A Tale of Two Franchise Expansion Strategies
There’s more growth in area representation than meets the eye
By Marvin L. Storm
“It was the best of times, it was the worst of times.”
The classic A Tale of Two Cities is a story of two individuals, Charles Darnay and Sydney Carton, who are similar in appearance but have very different personalities. In many ways, franchise growth strategies for new concepts, as well as for mature franchise companies, may look very similar but, in fact, are nothing alike.
Why is this? And what are the secrets to success of different franchise expansion strategies? What are the most common mistakes franchise companies make in deploying aggressive franchise expansion strategies?
Over the years, I have seen great franchise concepts with enormous potential fail because well-intentioned growth strategies are poorly executed. Yet mistakes are avoidable if a few simple, proven concepts are incorporated into the execution of these growth strategies.
This is the first in a new regular column for Franchise Update that will address best practices, effective strategies, and useful methods to succeed in one of the fastest growing, most effective, but least understood growth strategies in franchise today: area representation.
What is area representation?
Many people confuse the term, “area representative” with “master/ subfranchising” or “area development.” When discussing area representation as a growth strategy, it is important that everyone speak the same language. This can be challenging, because each franchise company uses their own terminology when referring to their expansion strategy.
For the purposes of this column, an area representative is defined as: someone (who may or may not be a franchisee) with the right to seek out franchise candidates and provide marketing and operational services to franchisees within a predefined geographical territory. This is in return for a percentage of the initial franchise fees and ongoing royalties. However, the contracting parties are the franchiser and franchisee, not the area representative and franchisee.
Recently, I eavesdropped on a conversation between the founder of an emerging franchise company and the CEO of an “old-school” franchise company. The conversation went something like this:
Founder of new franchise company: “I’m thinking of using area representation as an expansion strategy to grow my company.”
CEO of old-school franchise: “That’s a stupid idea. Why in the world would you want to give up 40 to 60 percent of the initial franchise fee and ongoing royalties to someone who is not going to do a good job of finding a qualified franchisee or providing adequate support to them after they are in business? Area representation is the biggest bonehead idea in the history of mankind.”
These are legitimate concerns. It appears the old-school CEO had direct experience with under performing area representatives. Yet, if the right area representatives are recruited and managed properly, area representation is one of the most powerful accelerators in franchise growth today. If executed properly, a small, relatively insignificant franchise concept can become a dominant force in the marketplace in just a few short years! How? It’s all in the numbers:
Recruit 50 franchisees, and you get 50 times the annual revenue, multiplied by the royalty fee, as the revenue stream for the franchise company.
Recruit 50 area representatives with a minimum development schedule of 40 units, and you have 50 area representatives times 40 franchises. Multiply that by a lesser percentage of the royalties (because the royalties are shared by the franchiser and the area representative) as the top-line revenue of the franchise company.
If you plug in realistic numbers to these equations, what do you get?
| 50 | Individually recruited franchisees | |
| x | $400,000 | Revenue for an average unit |
| = | $20,000,00 | |
| x | 5% | Royalty |
| = | $1,000,000 | Top-line revenue for the franchise company |
| OR… | ||
| 50 | Area Representatives | |
| x | 40 | Unit development schedule |
| = | 2,000 | Units |
| x | $400,000 | Revenue for an average unit |
| x | 5% | Royalty |
| x | 50% | Paid to the area representative (an average, since percentages range from 40%–60%) |
| = | $20,000,000 | Top-line revenue for the franchise company |
The question then becomes, which is more profitable?
Answer: It depends on the ability to recruit and support qualified area representatives, as well as holding them accountable for franchise development and supporting franchisees.
A well-executed area representative program can create tremendous value for a franchiser, while at the same time, quickly establishing brand dominance in the marketplace. This is key to emerging franchise companies, which have a limited window of opportunity to establish themselves before larger, better-capitalized players enter the market as competitors.
Write your own successful ending to your “A Tale of Two Franchise Expansion Strategies,” and you may well say, “It is a far, far better thing I do, than I have ever done.”
Join me for the next installment, where I’ll be discussing “The Three Biggest Mistakes Newbie Franchisers Make in Area Representative Franchising.”
Marvin L. Storm is managing director of Blackstone Hathaway, which specializes in using area representatives as a franchise growth strategy. He can be reached at 925-376-2900 x201 or mstorm@blackstonehathaway.com.