and by
franchise sector.
2.5 The Postal Questionnaire
Piloting of the questionnaire was carried out
over a period of two weeks prior to the
was sought from a number of professional
advisers as well as franchisors and questions
were amended to reflect relevant comment on
style and sequence of questions. The
questionnaire was distributed during the
second week of November 1994 to 94
exhibitors at the Autumn show organised by
Blenheim Exhibitions and Events and within

Fig 5 - No. of Franchised Outlets: By Franchise Sector

100%

80%

60% Proportion
of Sample/
40% Sub-sample
32% (Sector)
20%
23%
0%
50 or more
15%
30%
25-49 Other
Retail
10-24
Distribution
0-9 Franchise outlets B/Services
All

International Franchise Research Centre - Special Studies Series Paper No.8 11

two weeks more than 50% of the forms had
been received back.
A follow-up letter was sent one week later
resulting in a total of 70 replies before the cut
off date in late December. Four of the
responses were scrapped due to lack of
detail, leaving a total of 66 usable replies for
our survey. Reply-paid envelopes addressed
to the writer's employer, The Royal Bank of
Scotland, and favourable publicity from the
BFA were seen as helping the response rate,
i.e. 70%.
The completed forms were checked and
appropriately coded prior to the analysis
stage. No incentives were offered for
completing the survey, except an offer to
show the results was extended to
respondents, that expressed an interest by
ticking the relevant box. Strict confidentiality
of individual responses was guaranteed. The
adequacy of the sample rests largely on the
quality and relevancy of the exhibitor list and
the clear interest by franchisors exhibiting in
recruiting franchisees for their systems.
2.6 Interviews
Following an analysis of the survey
responses, interviews were arranged in
London with six leading figures, who are
highly influential in setting the agenda on
franchising not only within the industry but
with government and academic circles. The
objective being to test the main findings
against the perceived wisdom of these key
figures in the industry. They were:
■ Brian Smart, Executive Director of the BFA
■ Anton Bates, Senior Partner, Owen White
Solicitors and Legal Advisor to the BFA
■ Martin Mendelsohn, Senior Partner,
Eversheds Jaques & Lewis and Legal
Consultant to the BFA
■ Andy Pollock, Senior Partner, Rees
Pollock Accountants and Affiliate
Representative of the BFA
■ Nigel Wicking, Managing Director, BDO
Stoy Hayward Franchising Services
12 International Franchise Research Centre - Special Studies Series Paper No.8
■ Bob Riding, Publisher and Editor,
Franchise World Magazine.
The interviews were tape recorded and
consisted of structured, mainly qualitative
questions, to probe into the more complex
issues arising from the survey. There were
also two multi-choice questions taken from
the questionnaire. Each interview lasted
around 25-30 minutes and comprised cordial
but frank exchanges, given that the
interviewer knew the interviewee well in each
case. This allowed the interviewer the
freedom to question replies in a relaxed
environment, leading to the provision of
information, which added to the value of that
obtained from the survey. In particular, the
interviews helped in drawing out the
conclusions in each chapter and the
recommendations in the final chapter.
2.7 Limitations of Approach
The main limitations of the approach taken
are seen as follows:
Literature Review
It is not possible to review every piece of
current literature. As franchise research and
data gathering is more developed in the US,
some use of that material is made. The
writer's approach has been to generally
review the broad issues and concentrate on
just three main issues. This approach will,
therefore, not allow an assessment of all the
key issues to franchise recruitment, but it will
show how improvements may be made to
recruitment from the areas under
examination.
Postal Questionnaire Survey
The Questionnaire asked qualitative and
quantitative questions which were then coded
and analysed. Clearly, however, there are
limitations to data gathered by postal
questionnaires, as there was no opportunity to
probe or clarify answers which were provided
by respondents. While the size of the
sampling frame was relatively small,
anecdotal evidence would suggest it is still
likely to represent a significant percentage of
franchisors actively recruiting.
Nevertheless, it is recognised that those
franchisors not exhibiting at the NEC in
Birmingham are missing from the sample and
there will be a degree of bias, to the extent
that the sample may not be truly
representative of the entire population. The
extent of bias, however, is difficult to gauge as
there is no consistency in the category
classifications used in the established
franchise publications, the NatWest/BFA
Survey or that used by the exhibition
organisers. Indeed, this is a fundamental
problem associated with research into
franchising in the UK. The adopted approach
is best characterised as convenience
sampling Churchill (1991), since the fit
between the sample and the present
population of all franchisors, cannot be
decisively ascertained.
It was also possible, that by taking only the
aggregate figures in the survey, this would
mask the fact that a non-homogeneous group
of franchisors would find different aspects of
recruitment most salient. So it was considered
not only important to determine what a
generalisable sample of all franchisors
perceived the main issues in recruitment to
be, but also to identify the characteristics that
companies in different franchise sectors and
with different experience in terms of the length
of time in franchising, thought most important.
It was necessary, however, to limit the
groupings to a small number (i.e. 4) in order to
have sub-samples of a sufficient size in our
analyses. The lack of consistency in sector
classifications throughout the literature,
however, impacted on our ability to obtain
meaningful data on the sector analysis and
therefore only limited observations are made.
Consequently, the main focus of our analysis
has been by length of time in franchising.
Structured Interviews with
Six Leading Figures in Franchising
There are potentially two basic problems with
'informal' methods of investigation:
a) the results obtained are to a degree
dependent on the skills of the interviewer,
and
b) difficulties in summarising and quantifying
the data collected.
International Franchise Research Centre - Special Studies Series Paper No.8
With this in mind and given the experience of
the writer in franchising, the interviewees were
carefully chosen and well known in each case.
This contributed to a relaxed environment in
which the interviewees were at ease and gave
open and honest answers to the questions.
This was helped by the perceived importance
of the subject matter to those interviewed.
Interviews were also limited to 25-30 minutes
and were tape recorded and subsequently
transcribed from the tapes. Questions were
prepared in advance and interviewees were
invited only to give an opinion based on their
lengthy experience advising franchise
companies on recruitment matters.
Information obtained from the interviewees,
however, is used only sparingly in this paper
with a view to adding clarity and weight to
certain of the conclusions and
recommendations.
Occupational Experience
Occupational experience was used to provide
general direction and credibility in order to
obtain information from all the relative
sources.
In summary, the research draws on
information gathered from several sources,
each requiring an element of subjective
selectivity in what information is presented in
the text. The research paper will ultimately
only suggest a small number of conclusions
and recommendations, which were generally
tested by cross-referencing against each
source of information used.
CHAPTER 3 - MARKETING OF THE FRANCHISE
3.1 Introduction
The process of franchise recruitment or the
selling of franchises is a complicated one and
depends to a large extent, not only on the
business experience of the franchisor, or the
level of the investment, which varies
dramatically across different sectors, but also
on the demand for the underlying product or
service. Having established a successful
business which you wish to franchise, you are
in effect entering into a different business from
your core business. This is underlined by
Brian Smart of the BFA, who indicates that
franchise companies have two main hurdles
13
to overcome:
"In the first place they are in the
business of selling their product or
service and secondly the business of
expanding their network through
promoting their franchise to prospective
franchisees. It is only if they are
successful at the first hurdle that they
can move on to the second hurdle and
then they are in a completely different
market."
A summary of the franchise literature in the
US by Dant (1994), asserts seven primary
reasons that are expected to nudge
successful growth-orientated businesses in
the direction of franchising:
■ access to capital
■ access to managerial talent
■ access to local market knowledge
■ economies of production
■ economies of promotion
■ economies of co-ordination
■ in-built disincentives to agent shirking.
Abell (1992), suggests that for a business to
be "franchiseable", there must be definable
know-how and a distinct way of doing things,
that distinguishes the business from others.
For those businesses looking to expand by
franchising in an ethical manner, the
marketing process will normally involve the
following stages:
■ 1: the development of a successful
business concept that is replicable
■ 2: the operation of a successful pilot
operation(s)
■ 3: the production of a prospectus,
marketing brochure, operations manual
and franchise agreement
■ 4: the selling of the key benefits of your
franchise through appropriate channels
14 International Franchise Research Centre - Special Studies Series Paper No.8
■ 5: to establishing a selection system
together with arrangements for training and
pre-opening assistance.
3.2 Establishing the Business Concept for
Franchising
One of the more usual ways for companies to
get into franchising, is for an existing
business, which has scope for a more rapid
expansion rate than its capital and staff
resources allow, to turn to franchising as a
means to exploit this opportunity. This is
perfectly valid, however, it should not be the
case that franchising is a path to salvation for
an ailing business. There are five main factors
to consider (Mendelsohn & Acheson, 1989,
How to Franchise Your Business):
■ will the company be able to attract
franchisees with sufficient financial
resources ?
■ will the company be able to attract
franchisees with the ability to acquire the
necessary skills and be able to teach those
skills to staff ?
■ can a sufficient flow of suitable premises
be found at rental levels to enable the
franchisee to trade profitably ?
■ has the company demonstrated an ability
to devote adequate resources to establish
sufficient consumer demand ?
■ is the business sector growing or in decline
and does the product have staying power ?
The successful running of the pilot operation
is essential to the preparation of the franchise
package. The experience obtained in setting
up and running the 'pilot' will provide the
bedrock upon which the elements in the
package are structured. This involves bringing
all the elements of the package together to
reflect the accumulation of the total
operational experience in a transmittable
form. In many cases, more than one pilot
operation should be undertaken, over a period
lasting longer than one year, in order to bring
out regional differences before national
recruitment is contemplated. Unfortunately
this advice is often not heeded and there are
 Fig 6 - No. of Company Outlets: By Length of Time in Franchising
47%
23%
30%
35%
18%
No Company outlets
17%
1 >= 10 years
2-4
5 or more
All
very few properly structured and piloted
franchise systems that can be ready for
marketing in less than two years from the time
the idea is first conceived (Mendelsohn 1989).
With this statement in mind, Figure 6, gives a
breakdown of the respondents in our survey in
terms of their franchising experience and the
number of company outlets that they run.
Franchising experience in this context, is
measured from the year of the first franchise
sale.
One of the significant findings from our survey
is the large percentage of franchisors (65%)
that have only one company outlet or less.
Indeed, 30% have no company outlets at all.
Clearly, this has implications for the
franchisor, from both an operational point of
view in terms of feedback from the front line
and for new product development. When
compared to the significant number of
company outlets operated by franchisors in
the USA, where the costs of franchising are
prohibitive in view of legislative requirements,
this would suggest that many of our
companies are franchising their business
without sufficient experience in terms of a
company network. When added to a lack of
proper regard for piloting this is a terribly weak
foundation from which to launch a franchise.
In the writer's opinion, a franchisor which is
International Franchise Research Centre - Special Studies Series Paper No.8
35% 50%
33%
40%
33% 40%
Proportion
24%
30% of Sample/
Sub-sample
18% 24% 20% (Time in
17%
Franchising)
10%
13%
0%
5-9 years
2-4 years
< 2 years
prepared to invest in running a company
operation as well as a franchise network, will
provide a more convincing approach to
potential franchisees.
3.3 The Franchise Offer
Many commentators believe there is a basic
conflict at the root of the exchange in the
franchise relationship, given that the
franchisee normally seeks independence and
the franchisor seeks control and this is
reflected in the offer documents. For example,
conflict can often emerge between
franchisees who lack expertise and seek to
obtain it from the franchisee affiliation and the
concern of existing franchisees of having their
reputation and image tarnished by an
incompetent new franchisee. Conflict is also
possible through the franchisor's pursuit of
growth and its continuing ability to provide the
requisite support to existing franchisees. The
implications for the marketing of the franchise
are obvious in both cases and these aspects
have to be carefully managed both in the
messages conveyed to potential and existing
franchisees in the promotional mix, and
particularly in the prospectus and franchise
agreement.
Indeed, Harris (1993) suggests that the most
difficult aspect of franchising is getting the
recruitment practice right. He argues that the
15
 Fig 7 - Lead Generation, 1st choice: By Length of Time in Franchising

41%

36%
33% 25%
33%
25% 45%
17%
40%
26%
35%
24%
17% 30% Proportion
12% 25% of Sample/
Sub-sample
20%
Exhibitions (Time in
15% Franchising)
Other response
National Advertising
5% 7% 8% 10%
Local Advertising 5% 5% 5%
Word of Mouth 3% 0%

Franchise Magazines
2% >= 10
Extended Family 5-9 years years
2%
Customers
2-4 years
< 2 years
All

word recruitment leads to an inevitable system this is plainly not sensible."

association with the process of recruiting
company employees, which is an inaccurate In short, these very different viewpoints
analogy. In his opinion, the franchisor is, in clearly highlight the difficulty with the
fact, selling a product, i.e. the franchise promotional offer documents.
which is the package of rights, obligations and
assets from which the franchisee will make a 3.4 The Communication or Promotional Mix
living. In essence, he maintains, the final
transaction is between a willing buyer and a Another of the critical success factors in the
willing seller. marketing of the franchise is the choice of
communication channel and the underlying
A different opinion is voiced by Nigel Wicking message conveyed to potential franchise
of BDO Stoy Hayward Franchise Consultants, buyers in order to generate leads. Figures 7
however, illustrating the basic dichotomy in and 8, give a breakdown of the responses, in
franchising over this matter. He compares terms of first and second choice preferences,
franchise recruitment to that of key company for generating recruitment leads in our survey.
employees and states that:
In both cases, franchise exhibitions is the
"Many companies are prepared to clear leader for generating leads, although
spend a lot of time drawing up job there is no clear category in second place with
advertisements and specifications but 26% of franchisees preferring some other
do not take the time and trouble to do response to the question, despite a wide
similarly when promoting their variety of what are commonly thought to be
franchise to a new franchisee. Many the main options included. Thirty-three
employment contracts have a six percent of all franchisors in the survey ranked
month probationary period whereas a exhibitions first and this figure rose to 41% for
franchisee is normally tied to a franchisors with 5-9 years experience.
franchise under a five year contract Exhibitions also led the way for second ranked
before an option for review/renewal choice with 24% in the overall category.
comes up. When the franchisee Twenty-nine percent of respondents in the 5-9
represents the franchisor's brand in a year category, favoured national advertising
town and the only control is that of the as the second choice and 33% of franchisors

16 International Franchise Research Centre - Special Studies Series Paper No.8

 Fig 8 - Lead Generation, 2nd choice: By Length of Time in Franchising

32% 25%
20% 33%
18%
27%
24%

23%

35%
18%
17% 8%
17% 30%
13%
12%
8% 25%
Exhibitions Proportion
Other response 20% of Sample/
8%
National Advertising 6% Sub-sample
6% 15% (Time in
Franchise Magazines
0% 8% Franchising)
Word of Mouth 10%
No response 3%
Local Advertising 6% 5%
2%
Seminars 0%
2%
Extended Family
2% >= 10 years
5-9 years
Current Employees 2-4 years
< 2 years
All

with over 10 years' experience, favoured the conventionally thought of as an employee

franchise magazines as second choice. The relationship.
variety or spread of the responses, however,
suggests that this is still a grey area for most With this issue firmly in mind, Figure 9 looks
franchisors with their approach being largely at the views of franchisors in our survey, on a
speculative. continuum, ranging from fully independent to
employee status. They show that the largest
Conveying the right message in the percentage of the respondents believe that
promotional mix to potential franchisees is running a franchise is halfway between
complicated by what you understand the running an independent outlet and running a
franchise relationship to be. This can vary managed outlet, i.e. 38%. Twenty-six percent
considerably from company to company and of franchisors, however, choose the
amongst professionals and academics. The independence option and 30% the
view of Bradach and Kaufman (1988), is worth independence with strings attached option,
recording. They suggested that franchising is indicating that many see the franchisee more
a complex organisational arrangement that like an independent businessman. In the most
combines elements of both entrepreneurship experienced category, 75% of franchisors
and employment. In their view, the ability of think it is more like running an independent
franchisees to affect their income, is business or an independent business with
constrained by provisions in the franchise strings attached, which probably reflects the
agreement designed to protect the integrity of maturity of the franchisees in their network
the trademark. For instance, while franchisees and the reduced ongoing support needed.
have control over local operating decisions Those in the middle range in terms of
such as pricing, staffing and possibly experience, were firmest in the belief of the
suppliers; they typically may not alter the halfway house status i.e. 40%, with only 7%
physical plant, production process or product choosing the independence option with strings
offerings. They conclude that while the attached.
financial incentives make franchising look
much like owning your own business, This view of franchising as being hybrid in
particularly since franchisees bear the risk of nature is reflected in both theory and practice.
failure, the contractual stipulations regarding For instance, on a similar continuum
the operating standards mirror what is representing degree of independence, Knight

International Franchise Research Centre - Special Studies Series Paper No.8 17

 Fig 9 - "Running a Franchised Outlet is like ...":
By Length of Time in Franchising
38%
30%
5%
Managed Outlet
26%
Managed Outlet + strings attached
Half-way between
Independent Business + strings att.
Independent Business
(1984), places franchisees almost exactly
mid-way between solo entrepreneurs and
large corporate managers. The rhetoric that
surrounds franchising also reflects its hybrid
nature. Two themes pervade such rhetoric
and address the weaknesses perceived to
exist for both the entrepreneur and the
conventional employment relationship. One
theme is that franchising reduces the risk
associated with starting your own business,
with messages of "in business for yourself but
not by yourself", and the other theme, which is
probably the most widely used theme,
encourages employees to escape the
stultifying nature of their job by "being your
own boss".
Arguing against the latter theme in particular,
Felstead (1993), expresses the view that
franchising is often wrongly promoted by the
media in this country as a non-hierarchic form
of work, under the guise that franchisees
trade as local, independent businesses. He
states that the strategic decisions, setting out
the parameters of the business, remain firmly
in the hands of the franchisor, which thereby
place a ceiling on the level of independence of
franchisees. All of this adds to a confusing
picture of franchising in this country.
18 International Franchise Research Centre - Special Studies Series Paper No.8
53% 0.6
0.5
40%
0.4 Proportion
of Sample/
32% 0.3 Sub-sample
(Time in
0.2 Franchising)
0.1
12%
0
>= 10 years
5-9 years
2-4 years
< 2 years
All
3.5 Conversion Rates
Figure 10 shows the estimated conversion
rates of leads to recruits in terms of
franchising experience. It is interesting that
more than 60% of all franchisors in our
survey, recruit 5% or less of leads generated.
Despite expectations that recruitment will
come easier with maturity and growth of the
franchise network, the evidence suggests that
this is not so. This has probably more to do,
however, with franchisors being more
selective, than insufficient candidates coming
forward. The more experienced franchisors
have the highest percentages in the 1-2%
conversion category, with 41% in the 5-9
years and 33% of the above 10 years
respectively. Meantime young franchisors are
less discriminating, with 36% in the 5-10%
conversion category. This supports the theory
that young franchisors are in the business of
selling franchises, rather than recruiting
franchisees. The more experienced
franchisors, having had problems in the
network, will screen applicants more carefully,
with the intention of reducing the future
number of problematic cases.
Brian Smart of the BFA feels that any
measurement of the conversion rates of
franchisors, however, is dependent on your
starting point for what represents a serious
 Fig 10 - Estimated Conversion Rate: By Length of Time in Franchising

53% 41%
33% 42% 60%

50%
18%
36% 40% Proportion
38% 24%
26% of Sample/
13% 30% Sub-sample
17% (Time in
20% Franchising)
21%
10%
1-2% Estimated conversion rate
2-5% 0%
11%
5-10% >= 10 years
10-25% 5% 5-9 years
2-4 years
25%+
< 2 years
All

enquiry. On average, he feels that one in a vary in direct proportion with:

hundred is about right from a straightforward
advertisement. Combine this with editorial, "Being able to transfer a serious
however, and you are likely to multiply this by amount of information to your
a factor of 10, which he considers to be about prospects."
the same percentage of candidates likely to
flow from an exhibition, where the exhibitor Smart accepts that inexperienced franchisors
has the benefit of a face to face discussion. will recruit substantially more of their serious
He states that conversion rates are likely to enquiries and estimates the figure to be one in

Fig 11 - Areas for Most Improvement: By Length of Time in Franchising

58%
59%

50% 41%
40% 60%
35%
25% 50%
27%
17% 40% Proportion
24% of Sample/
14% 30% Sub-sample
13% (Time in
12% 20%
Targeting Franchising)
Marketing 10%
Profiling 6%
Processing 0%
3% 5%
Other response
2% >= 10
Relationship handling 5-9 years years
2%
Interviews 2-4 years
< 2 years
All

International Franchise Research Centre - Special Studies Series Paper No.8 19

 Fig 12 - Sector or Format: By Length of Time in Franchising
62%
36%
Business format decided first
Business sector decided first
All
ten. He thinks this has more to do with attitude
and feel, rather than money and says:
"Good franchisors are about recruiting
people who will be successful - an
indication of a bad franchisor is a
willingness to accept franchisees they
think will fail."
3.6 Areas for Most Improvement
Figure 11 looks at areas for most improve-
ment in franchise recruitment. More than 50%
of all franchisors in our survey feel that the
targeting of franchisees is the most important
area for improvement in recruitment. The
figures are roughly similar for the younger and
older franchisors, i.e. 59% and 58%
respectively. Once again, those in the middle
categories, or high growth phase, see this as
less of a problem but still the most significant
area for improvement. In essence, the
franchisors are probably indicating that they
are either unsure of who their best franchisee
targets are or they do not know how to reach
them (or both). The other significant area for
improvement is marketing generally. This
could mean any of the factors outlined earlier
in the marketing process, but it most probably
means the quality of the prospectus/
marketing brochure, together with more
effective spending on communication
20 International Franchise Research Centre - Special Studies Series Paper No.8
80%
73% 70%
60%
Proportion
50% of Sample/
40% Sub-sample
30% (Time in
20% Franchising)
10%
27%
0%
>= 10 years
5-9 years
2-4 years
< 2 years
channels such as advertising, exhibitions,
promotions, PR and personal selling.
The marketing of franchises to those that
have been self-employed before, in particular,
is an interesting area of our study and we will
return to this in more detail later. For instance,
franchisee research undertaken by Stanworth
& Purdy (1994), at the Birmingham exhibition,
indicates that nearly 50% of those likely to
take up a franchise have had some form of
self-employment experience before, and yet
both the exhibition organiser and the
franchisor exhibitors seem reluctant to target
this sector, by selling the benefits most salient
to this group of a proven business system,
reduced risk, ongoing support and known
trade name.
An important finding from the analysis in this
area is worth highlighting at this stage.
Figures 12 and 13 consider whether
prospects looking at franchising decide on the
business sector or the business format first.
Previous research by Bradach & Kaufmann
(1988), indicates that the choice between
business sector and organisational form is
part of the same decision process. Our
analysis highlights that 62% of all franchisors
believe prospective franchisees decide on the
organisational form or business format, before
the business sector. This contrasts sharply
 Fig 13 - Sector or Format: By Franchise Sector

80%
70%
78%
60%
35% 59% 50% Proportion
40% of Sample/
62%
30% Sub-sample
(Sector)
20%
10%
0%
36% 22%
Other
Retail
Business format decided first
Distribution
Business sector decided first B/Services

All

however with the findings of both Stanworth & 3.7 Chapter Conclusions
Kaufmann (1994), and Stanworth & Purdy
(1994), which show that the majority of ■ Companies thinking about franchising their
potential franchisees indicate that the decision business should realise it is not a quick-win
search actually starts with the business business and should take a long term view.
sector and not the business format. Indeed This means investing time, effort and
Stanworth & Kaufmann, found that as much money on getting the package right by the
as 79% of UK respondents and 75% of US use of effective pilot operations. Our
respondents, in their research on franchisee survey indicates that many offer a
motivation, decided that the organisational franchise without much of a company-
form, i.e. franchisee or independent, was less owned operation and probably at too early
important than the decision on the business a stage in their development. Franchising
sector. should not be a cheap option or a route to
salvation for a failing business.
Figure 12 highlights that those with 2-4 years
experience in franchising in particular are ■ Understanding the intricacies of
most likely to misread this situation, with more franchising will also help you realise it is a
than 70% nominating the business format separate business from your core
over the business sector. In the sectoral business, requiring different management
analysis, Figure 13, on the other hand, skills. It is important to recognise early on,
reveals that those in the business services for instance, that mutual reliance is the
sector are most likely to make the same keystone to successful franchise
mistake, with more than 70% also nominating relationships (Cherkasky, 1994).
the business format over the business sector.
Interestingly, those in the retail sector seem Raising the general level of knowledge
to be most in tune with what potential about the real benefits of franchising is
franchisees are actually saying in this regard. also a key factor. Brian Smart, for
instance, believes in:

"The educational value of seminars to

advise companies with insufficient
experience or lacking a marketable

International Franchise Research Centre - Special Studies Series Paper No.8 21

 USP [unique selling point] to wait and
be patient before deciding on
franchising."
His message is that both the business and
the people involved have to be sure about
franchising. This means a critical self-
analysis of management style and the
objectives of the business. A similar point
is made by Martin Mendelsohn of
Eversheds Jaques & Lewis who says:
"Too many franchisors lack the
patience or the will to get it right.
Financial pressures, lack of experience
and lower standards will mean that
they are not prepared to say ‘no’ to
unsuitable candidates from day one.
The right strategy is about making
contact with the right person for your
business. How you reach the right
people with the appropriate message
requires a great deal more thought
than most companies put in."
■ The majority of respondents in our survey
indicated that the targeting of franchisees
is the main problem for them. It should be
important, therefore, for franchisors to
identify and determine market segments or
sets of buyers that become targets for their
recruitment plans. This would have three
main benefits:
● allow the company to direct specific
marketing programmes towards those
segments
● improve the company's ability to meet
changing market demands
● improve allocation of company
resources.
This is endorsed by Nigel Wicking of BDO
Stoy Hayward who says that:
"Many companies embark on
franchising having done very little
research into the type of candidate
most suited to their franchise and
therefore are failing at the first hurdle in
their marketing efforts. If proper
analysis is done then the promotional
mix can be tailored specifically to the
22 International Franchise Research Centre - Special Studies Series Paper No.8
target audience."
With regard to marketing the franchise,
each franchisor has to consider the level of
interdependence with the franchisee.
While the majority in our survey considered
franchisees to be either independent or
independent with strings attached
business people, the largest single
component preferred the half-way house
status, between full independence at the
one extreme and employee status at the
other. Most franchisors, however, pick up
on the attraction that "being your own
boss" brings to potential franchisees,
(Stanworth & Purdy 1993, 1994), and it
becomes a cliché in the marketing
material. This approach is too general and
lacking in focus, particularly when those
with self-employed experience value
factors such as a proven business system
more than the independence factor. What
is needed therefore is a comprehensive,
differentiated and focused marketing
campaign, through the most appropriate
communication channel, outlining the key
benefits of the franchise.
■ Our survey also indicates that exhibitions
are the preferred route for generating
leads, yet too many franchisors attend
exhibitions with marketing material that is
lacking in depth or transparency. The
prime objective should be a quality driven
transparent marketing brochure, with full
illustrative costs and financial projections,
based on well tested pilots, proving the
concept works for franchising. No
confusion, for example, should exist over
the amount of franchise fee and the total
costs of start-up which unfortunately is
often the case.
■ Similarly, advertisements are often
inappropriately drafted in the national
press and give insufficient information
about the nature of the business or the
unique selling point (USP) of that business
or sector. This is particularly relevant,
given that our research shows that the
decision search for a potential franchisee,
starts with the business sector and not the
business format. Furthermore, many
advertisements often make wildly
inaccurate earnings claims and forecasts,
 which distort the message and jeopardise
their credibility and the reputation of
franchising. Far better to have clear,
concise, focused, and value for money
advertising to a targeted audience through
the use of specialist press.
■ Although the inexperienced franchisors in
our survey have better conversion rates
than the more experienced franchisors,
this has probably more to do with lower
standards of selectivity. Many would seem
to be in the business of selling franchises,
rather than recruiting franchisees into their
system, with the long term aim of mutual
benefit firmly in mind. In general, therefore,
franchisors need to be more open about
the financial strength of the company, the
margins available in the business, the
prospects for the business sector, the
relevant skills required for the franchisee
and the performance to date of the existing
network. While this may give confidential
information to the competition, it also
sends a message of confidence to
prospective franchisees, who are then able
to make a better evaluation of the
franchisor's resources and ability to deliver
the support promised. This, perhaps,
would have the added benefit of weeding
out inappropriate candidates and
improving conversion rates.
In summary, the continued growth of the
franchise industry is clearly dependent upon
franchisees establishing new units, which
could mean existing franchisees expanding to
become multi-unit operators, or company
outlets being sold off to new franchisees, as
well as new start-ups. As the industry
matures, the sell-on of existing managed or
franchised outlets is likely to increase in
significance and this will present a new
marketing opportunity for an increasing
number of mature franchisors. Perhaps one of
the problems for franchising currently, is that
the marketing activities of franchisors by
necessity are related to the strength of the
business concept (intellectual property) and
the strength of the brand (number of outlets,
quality of product/service and quality of
purchasing, marketing and management) and
insufficient numbers of well-established,
quality-driven companies are coming forward
to show the way and set the standard for
International Franchise Research Centre - Special Studies Series Paper No.8
others to follow.
CHAPTER 4 - THE SELECTION PROCESS
4.1 Introduction
It is one of the ironies of life that people often
only learn by their mistakes. It is also
suggested that choosing the right franchise is,
of necessity, developed with experience.
Certainly, it is common to find that franchisors
have more problems with the first ten
franchisees, than those who subsequently join
the network. To an extent, this is
understandable for having spent a great deal
of time and money in establishing the
franchise, the franchisor will want to expand
quickly and see a return on investment.
However, the franchisor is at the point of
maximum vulnerability just when he requires
the strongest nerve (Mendelsohn and
Acheson 1989).
Much of the literature insists that it is a
mistake to accept a franchisee unless he
matches up to requirements in every respect
and that standards should never be relaxed or
compromised. But, in practice, in view of the
haphazard approach to marketing their
franchises by franchisors, it is difficult to
understand what is actually meant by this.
Clearly, there are difficult decisions to be
made in the recruitment of franchisees, which
are tied up with accurate assessments of who
will succeed and who will fail. Perhaps
franchisors offering franchises at the lower
level of investment, therefore need to be on
guard against taking on franchisees who can
afford to fail? The current theory seems to be
that the larger the investment, the more
careful the decision tends to be by both
franchisor and franchisee, even if it is only
subliminally. Certainly those with an excellent
reputation to protect can ill afford to have
failures for the damage it ultimately causes to
future recruitment prospects.
For record purposes, a comparison of the
factors for franchisee success, put forward by
a survey of leading franchisors in the USA
(Francorp Consultants, USA), with the
reasons for failure put forward by Brian Smart
of the BFA (article in Business Franchise
Magazine), are listed overleaf in Figure 14.
23
 Fig 14 - Franchisee Success and Failure
Factors for Success
■ eagerness to learn
■ willingness to work long hours
■ people skills
■ sales ability
■ resistance to stress
■ ability to take direction
■ having money in reserve
■ willingness to take risks
■ age
4.2 Factors in the Selection Process
The anecdotal experience of the writer
suggests that the skills profile of a franchisee
for many franchisors is often far too vague,
with the only expressed preference being for
candidates with previous sales/marketing
experience and/or management experience.
In addition, most franchisors seem to be
simply looking for ambitious, hard-working
and committed individuals who are able to put
in 30-50% of the total start-up costs from their
own cash resources. On the upside, the
financial contribution of a franchisee is seen
as a great motivator and limits the recourse to
borrowing to acceptable gearing levels. While
on the downside, this approach often leads to
franchisee selection based on financial
resources alone, rather than on the requisite
skills and competencies for running and
making a success of the business. Some
franchisors do develop a psychological profile
of what they think is their most suitable
franchisee. In essence, however, this often
reflects the pattern, qualities and
qualifications of franchisees whom they have
already set up in business, rather than on any
meaningful measurement system. If they do
not get it right in the first place, then this can
24 International Franchise Research Centre - Special Studies Series Paper No.8
Reasons for Failure
■ did not follow the system
■ did not work hard enough
■ went ahead despite family opposition
■ spent money on the good things of life
before they had earned it
■ could not stomach selling demands of
the job
■ did not have the self-discipline to cope
with the loneliness of a small business
■ underfunded and misled the franchisor
on the amount of funds available
often lead to the perpetuation of the same
mistakes!
Figure 15 looks at the responses to the
question on the most important factor in the
selection process and shows that 42% of our
survey place most emphasis on the
application/interview. This is particularly the
case for the most experienced franchisors i.e.
58% and the least experienced franchisors i.e.
45%. Around 21% of all franchisors do
personal profiling and this percentage rises to
33% for franchisors in the most experienced
category. Up to 18% in the least experienced
category rely on 'gut feeling', which backs up
our theory that a sale is often made if the
candidate has sufficient funds to get started.
The recruitment interview conducted by most
franchisors will inevitably evolve over time as
the Company grows. Initially, most cases will
be handled by the business owner(s). Once
the company achieves critical mass, however,
a franchise director will be recruited. At this
stage, the company needs to be careful about
getting a little arrogant and placing less
importance on recruitment. After all, the
reputation of the whole network can be
damaged by a rogue franchisee. Our findings
 Fig 15 - Most Important Factors in Selection Process:
By Length of Time in Franchising
58%

60%
45%
42% 50%
33%
40% Proportion
of Sample/
30% Sub-sample
23% (Time in
20%
21% 8% Franchising)
18% 10%
Application/Interview
Other (please state) 0%
11%
Personal Profiling
9%
>= 10
"Gut Feeling" 5-9 years years
3%
2-4 years
Previous Job Experience
< 2 years
All

suggest that companies do, however, get a selection criteria for those franchisors and
little complacent. Figure 16 shows the their ability to manage and support such
number of franchisees recruited by our growth. Those that have been around 10
respondents in the past two years. These years or more will have gone through the
results show that 40% in the 2-4 years learning curve and developed the appropriate
category recruited more than 30 franchisees support structure for rapid expansion and this
during a period when they would be still is less of a concern.
feeling their way in franchising. These figures
raise a question about the standard of the

Fig 16 - No. of Franchisees Recruited in the Past 2 Years:

By Length of Time in Franchising

73% 80%
70%
47% 60%
Proportion
50%
of Sample/
39% 33% 40% Sub-sample
30% (Time in
40%
20% Franchising)
24%
10%
1-10 Franchisees 0%
8% 26%
10-20 >= 10 years
20-30 5-9 years
2-4 years
30+
< 2 years
All

International Franchise Research Centre - Special Studies Series Paper No.8 25

 Fig 17 - Do Franchisors Prefer Candidates With Prior Self-employment
Experience: By Length of Time in Franchising

75%
80%
70%
60%
Proportion
50%
of Sample/
40% Sub-sample
30% (Time in
52% 41%
17% 20% Franchising)
45%
10%
0%
38%
>= 10 years
5-9 years
No
2-4 years
Yes < 2 years

All

4.3 Previous Self-Employment and Prior Line
Experience
Two factors which appear to receive
insufficient attention by franchisors, are
previous self-employment experience (as
mentioned earlier) and prior operational line
experience of potential franchisees. Research
by Stanworth & Purdy (1993, 1994), shows
that around 50% of those actually looking to
take on a franchise at an exhibition are, or
have previously been, in self-employment. In
large measure, they are attracted by a proven
business system, whereas, those without
such experience are attracted by the lure of
independence. Despite this, many franchisors
appear to discriminate against self-employed
people, fearing perhaps, an inability to retain

Fig 18 - Do Franchisors Prefer Candidates With Prior Self-employment

Experience: By Franchise Sector

65% 70%
60%
50%
Proportion
43% 40%
of Sample/
52% 30% Sub-sample
43%
29% 20% (Sector)

10%
38% 0%

Other
Retail
No
Distribution
Yes B/Services

All

26 International Franchise Research Centre - Special Studies Series Paper No.8

 Fig 19 - Do Franchisors Prefer Candidates With Previous Line Experience: By
Length of Time in Franchising

92%
100%

80%
Proportion
60% of Sample/
53% Sub-sample
73% 40% (Time in
Franchising)
20%
33% 8%
0%

>= 10 years
21% 5-9 years
No
2-4 years
Yes < 2 years

All

control over them. In many cases, this may
well be an expression of the franchisor's own
inadequacies. Similarly, many franchisors
prefer not to take on franchisees who have
previous experience in the line of business,
preferring to train new franchisees in the
system, thus avoiding recruits who apparently
bring with them bad habits and work
practices. By adopting this approach,
however, franchisors are only fishing in half
the pond.
The frequency with which franchisees are
seen to emerge from a social strata with a
previous history of links with self-employment,
reinforce the suggestion that many see
franchising first and foremost as a business
opportunity, since those going into more

Fig 20 - Do Franchisors Prefer Candidates With Previous Line Experience: By

Franchise Sector

80%

64% 60%
Proportion
73%
40% of Sample/
Sub-sample
(Sector)
20%

21% 0%

Other
21%
Retail
No
Distribution
Yes B/Services

All

International Franchise Research Centre - Special Studies Series Paper No.8 27

 Fig 21 - Why Do Candidates Drop Out: By Length of Time in Franchising
45%
35%
Financing
8%
Second Thoughts
Suitability of Location 6%
Other (please state)
3%
Family Pressure
3%
No response
Legal Advice
Lack of Training Available
conventional forms of self-employment tend to
have similar family and personal histories
(Stanworth, Stanworth, Granger & Blythe,
1989). Figures 17 and 18 look at the
responses given by franchisors to the
question of whether they preferred candidates
to have previous self-employment experience
or not. The responses show that the tendency
to prefer candidates without self-employment
experience is more marked with the more
experience of the franchisor i.e. 41% in the
least experienced category, through to 75% in
the most experienced category. Figure 18
meanwhile indicates that it is also most
pronounced in the retail sector in our sectoral
analysis, with only a marginal preference in
the distribution and business services sectors
coming out.
Figures 19 and 20 look at the responses to
the question on whether franchisees were
preferred to have previous line experience.
Significantly, the percentages in favour of no
previous experience also rise from 77% in the
least experienced category, to 92% in the
most experienced category, although they do
dip a little in the middle. The findings are
broadly similar across all the franchise sectors
also and indicate a real bias against prior
operating line experience. To some extent,
the results are surprising given that you would
expect experience to be preferred in those
28 International Franchise Research Centre - Special Studies Series Paper No.8
65%
50%
47%
70%
25% 60%
50%
Proportion
40% of Sample/
Sub-sample
8% 30%
(Time in
Franchising)
20%
10%
0%
>= 10 years
5-9 years
2-4 years
< 2 years
All
sectors where technical skills are actually
required. For example, strong links are
normally associated between sector of origin
and sector of possible destination in fields
such as automotives, business services, and
building and maintenance services.
It is commonly suggested that franchisors
normally prefer franchisees without prior
experience because they are more amenable
to training and operational compliance with
the franchisor's instructions. Although this
frequently verbalised reasoning may be fully
justified, it is not without its power and
motivational dimensions, as franchisees
without prior operational experience are more
likely to defer to the franchisor's knowledge
and authority. For example, a legal case in
1987 involving a franchisee who had decided
not to renew his contract with Prontaprint, but
to continue operating at the same site under a
different name, appeared to turn against the
franchisee because of his lack of know-how
prior to taking on the franchise. This may
indicate a stronger and often unspoken
reason for a selection preference in this area
(Felstead 1993).
When asked about franchisors' views on prior
operating line experience, Brian Smart of the
BFA confirmed in our interview that there has
been a great reluctance in the past by his
members to take on people who were skilled
in the franchised area of operation as:
"Old restrictive practices developed in
a restrained trade union atmosphere
would prejudice the franchisor's way of
working."
He thinks, however, that things have
changed, with many franchisors now much
more flexible in this area. For example, Smart
says:
"The primary constraint for recruitment
today is that franchisors find
franchisees who can accept and work
within the operating system and don't
try to re-invent the wheel."
The survey findings would suggest a different
picture to that of Smart's perception of his
membership.
4.4 Why Candidates Drop Out and the
Consequences of Poor Selection
Finally in this chapter, we look at why
candidates drop out leading to lower
conversions rates and the consequence of
poor selection. Figure 21 highlights that
financing is the clear leader amongst
respondents, with nearly 50% suggesting that
this is the main problem. In this area, many
also drop out from the most experienced
franchisor category through having second
thoughts. This may be due to the franchisor
not living up to expectations following due
diligence, or that a self-analysis does not give
the potential franchisee sufficient comfort on
the impending risk/reward profile.
The financing problem amongst
inexperienced franchisors, i.e. 55%, is
probably caused by a lack of transparency
over the full set-up costs in the prospectus,
thus attracting wholly inappropriate prospects
in the first instance. A review of the
prospectus/marketing brochures at the
National Exhibition in Birmingham, for
example, indicated that less than 25% of the
exhibitors produced meaningful detail on start-
up costs and financial projections for the first
two years of trading. This was particularly
evident for those companies in the early
stages of franchising.
International Franchise Research Centre - Special Studies Series Paper No.8
There are obvious consequences of poor
selection. It inevitably brings problems which
slow growth and divert the management
resources of the franchisor away from other
vital tasks Mendelsohn (1989), and this is
particularly important to remember when
franchisors are anxious to recruit and expand
quickly. Similarly, when franchisors have a
poor image in the market, it is often primarily
caused by inadequate selection criteria and
lax controls being in place (Croft, 1987).
These factors are compounded as recruitment
is often a major cause of conflict in a franchise
network, as mentioned previously. Existing
franchisees do expect franchisors to select
competent new franchisees, while franchisors
often complain of a lack of qualified applicants
(Knight, 1986). In consequence, franchisors
must remember the importance of the
franchisee being their brand in a particular
location and the effect that poor franchisees
have on good franchisees in the network if
they are looking to maintain standards.
The degree of independence of the franchisee
in the system, for instance, should also
become a major factor in the selection
process. A delicate balance has to be struck
between an individual who is too independent
and one who shows no independence at all.
The former will soon find that he is at odds
with his franchisor and repeatedly challenging
the franchisor's system. The latter, on the
other hand, will become increasingly
dependent upon the franchisor's support to
the extent that he will show little initiative and
find it increasingly difficult to exercise
judgement - in effect, he becomes an
employee of the franchisor (Ishani 1994).
Porter & Renforth (1978) first reported that the
most consistent characteristic of franchisees
with legal problems was that they were
involved in their first business undertaking.
This finding was reinforced much later by Rust
(1991), who cautioned against granting
franchises to persons who did not understand
the nature and risk associated with self-
employment. Bearing in mind the stated
preference of franchisors in our survey for
candidates without self-employment experi-
ence these are findings which perhaps need
clarified in terms of the preconceived attitudes
to previous self-employment and prior
operational line experience.
29
4.5 Chapter Conclusions
■ Franchisors should think about selection in
a way which is complimentary to the
marketing effort. The first step is to
discourage inappropriate leads through
misleading information. Potential fran-
chisees do not wear a label and are largely
self-selecting, thus having given them
sufficient information on the business
sector and the franchised business, then a
simple invitation should be extended, to
send for an application form. Martin
Mendelsohn suggests that:
"A comprehensive application form
should then be sent incorporating a CV
and an asset/liability statement that
touch the points of particular sensitivity
for that franchised business and
assists in the weeding out process."
■ Perhaps the hardest thing for any
franchisor is to recognise the things that a
franchisee will need to do in a franchised
business, but will not be able to do
because it is simply wishful thinking. Good
franchisors engage franchisees in a
thorough evaluation process and they are
prepared to say no from day one, if
candidates do not meet the quality
standard. In the writer's view, it is
questionable whether you can reach a
successful decision on recruitment from
the application/interview alone, which was
the stated preference of the majority in our
survey. On the contrary, time should be
taken to draw up a skills/qualification
profile, as necessary, for franchisees in the
franchise network. Similarly, it must not be
enough simply to have the financial
resources to be able to get started in a
franchise, which was the clear implication
derived from the number of franchisees
recruited by inexperienced franchisors in
our survey.
■ Similarly, it is important that time is given
to franchisees to enable them to evaluate
whether the franchise is right for them.
Smart mentions, for example, that:
"One of the major problems is that
potential franchisees need to be honest
with themselves. While this is easy to
30 International Franchise Research Centre - Special Studies Series Paper No.8
say, it is painfully difficult to do,
especially when it means bursting the
bubbles of your own dreams."
Where franchisees are measured against
attitudinal criteria of drive, determination
and a willingness to work hard, the
screening criteria used by franchisors must
bring out these characteristics and only
suitable applicants invited to take on the
challenge of a franchise. Our survey
responses to the question on problematic
franchisees indicated that this is clearly not
the case. If the franchisor is in any doubt
about the authenticity of the information
provided by franchisees, then they should
check references and ask for evidence on
the financial resources available etc.
■ More thought and effort in recruitment, is
required by franchisors to weed out the
inappropriate candidates. For instance,
where technical experience, or sales and
marketing skills are essential, then an "on
the job" assessment should become a
necessary part of the screening process. A
good example of this is McDonald's
Restaurants, who require franchisees to
finance themselves through 6-9 months of
full-time training before considering the
offer of a franchise. The point is underlined
however, that it is those franchisees who
feel most comfortable in their environment
that are most likely to be successful.
Certainly, it should not be the case that
franchisors recruit franchisees they do not
expect to be successful. This is bad
practice and the sign of an unethical
franchisor. Perhaps, the use of psycho-
logical profiling and simulated job-related
exercises, can assist in the selection
process for more franchisors, as only a
minority of respondents in our survey used
it.
■ With regard to conversion rates, the
findings also suggested that the majority of
candidates dropped out through an inability
to raise the finance. This aspect may be
greatly improved by giving a breakdown of
appropriate start-up costs and working
capital requirements in the brochure and
having an application form that helps in the
screening process. Furthermore,
franchisor assistance with business plans
 and other innovative and flexible financing
arrangements can help those franchisees
that have the right attributes to get into the
franchised business. Arranging finance
schemes with the banks is also important
for the franchisor in this context, as they
can signal to a potential franchisee that the
banks are in possession of information,
which make them more comfortable in
providing finance. On the other hand,
where the banks are cautious about
lending to franchisees, this can act as a
warning sign. Franchisors, therefore,
should be encouraged to keep the banks
closely advised of their progress in order to
help their conversion rates.
■ Personal chemistry between the franchisor
and franchisee is also an important factor
and this is particularly relevant for those
companies that are in the high growth
phase, where everything seems to be
going well and plenty of candidates are
coming forward to take on a franchise. In
our survey, this was most relevant to those
in the 2-4 years category by length of time
in franchising. The recruitment of
franchisees by a franchise director (paid
employee), for example, is normally not
undertaken with the same level of
selectivity, as that undertaken by the
business owners, especially if it is
commission driven and a question mark
must surround a company's ability to
support franchisees when expanding at a
rapid rate. For this reason, business
owners should remain involved in the final
decision on who to take on as a franchisee.
■ Most significantly, the evidence from our
survey suggests that there is a real bias
against those previously self-employed
and with prior operating line experience.
Indeed, the more experienced the
franchisor, the greater the bias in both
these areas. Despite a stated preference
for new recruits without self-employment
experience, previous research shows that
those with self-employment experience,
are less likely to fail. Furthermore, the
responses to the registration cards at the
exhibition collected by the organisers,
indicated that the self-employed sector
(both currently and previously self-
employed) have most funds available to
International Franchise Research Centre - Special Studies Series Paper No.8
invest and are most likely to state an
intention to purchase a franchise. In these
circumstances, it would seem sensible to
reconsider any selection bias against this
group, unless franchisor experience
specifically dictates otherwise. Meantime,
the preference for new recruits to the
business sector is tied up with a perceived
problem of operational compliance with the
franchise system. Although Brian Smart,
feels that his BFA members are changing
their attitude in this respect, the evidence
of our survey clearly suggests otherwise.
Inevitably, the impression from the survey and
the interviews is that the recruitment process
of franchisors is largely driven by costs, and
many of the smaller companies cannot afford
to implement the desired selection
programmes and one, therefore, has to
question whether they are right for franchising
in the first place. Those that recruit wholly
inappropriate candidates because they have
sufficient funds to get started, do the
reputation of franchising absolutely no good,
particularly when applicants have invested
and subsequently lost their life savings. The
bad publicity that follows ultimately damages
all franchisors and the reputation of
franchising.
CHAPTER 5 - STRUCTURE OF FEES AND
RECRUITMENT COSTS
5.1 Introduction
The income of a franchisor will normally come
from three sources:
■ up-front fee
■ continuing fee as a percentage of
franchisee sales, and/or
■ mark-up on goods sold or supplied.
Monthly contributions are also normally paid
by franchisees into an advertising fund held
centrally by the franchisor, however, these
monies should be accounted for each year in
terms of the total advertising spend by the
franchisor for the network in promoting the
brand and therefore are ignored for the
purposes of this study.
31
 Fig 22 - Up-front Franchise Fees: By Length of Time in Franchising

58%

60%
50%
50%
42%
40% Proportion
of Sample/
20% 30% Sub-sample
15% (Time in
24% 20% Franchising)

17% 10%
£3-5k Up-front franchise fee
£5-10k 0%
9%
£10-15k >= 10 years
11%
£15-20k 5-9 years
2-4 years
£20k+
< 2 years
All

Although the structuring of fees will be a ■ initial fees should be related to the total
strategic decision taken prior to the launch of investment required for the outlet
the franchise it is not a once only decision.
Clearly it is an important part of the franchise ■ an increase in the strength of the
offer but needs to be reviewed, like other franchised brand name should lead to
aspects of the business, on an ongoing basis higher management services fees
in light of the economic outlook, the
competitive position and the overall costs of ■ management services fees should de-
recruitment in the network, which is a function crease when a higher degree of
of the marketing, selection and training costs. downstream managerial responsibility is
This is an important aspect of the business for required
franchisors to keep under review and control.
Given the administrative burden of making ■ initial fees should increase with the length
changes to the fee structure, however, it of the contract period
should not be taken lightly, and franchisors
must always be mindful of the effect that a ■ both initial and continuing service fees
different fee structure can have between new should decrease if the franchisor imposes
franchisees and existing franchisees. Those mandatory purchase requirements on the
that join the network early and help to franchisee for the supply of goods etc.
establish the brand, are arguably entitled to
obtain entry to the franchise system at a lower ■ provision of more initial services,
cost to reflect the greater risk. particularly the length of training and
financial assistance should lead to higher
In the writer's experience, the costs initial fees
associated with recruitment and the running of
a franchised network are often understated ■ provision of more continuous services by
and much higher than originally forecast by the franchisor should increase
many franchisors. Sen (1993), suggested the management services fees
following ideas as helpful in building a
framework for structuring fees based on US ■ a higher level of environmental risk faced
franchisor experience: by the franchisee should lower initial fees
and increase management services fees.

32 International Franchise Research Centre - Special Studies Series Paper No.8

 Fig 23 - Up-front Franchise Fees: By Franchise Sector

67%

70%

60%

50%
42% Proportion
40%
of Sample/
15% 30% Sub-sample
(Sector)
20%

17% 10%
£3-5k Up-front franchise fee
£5-10k 0%
9%
£10-15k Other
11%
£15-20k Retail
Distribution
£20k+
B/Services
All

5.2 Setting the Level of Fees
Martin Mendelsohn believes
companies in the UK:
"Set their fees by what they can get
away with rather than on any
meaningful costing system and in light
of what the competition are charging."
Provided the competition has set the figure at
the right level to reflect demand for the
that most franchise, clearly this is not an illegitimate way
of setting the fee. However, if it is a drain on
resources then this matter needs to be
urgently reviewed to prevent the franchisor
going out of business.
Figure 22 examines the level of up-front fees

Fig 24 - Estimated Cost of Recruitment: By Length of Time in Franchising

60%
25% 50%

60%
42%
50%

30% 40% Proportion

of Sample/
18% 30% Sub-sample

20% (Time in
17% Franchising)
£3-5k Recruitment cost/franchisee 27% 10%
£5-10k 3%
£10-15k 0%
2%8%
£15-20k 12% >= 10
£20k+ 5-9 years years
2-4 years
Don't Know
< 2 years
All

International Franchise Research Centre - Special Studies Series Paper No.8 33

 Fig 25 - Estimated Cost of Recruitment: By Franchise Sector
42%
30%
£3-5k Recruitment cost/franchisee
£5-10k
3%
£10-15k
2%
£15-20k
£20k+
Don't Know
charged by length of time in franchising. Only
15% of respondents charge £3-5,000. Forty-
two per cent of respondents fall into the £5-
10,000 category and this figure rises to 50%
for the least experienced franchisors and 58%
for the most experienced franchisors. There is
a fairly even split across the range up to a
maximum of £20,000 in the 2-4 years
category of franchising. Twenty-four per cent
of the 5-9 years category charge £20,000 or
more, underlining our earlier assumption that
in this phase of growth, they probably get a
little arrogant and perhaps feel able to charge
a premium to cover the costs associated with
the build up of internal resources to provide
more support.
Figure 23 examines the level of up-front fee
charged by franchise sector. Forty-seven per
cent of franchisors in the retail sector and 43%
of those in the distribution sector charge £5-
10,000. Furthermore, 21% in the distribution
sector charge £10-15,000 and 14% charge in
excess of £20,000. This may be connected
with the level of support actually provided to
franchisees in the distribution sector where
there is normally a lot of administrative work
carried out for franchisees. Forty-eight per
cent of franchisors in business services
charge in excess of £10,000 by way of
franchise fee.
34 International Franchise Research Centre - Special Studies Series Paper No.8
100%
100%
80%
Proportion
60%
of Sample/
40% Sub-sample
(Sector)
20%
24%
16%
0%
8% Other
12% Retail
Distribution
B/Services
All
5.3 Estimated Costs of Recruitment
Figure 24 examines the responses on the
estimated cost of recruitment by length of time
in franchising. In our survey, 72% of
respondents estimate the figure to be £10,000
or less, with 27% of those franchising for less
than two years and 17% of those franchising
for more than ten years, not being able to put
a figure on the unit cost of recruitment ! Sixty
per cent of those in the 2-4 year category, and
41% in the 5-9 year category, suggest the
costs are less than £5,000, despite the fact
that only 15% of all respondents charge £3-
5,000 for the initial franchise fee. Only 25% of
those franchising for more than 10 years
suggest a figure as low as £3-5,000, with
approximately 50% indicating it is £5-10,000.
Perhaps the more experienced franchisees
have a better idea of the true costs.
Interestingly, 12% of companies in the 5-9
years category, and 8% in the above 10 years
category, indicate the costs to be in excess of
£20,000.
Figure 25 examines the responses on the
estimated cost of recruitment by franchise
sector. Fifty per cent of franchisors in the
distribution sector and 47% in the retail sector
estimate the cost to be £3-5,000. Only 29%
and 18% respectively believe it to be £5-
10,000. This suggests that many franchisors
 Fig 26 - Area of Geographic Expansion:
By Length of Time in Franchising
89%
Nationally
5%
Regionally
Locally
6%
Other response
< 2 years
All
in these sectors are making money on the
sale of franchises, or are underestimating the
costs, or both. Sixteen per cent of those in the
business services estimate the unit cost of
recruitment to be in excess of £20,000,
indicating that this sector either has most
difficulty in attracting franchisees, or is more
selective in the screening process. Twenty-
four per cent of those in the retail sector
provided a 'don't know' response which might
also mean that they are not actually willing to
say, of course.
Clearly however, we have to be careful about
drawing too many conclusions from the data
in this case given that we do not know how the
costs were actually measured in each case.
Although we did ask respondents to include all
reasonable overhead costs and not just direct
marketing costs Andy Pollock of Rees
Pollock, Accountants, is of the view that:
"Too many companies ignore executive
time and other overheads when
reaching their calculation while others
will be much more focused on the true
costs and therefore it is difficult to
compare like with like. Many may also
suggest a figure simply to show the
company in the most favourable light."
International Franchise Research Centre - Special Studies Series Paper No.8
100%
80%
Proportion
60% of Sample/
17% Sub-sample
40% (Time in
Franchising)
20%
12% 0%
>= 10 years
5-9 years
2-4 years
5.4 Geographic Expansion
The survey results on areas of geographical
expansion and length of time in franchising
are highlighted in Figure 26. These show that
the vast majority of companies, i.e. 89%, are
looking at national expansion. The figures rise
to 95% for the least experienced companies,
and are brought down by the experienced
companies, who will clearly already have a
substantial network in place and will simply be
looking to plug some gaps.
They also indicate that too many companies
have a shotgun approach to franchise
recruitment. This policy has clear implications,
so far as both the unit costs of recruitment
and ongoing support are concerned,
especially for young franchise companies. All
the interviewees agreed that it is much better
to grow in concentric circles from a defined
base than to go for national expansion too
early. In these circumstances, franchisors and
franchisees would benefit from controlled
growth where brand recognition becomes a
factor with the consumer and where
franchisees can benefit from the close
proximity of colleagues in terms of local ideas
and local marketing initiatives.
35
5.5 Chapter Conclusions
■ In the writer's experience, and confirmed
by all of those interviewed, too few
franchisors fully understand the nature and
extent of the franchise recruitment costs.
While this may be understandable for
franchisors in the early days when
experience is limited, there should be no
excuse for companies that have been
going a while and where the information is
readily available to them. Yet a significant
percentage of experienced franchisors in
our survey indicated that they could not put
a figure on the cost of recruitment.
■ Many companies still enter franchising
believing it to be a sure-fire way to make
money and depend on the up-front fee,
either to make a significant profit or
maintain the cash flow needed to keep the
company in business. In these
circumstances, many decisions will be
taken to recruit wholly inappropriate
franchisees, which can cause severe
damage to the franchise network by
poisoning the atmosphere later on
(Mendelsohn & Acheson 1989). Those
companies who get into franchising
operating under the misconception that it is
an easy way to make money need to be
refrained from doing so. In this regard,
both the initial up-front fees and the
ongoing fees charged by a franchisor, are
important in structuring the franchise
opportunity, as they can say a lot about the
ethics, attitude and standing of the
company.
■ Financial expediency demands franchisors
understand the costs associated with
recruitment and set the fee at an
appropriate level to cover costs, including
appropriate overhead allocation costs and
not just direct marketing costs. It would
seem, however, too many companies
ignore executive time and other overheads
when reaching their calculation. For this
reason, it is difficult to compare like with
like in our survey, as we do not know what
costs franchisors are actually focusing on.
Many may be stating a figure to show the
company in the most favourable light and
therefore it was decided not to look too
deeply into the figures provided.
36 International Franchise Research Centre - Special Studies Series Paper No.8
■ Nevertheless, on the face of it, many
franchisors do seem to be making money
on the up-front fee relative to the cost of
recruitment and this is particularly the case
at the lower investment levels. For
example, 50% of franchisors in the
distribution sector estimate the cost of
recruitment to be £3-5,000 only, whereas
only 14% charge this amount by way of an
initial fee. Indeed, 35% of franchisors in the
distribution sector actually charge more
than £10,000 by way of an initial up-front
fee.
■ With regard to continuing management
service fees (or royalties), the accepted
view is that the level of remuneration
should be in direct proportion to the
provision of services provided and the level
of support staff available to the franchise
network. In terms of marketing, franchisors
need to bear in mind that most professional
advice given to franchisees will be to be
wary of those companies where the up-
front fee is high in comparison to the initial
start-up costs and the ongoing fees. These
factors do impact on a successful
recruitment policy.
■ Franchisees in turn, need to be wary of the
unethical companies that hitch their wagon
to franchising. They must thoroughly
investigate a company before entering into
any contract to join a network. It is always
advisable to obtain a list of franchisees in
the network and speak to a random
sample, to get feedback on the support
available and the underlying demand for
the product and service.
■ Those franchisors who get hung up about
front-end rather than back-end reward can
damage their prospects to expand in two
ways. Firstly, the ability to promote
franchises is made more difficult by the
natural reluctance and scepticism of
franchisees to pay for something in
advance. Secondly, the higher the up-front
fee, the higher the likely total start-up
package, with knock-on consequences so
far as the raising of finance and the fixed
costs of servicing debt are concerned. The
right message is to focus on the long term
mutual benefit of the franchise relationship
by linking reward to the profit potential of
 each of the franchised businesses. The
second point is to ensure that the initial
franchise fee is not confused with the total
start-up costs for a turnkey operation.
While it is legitimate for the franchisor to
initiate marketing plans that look to
maximise the sales of their franchisees,
this should not be at the expense of
franchisee profit margins, which naturally
causes problems in the network.
■ Franchisors who embark on national
expansion too early, and the vast majority
do, according to our survey, need to take
into account the costs of managing and
supporting a dispersed network of
franchisees. When considered with the
marketing disadvantages outlined earlier,
the approach of the inexperienced
franchisors in this respect often smacks of
a little desperation and a need to generate
cash from the initial fees in order to keep
the business going.
■ Complete transparency over the risk/
reward prospects and the payment
structure for the business will help to
minimise the discontentment some
franchisees feel later on once they become
established. The benefits of bulk
purchasing should be passed on to the
network. Franchisors should not be
frightened to admit when some of this
benefit passes on to them. Franchisees
should be in no doubt about the payments
due to the franchisor for management
services fees and for marketing purposes
in promoting the brand.
Currently, however, the only checks and
balances in franchising are the honesty and
standing of the franchisor, the advice given by
the BFA and professional advisers and the
degree of homework done by the franchisee
themselves. This leaves the market wide
open for abuse and challenges the wisdom of
self-regulation advocated by the BFA.
CHAPTER 6 - CONCLUSIONS AND
RECOMMENDATIONS
Our findings indicate that few companies
embarking on franchising have a full grasp of
the intricacies involved. Many proceed in a
naive way, with insufficient business
International Franchise Research Centre - Special Studies Series Paper No.8
experience in terms of company-owned
outlets and without due regard for pilots.
Others would appear to be attracted by a first
mover advantage on untested and rather
vague concepts. Too many enter franchising
for short term gain, lured by the expectation of
quick profits and revenues from the sale of
franchises, without due regard to the long
term consequences of their franchisees. In
this respect, the costs of entry to franchising
are not sufficiently restrictive to prevent those
that proceed in an unethical manner.
Given the many different types of franchise
available, conflicting messages abound over
what franchising is really all about, leading to
confused candidates coming forward and poor
conversion rates generally. Each franchisor
has to critically examine the package of
benefits available and the level of support
offered in their franchise and market the
salient benefits of the franchise to the public in
a bespoke and differentiated way. This is
largely tied up with the debate on the degree
of independence of franchisees. Where the
degree of inter-dependency is significant, for
example, it is more appropriate to promote the
partnership or proven business aspect of the
franchise in a marketing context. Too often
however, franchisors sell the message they
think franchisees want to hear, irrespective of
the reality of the situation. This is particularly
relevant to the plethora of franchisors who
promote the "be your own boss" drum to
death and those that make wildly inaccurate
claims in respect of the earnings potential
available in rather obscure and untested
franchises.
Many franchisors appear to be relatively
unaware of the segmented nature of the
population of prospective franchisees. Only
the most experienced of franchisors seem to
realise that prospective franchisees are less
concerned about the business format (i.e.
franchised or independent) than the business
sector of the franchise. As a consequence,
too few successfully identify target candidates
and promote the salient benefits to different
groups. This suggests that franchisor
decision-making is often more intuitive than
analytical.
Indeed, the majority of franchisors in our
survey confirmed that they have the most
37
difficulty in targeting potential franchisees. A
connected problem clearly exists for
marketing generally. In essence, it would
seem most franchisors are unsure who their
potential targets are and how to reach them.
Perhaps this is because of insufficient
analysis at the outset, or the qualifying criteria
for a franchisee being too low. For those at
the higher end of the quality spectrum, the key
must be to ascertain a genuine understanding
of suitable candidates for the franchise by
identifying such factors as age, gender,
education, business sophistication,
communication skills, personality traits and
career objectives, etc. (Sluman, 1991). Only
then can the promotional mix be tailored
specifically to the target audience.
Meantime, many franchisors seem to be
scratching around in the dark. They indicate a
preference for franchise exhibitions over other
communication channels and yet turn up with
poor quality promotional material that is
lacking in depth or transparency. Similarly,
advertisements are drafted with misleading
information, which inevitably distorts the
message to potential franchisees. Perhaps a
leaf can be taken from Brian Smart's book,
when he indicates that good franchisors are
about concentrating on the image they want to
project to the public and ensuring that the
marketing effort is directed towards getting
the right amount of serious information
through to potential candidates. The use of
editorial and other PR coverage can be quite
successful in this context.
Although conversion rates in our survey are
generally better for the inexperienced, rather
than the experienced franchisors, this has
probably more to do with the degree of care
taken over the selection of suitable candidates
than with effective marketing or the underlying
product or service. There will be exceptions to
this rule, of course. The more experienced
franchisor, however, having had problematic
franchisees that take up a disproportionate
amount of management time, will raise the
quality standards of acceptable franchisees to
themselves, as a reaction to these problems.
Those in the early stages of high growth are
less reticent. Given the importance, however,
of early franchisees to the franchise, they are
most likely storing up problems for the future.
Expert advice suggests that it is much better
38 International Franchise Research Centre - Special Studies Series Paper No.8
to build a solid foundation of good franchisees
than to grow too quickly, as it is successful
franchisees that are the best marketing tool
for any franchise.
The question of local or national recruitment is
closely connected with this strategy. The vast
majority of franchisors in our survey were
recruiting nationally. There was no noticeable
difference either by length of time in
franchising, or across the franchise sectors, in
this instance. This policy would appear to be
sales driven, particularly, for the
inexperienced franchisors. From a
management and control point of view it does
not make sense otherwise. Controlled growth
from a regional base, on the other hand,
would allow franchisees to benefit from brand
recognition in the community and by the local
marketing ideas and initiatives of other
franchisees and would also keep down the
cost of franchisor support.
The majority of franchisors in our survey, also
preferred candidates without prior self-
employment experience. This became more
marked with experience in franchising. It
seems sensible to deduce from this that
franchisors have had problems in this area.
However, this may have more to do with the
quality of the franchisor than the quality of the
franchisee. In any event, ruling out candidates
with prior self-employment experience will
leave franchisors fishing in only half the pool.
For example, 50% of visitors to the exhibition
in Birmingham, were either in, or previously
had self-employment experience. Indeed,
according to research by Stanworth and
Purdy, many more respondents in the self-
employed category were prepared to state a
definite intention to purchase a franchise than
those without self-employment experience. As
earlier research shows that those with prior
self-employment experience are less likely to
fail, the onus would seem to fall on franchisors
to review their general attitude towards
recruitment in this area. Perhaps, this would
be an ideal area for further research.
The bias against prior operating line
experience was even more overwhelming.
The vast majority of franchisors preferred
candidates that were new to the business
sector. This perhaps, reflects the lack of
company-managed outlets in our survey, as it
is likely that a very different view, would be
held by franchisors looking to convert
company-owned stores to franchise stores.
Accepting the point, that operational
compliance with the franchise system is a
prerequisite for all franchisees, are the old
arguments about prior operating line
experience and bad habits still relevant
today ? Or is it that most franchisors are
working on the premise, that those with years
of training and experience in a given industry,
are not likely to perceive the benefits of the
franchise in quite the same light as a novice ?
This may also be an interesting angle for
further research.
Certainly, in the view of all the interviewees,
good franchisors with a proven business
format, and a marketable USP, need not
underestimate the appeal of their franchise to
either of the above groups. All agree that it is
extraordinarily hard being in business on your
own. If the experience of those emanating
from either of the above sectors, therefore,
can help to create the right conditions within a
franchise network so that entrepreneurial flair
flourishes, then this will be of immense benefit
to most franchisors thereby enabling them
and their franchise to appeal to a much wider
audience.
With regard to franchisee selection, the
screening process of a significant number of
franchisors is not sufficiently developed. While
a minority use psychological profiling
methods, most rely on the application form
and the interview. In many cases, however,
the application form does not touch the points
of sensitivity necessary, to identify the
attributes of candidates for the franchise.
Many inappropriate candidates proceed not
only to interview, but to be granted a franchise
on the basis that they have sufficient funds to
get started. This suggests that many
franchisors are driven by cash flow needs and
have low recruitment standards. This is
particularly the case, for both inexperienced
franchisors and at the lower investment levels
such as the distribution sector, where it may
be tied up with assessments of who can afford
to fail rather than on any positive criterion.
The personal chemistry between a franchisor
and franchisee should also be an important
factor in the selection process. Those
International Franchise Research Centre - Special Studies Series Paper No.8
franchisors in the high growth phase should
not leave the recruitment decision to a
franchise director (company employee) alone.
It is important that the business owners
remain involved in the final decision, as they
are most likely to be concerned with applying
the higher standards they set for themselves
in a more rigorous way. Given the low conver-
sion rates generally, it suggests that more
effort is needed by franchisors to weed out
inappropriate candidates at an earlier stage.
In this regard, perhaps more use should be
made of 'on-the-job assessment' techniques
to measure particular skills or experience,
prior to granting a franchise, given the
concerns of existing franchisees on unsuitable
new franchisees entering the system.
Many candidates drop out of the selection
process through a failure to raise the finance.
Having got to the stage of producing a
business plan, it follows that franchisors must
reckon that they have the necessary attributes
for the franchise. Given this problem, joint
ventures and deferred purchase
arrangements can perhaps be used
successfully by franchisors, to provide a
vehicle through which prospective franchisees
who have the necessary attributes to run a
franchise but lack sufficient funds, can be
brought into the network (Abell 1994). This
can be particularly helpful in selling an existing
franchised outlet to a new franchisee, for
example. Similarly, it can be used both to
allow existing franchisees the opportunity to
expand and become multi-unit operators, or
through the conversion of existing managed
outlets into franchised outlets. A variety of
arrangements are possible, but the essential
structure is one where a new company can
effect a stage-by-stage buy-in mechanism
based on certain predetermined targets being
achieved. As each target is reached, the
potential franchisee will take another tranche
of shares in the franchisee company until
such time as he owns all the shares.
According to two leading figures, Brian Smart
and Martin Mendelsohn, it is not uncommon
for both the best performing and the worst
performing franchisees to become
problematic in a franchise network in some
way. In the majority of cases, those in the
middle, comprising approximately 70-80% of
the network, are the solid core that keeps the
39
network intact. This suggests that neither the
know-it-all or the naive are likely to make good
franchisees, and the former may explain the
attitude of franchisors to self-employment and
prior operating line experience mentioned
earlier, although it is difficult to generalise. In
any event, it is suggested that those who
understand the importance of rules and
procedures and display a willingness to follow
them are likely to make the best franchisees.
In our survey the following reasons for
problematic franchisees were given:
The worst performing franchisees
■ insufficient funds
■ inappropriate skills
■ poor chemistry with the franchisor
■ lacked the drive, ambition and enthusiasm
necessary to build a business.
The best performing franchisees
■ pig-headedness
■ having ideas above their station
■ disillusionment with the system and
support given
■ a craving for independence
■ looking for a way of breaking away from
the post-contract constraints.
The top performing franchisees also create a
problem for the franchisor because of their
key influencing role in the network. Perhaps
an important consideration in the recruitment
process, therefore, is to identify high potential
candidates and harness their talent and
energy by giving them a platform on which to
put forward ideas for improvements to the
system. Anecdotal experience confirms that
the identification and implementation of best
practice amongst franchisees in a franchise
network, for example, separates the top
companies from the rest. Open communica-
tion channels and the empowerment of
franchisees are key to this process. Recent
events in the USA suggest that franchisee
40 International Franchise Research Centre - Special Studies Series Paper No.8
representation is to be welcomed in a
franchise network through franchisor
acceptance of franchisee associations. Many
existing franchise networks do not have such
an association in the UK. In the future, it may
also be important to have franchisee
representation at a national level through
either a National Franchisee Association or by
widening the membership of the British
Franchise Association.
The findings on the setting of fees, add weight
to the theory that they are set and monitored
in an ad hoc fashion, largely driven by what
they can get away with or by what the
competition are charging. The costs
associated with recruitment are managed in a
similarly haphazard way. For example, only a
small minority of franchisors set the fee at the
£3-5,000 level, whereas a much larger
number estimate this to be the actual cost of
recruitment. In general, most franchisors
tended to pitch their franchise fee at £5-
10,000 level. Those in the distribution sector,
in particular, seemed to be making money on
the up-front fee relative to the estimated cost
of recruitment.
It did not necessarily follow, however, that the
recruitment costs were actually lower with the
increased experience of the franchisor. For
example, 50% of franchisors in the most
experienced category estimated the figure to
be between £5-10,000 with 8% suggesting the
figure to be in excess of £20,000. Indeed 17%
in this category were not able, or not willing, to
put a figure on the unit cost of recruitment. It
is certainly important that recruitment costs
and fees are strictly monitored by franchisors,
yet too many companies ignore executive
time and other overheads when reaching their
calculation in respect of recruitment. Where
recruitment costs are posing a problem, then
the level of fees or the split between initial and
continuing fees will need to be revisited.
With improving conversion rates in mind,
franchisors should also be conscious of the
professional advice given to franchisees to be
wary of franchisors where the up-front and
continuous fees are high in relation to the total
start-up costs. The level and split between
initial and ongoing fees can say a lot about the
ethics, attitude and standing of the franchisor
and therefore impact on the marketability of
the franchise. Ethical franchisors are about
thinking long term rather than short term.
Fees should be set in proportion to the level of
service offered, but with the initial fees
established at a level to cover the costs of
recruitment, including the training aspect.
Given the low level of knowledge about
franchising, however, in this country, many
franchisees are vulnerable to sharp practice
from unethical operators. Many other suitable
candidates are put off by the hype that
surrounds franchising and closely associate it
with more unsavoury business activities.
In summary, our analysis by length of time in
franchising indicates that franchisor
expansion tends to follow a general behaviour
pattern of:
■ 1: initially shooting in the dark, influenced
in large part by the competition and the
perceived wisdom in the industry
■ 2: to getting a little arrogant, a feeling of
having got things under control and a belief
that franchising is relatively easy
■ 3: to a period of re-examination and loss of
confidence, as the mature franchisees get
more powerful and begin to flex their
muscles and cause disruption in the
network
■ 4: to uncertainty over future recruitment
policies and indeed recruitment
candidates.
The Future
With regard to improving the image of
franchising, the comments of Brian Smart are
pertinent when he says that:
"There are an enormous amount of
people who have never thought of
franchising. What kind of promotional
programme and at what cost would it
take to reach them ? - Not necessarily
to sell them franchising but to give
them an opportunity to consider it."
However, there are a whole range of issues
about communication, education, knowledge
and standards which lie at the heart of the
International Franchise Research Centre - Special Studies Series Paper No.8
recruitment problem - i.e. the reputation of
franchising in the UK. The focus by leading
practitioners, therefore, should be on ensuring
that a consistent message is put out about
franchising - which means tighter controls on
advertising and exhibition accreditation and
setting out in a clear way, through an
authoritative body with stiff membership
accreditation, what franchising represents.
This does not mean a focus on tightly
controlled definitions of franchising but has
more to do with the identification of good
practice and the condemnation of bad practice
in franchising.
With the improving of standards in mind, there
should be more educational seminars about
good practice in franchising using US
experience where necessary, through the
local LECS and TECS in Scotland and
England, and the leading business schools.
The purpose being to not only raise the
knowledge of franchisees on franchising, but
the franchisors too. Smart mentions, for
example, that:
"The BFA go on at length about
franchisees doing their homework, and
this is fine, but it would be much better
if many more prospective franchisors
were to do the same thing."
Improved media standards are also
necessary as they are responsible for a lot of
misleading information about franchising
which tends to distort the message. For
example, is it about "being your own boss",
given the degree of control vested by the
franchisor over the franchisee? World class
companies like McDonald's, on the other
hand, are all about promoting the partnership
aspect of their franchise. While in their case,
it normally extends to an investment in the
bricks and mortar of each outlet, the
remainder of their package can be emulated
by companies with much less financial
resources but with the will to do it right.
In the meantime, many argue that if the
franchise industry is conducting itself in a
responsible manner, it can avoid having more
rigorous restrictions in the form of legislation
placed upon it. According to Ishani (1995),
there are compelling commercial reasons for
avoiding statutory regulation, but legislation
41
has one big advantage over self-regulation
and that is "the law has teeth". In a self-
regulatory environment, for instance, there is
clearly very little the BFA can do about
compliance with a code of ethics nationally,
when non-member companies offering
franchises to the public are in the
considerable majority. Ishani suggests, that if
the current self-regulatory system is to survive
then it needs to be strengthened in two ways.
The first is a requirement that all franchisors
register with, or be licensed by, a central
authority. The second, is that the central
authority should be given sufficient resources
and powers to keep franchisors on the straight
and narrow.
These arguments are closely connected with
those about pre-recruitment disclosure for
franchisors advocated by many other lawyers.
According to Abell (1995), for example, the
BFA should take its ethics a stage further by
developing a standard form of disclosure and
then actually actively police its members to
ensure they comply with it. He argues, for
example, that the BFA do not currently police
the vague and general disclosure
requirements included in their code of ethics
at present and this intransigence can only
bolster the case for statutory disclosure in the
period ahead.
Given the current regulatory debate in
franchising, perhaps, a compromised solution
would be a voluntary disclosure policy,
developed around the framework currently
being considered in Canada. This requires
each franchisor to maintain an Information
Circular, which is updated annually and given
to franchisees prior to recruitment. The
information provided includes the following
(Goodman LaPointe Ferguson, Franchise
Bulletin):
■ A brief history of franchised business
including audited financial statements.
■ The disclosure of the names of each
shareholder having more than 10% of the
voting shares and a brief history of their
business experience.
■ A list of all existing franchise locations and
the date they joined the system together
with details of any franchisee association
42 International Franchise Research Centre - Special Studies Series Paper No.8
or advisory councils.
■ A list of all corporate outlets owned by the
franchisor and the operation dates for
those outlets.
■ Details of the required investment divided
among the various categories such as
initial franchise fee, initial capital
expenditure, initial inventory, leasehold
improvements and ongoing working capital
requirements.
■ A statement with respect to any previous
bankruptcy of the directors or controlling
shareholders for the preceding 10 year
period.
■ A description in reasonable detail of any
ongoing material litigation with present or
former franchisees.
■ Details of convictions under the law by the
directors or controlling shareholders for
fraud, embezzlement, misappropriation of
funds etc.
The adoption by the BFA, however, of a
programme along these lines would have
political implications which would clearly
impact on its membership given the ease with
which members may currently join. However,
perhaps the real question the BFA should be
asking itself is whether or not a policy such as
the above would be for the long-term good of
franchising ? As we mentioned earlier, most
governments are looking towards self-
employment and small business as an
important source of future jobs. As the
advantages pertaining to franchising become
more clearly understood in this country, it is
likely to appeal to a growing number of
businesses and potential franchisees.
Opportunities will be provided by the advance
of new technology, more working women and
an ageing population - but can franchising
attract the right quality of company to come
forward and thus elevate it to become the
established business practice that it is in the
USA ? All of the leading figures interviewed
certainly believed there to be immense scope
among small, medium and large companies
for achieving growth through the franchise
system - but they felt that companies were
slow to take advantage of the opportunities
available. Why ?
However, it remains the case that franchising
as a method of business operation is still in its
infancy in this country. The experiences of
mature markets in the USA and Canada,
where research and data-gathering is more
developed, can be useful in setting the right
direction for franchising here (Stanworth &
Purdy 1994). Given the current size of the
BFA and its limited resources, it regrettably
does not have sufficient resources or standing
currently, to take forward alone a more pro-
active stance with government, academic
circles, leading companies, or the professional
community, in respect of applying higher
standards to franchising and therefore
something has to give in this area as we
proceed to the new millennium. In the writer's
view what is needed, is a clear vision of the
best way forward to increase franchising's
contribution to the economy of this country.
This means bringing together all the leading
figures in franchising with other relevant
parties, including the BFA, government and
industry, to consider the introduction of quality
standards to franchising to weed out the
unethical companies currently offering
franchises to the public. The aim of any new
regulatory body must be to lift standards and
encourage more quality into the industry,
thereby raising the reputation of franchising
along the way. The focus must be on getting
franchisors to do things right and to take a
long-term view on franchising. This means
proper pilot operations, tested and proven
operating systems, proper disclosure,
transparent marketing material, including
conservative and sensible advertising to
reflect the real potential of the business,
before offering a franchise to the public. If all
franchise companies were approved by a
meaningful accreditation system, driven by
the highest quality standards, then this may
also provide the stimulus to encourage many
more individuals contemplating their own
business to consider franchising. Having put
its own house in order, the franchise
recruitment activities of franchisors would
then shift to a higher level which would bring
mutual benefits to both franchisor and
franchisee.
International Franchise Research Centre - Special Studies Series Paper No.8
REFERENCES
ABELL, M. (1992)
The Franchise Option, Waterlow, London
ABELL, M. (1994)
‘Recruiting Through Joint Venture’, Franchise
World, Sep-Oct
ABELL, M. (1995)
‘Comment: Athena Rescue’, Franchise World,
March-April
BRADACH, J. & KAUFMANN, P. (1988)
‘Franchisee or Independent Businessperson : some
observations on the Decision Process’ in: Research
at the Marketing/Entrepreneurship Interface, HMS,
G.E. LaForge, W. University of Illinois at Chicago,
pp.38-48
CHERKASKY, W. (1994)
Statement made by Bill Cherkasky President of
International Franchise Association, IFA
Convention, Las Vegas
CHURCHHILL, G.A. Jr. (1991)
Marketing Research: Methodological Foundations,
Fifth Edition, The Dryden Press, Hinsdale, Illinois
CROFT, N.L. (1987)
The Franchise Difference, Nations Business,
October, p.33
DALY, M. & McCANN, A. (1992)
‘How Many Small Firms ?’, Employment Gazette,
February
DANDRIDGE, T.C. & FALBE, C.M. (1994)
‘The Influence of Franchisees Beyond Their Local
Domain’, International Small Business Journal,
Vol.12, No.2
DANT, R.P. (1994)
Motivation for Franchising: Rhetoric Versus Reality,
Working Paper - Department of Marketing, Boston
University School of Management
DISENHOUSE, S.L. & LEBOVICS, D. (1995)
‘Canadian Franchise Association Introduces New
Voluntary Disclosure Guidelines’, Franchise
Bulletin, Goodman LaPointe Ferguson, Winter
43
FELSTEAD, A. (1993)
The Corporate Paradox - Power and Control in the
Business Franchise, Routledge, London and New
York
FRANCORP FRANCHISE CONSULTANTS (1993)
‘Franchising Playing to Packed Houses’, Advertorial
in Nations Restaurant News, December
GAUTHIER A.M. (1995)
‘The Invisible Party in a Franchise Relationship’,
Franchise Bulletin, Goodman LaPointe Ferguson,
Winter
HARRIS, G.D. (1993)
Franchising : A Commercial & Legal Guide,
Wragge & Co
ISHANI, M.G.K. (1995)
‘Statutory Registration’, Franchise World, Jan-Feb,
pp.40-42
ISHANI, M.G.K. (1994)
‘Selection Perfection Part II’, Business Franchise
Magazine, September
KEZIOS, S.P. (1992)
Statement of Susan P. Kezios on behalf of the
American Franchise Association, Franchise and
Business Opportunities Committee, North
American Securities Administrators Assoc,
Minneapolis
KNIGHT, R.M. (1984)
‘The Independence of the Franchisee
Entrepreneur’, Journal of Small Business
Management, April, pp.53-61
KNIGHT, R.M. (1986)
‘Franchising from the Franchisor and Franchisee
Points of View’, Journal of Small Business
Management, July, pp.8-15
MENDELSOHN, M. (1989)
How to Evaluate a Franchise Fifth Edition,
Franchise World Publications, London
MENDELSOHN, M. (1994)
‘Profiting from a Support System’, London Evening
Standard, Monday 14 November
MENDELSOHN, M. (1995)
‘Taking the Plunge’, London Evening Standard,
Monday 13 February
44 International Franchise Research Centre - Special Studies Series Paper No.8
MENDELSOHN, M. & ACHESON, D. (1989)
How to Franchise Your Business, Franchise World
Publications in association with Stoy Hayward
Franchising Services, London
National Westminster Bank/British Franchise
Association Franchise Survey (1993)
Business Development Research Consultants
PILLING, B.K. (1991)
‘Assessing Competitive Advantage in Small
Businesses: An Application to Franchising’, Journal
of Small Business Management, Vol.29; No.4,
pp.55-83
RUST, H. (1991)
Owning Your Own Franchise, Englewood Cliffs,
NJ: Prentice Hall
SEN, K.C. (1993)
‘The Use of Initial Fees and Royalties in Business
Format Franchising’, Managerial and Decision
Economics, Vol.14, pp.175-190
SLUMAN, A.J. (1991)
‘Franchising and Licensing: Two Ways to Build
Your Business’, American Management
Association Article
SMART, B. (1994)
‘Cross-Talk’, Franchise World, May-June Edition,
pp.45-48
SMART, B. (1995)
‘We Have The Means If You Have The Will’,
Business Franchise Magazine, March
STANWORTH, J. (1993)
‘The Dark Side of Franchising or Appreciating
Flaws in an Imperfect World’, International Small
Business Journal, Vol.12, No.2
STANWORTH, J. & PURDY, D. (1994)
The Impact of Franchising on the Development
Prospects of Small and Medium Sized Enterprises
(SMEs) in Europe, International Franchise
Research Centre, Special Studies Series No.4
STANWORTH, J. & PURDY, D. (1993, 1994)
The Blenheim Group plc/University of Westminster
Franchise Surveys
STANWORTH, J. & SMITH, B. (1991)
Franchising for the Small Business, Blackwell
STANWORTH, J. KAUFMANN, P. (1994)
The Decision to Purchase a Franchise: A Study of
Prospective Franchisees in the US and the UK,
Working paper for University of Westminster,
London, and Georgia State University, Atlanta

STANWORTH, J., STANWORTH, C., GRANGER, B.

& BLYTHE, S. (1989)
‘Who Becomes an Entrepreneur ?’, International
Small Business Journal, Vol.8, No.1, pp.11-22

International Franchise Research Centre - Special Studies Series Paper No.8 45

INTERNATIONAL FRANCHISE RESEARCH CENTRE

The International Franchise Research Centre

(I.F.R.C.) is committed to improving the
understanding of franchising. This is achieved
by the publication of impartial research and by
the encouragement of informed debate.
Membership is suitable for anyone with an
interest in franchising and further details are
available from the address on the rear cover.

SPECIAL STUDIES SERIES

Papers in the Special Studies Series are

supplied free of charge to I.F.R.C. members
and are published a minimum of four times a
year. They report upon a range of issues
which are felt to be of interest to the
franchising community. Subject matter
includes the findings of surveys of franchisors,
franchisees, and potential franchisees, and
also special interest matters, such as finance
for franchising.

No.1 The Blenheim/University of

Westminster Franchise Survey:
Spring 1993

No.2 Improving Small Business Survival

Rates via Franchising: The Role of the
Banks in Europe

No.3 Targetting Potential Franchisees:

Industry Sector Backgrounds and
Declared Areas of Interest

No.4 The Impact of Franchising on the

Development Prospects of Small &
Medium-sized Enterprises (SMEs) in
Europe

No.5 The Blenheim/University of

Westminster Franchise Survey: A
Comparison of UK and US Data.

No.6 Developing a Diagnostic Questionnaire

as an Aid to Franchisee Selection

No.7 Franchising as a Source of

Technology-transfer to Developing
Economies

46 International Franchise Research Centre - Special Studies Series Paper No.8