Risk and Reputation for Franchisees

It’s an unenviable position for those people in the parent company of a franchise business. A colleague once described it to me as “handing over the keys to the car, being locked in the boot and not knowing where you are being driven, but still being responsible for the insurance”.

Although a little extreme, it’s a sentiment I can appreciate. I imagine this is how many franchisors feel in this role. With an increasing focus on culture, governance and accountability, there are things that can be done to ensure the reputational fall-out at a franchisee level doesn’t damage the reputation and standing of the entire business.

Many franchise models rely on the acquisition of smaller firms. While the financials need to be poured over, there may be one element that is missing from many due diligence processes – the assessment of cultural fit and agreed expectations.

M&As often fail to include cultural factors when the due diligence is being done, yet it is critical to the risk and reputational process. Research shows that cultural differences are one of the key reasons for M&A failure.

On one deal I was involved in, we arranged to work out of their offices for two days and it proved to be the most useful part of the due diligence process. It allowed us to see the team in action, observe their interactions and test whether they were going to be aligned to our organisation’s values. After two days we made the decision not to proceed. It saved the tricky issue of dealing with earn-outs and alignment of operations post acquisition when there was little likelihood of getting the cultural alignment right.

Many franchise owners/managers are blessed with terrific entrepreneurial skills and are driven to grow and develop their business. But this growth can sometimes come at the expense of good process or the franchisee feeling like a “small business”. Although this can accelerate growth, we have seen occasions where employees in those businesses don’t feel they can speak up. This is driven by the natural power imbalance along with a disconnect from the support services available in head office. For the parent company, they need to identify ways to support those employees effectively and build a supportive culture while balancing the franchisee’s entrepreneurial benefits.

There is a lot of great elements of franchise models but both parties need to be aware of the risks and rewards and work to ensure that everyone shares equally in these.

Lindall West | Managing Director
+61 412 728 828

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