Finding the right franchise partner

By Daniel During managing partner Thomas Klein International

Whether you are finding a joint-venture partner, an investor, or a franchisee, make sure you get along before any other consideration takes place.

I believe that if the chemistry and understanding are there, all business issues can be resolved. My dad always used to say, ‘If you don’t trust a handshake, don’t sign a contract’, and I still believe in this whole-heartedly.

Contracts and formal agreements serve the purpose of clarifying doubts, and should something go wrong or turn nasty later on, then you have something to fall back on. However, you don’t really look at the contract on the day-to-day business relations with your partner, and I have found that many times both parties go well beyond the contract stipulations. Many times you may do things for the other person that you may not always do, just for the sake of maintaining the relationship, and mostly you do so willingly because of the good relationship you have with them.

The second most important element in any business relationship is the good-will of your potential franchisee. Your potential franchisee may not always have the necessary knowledge to operate a franchise, but if there is willingness to learn, it is sometimes better than having someone who may have the knowledge, but who is not willing to implement it.

Having considered all the points above, you need to consider who is ‘technically’ the best business partner to be your franchisee. Ideally you want him to have a proven record of operating similar food and beverage concepts. Operating fast-food outlets is obviously very different to operating a premium or casual dining restaurant. Not only are the requirements and the skills required to operate these types of outlets different but the people at the front who will be dealing with your guests will also be considerably different, both in character and skills.

In parallel to the professional ability of your partner, you should also look at his financial capability. It is crucial for you to first look at your business expansion plan, and then analyse whether your potential franchisee has the financial capability to grant such an expansion plan.

If the franchisee does not have the finance available immediately, you need to define whether your potential franchisee can come up with the necessary funds to grant such an expansion, and also how he will obtain the funds or the loans required.

At this point you really need to ask yourself the following crucial questions: ‘Do I want to work with a franchise partner who doesn’t have the funds available immediately?’ and ‘Will the franchisee be able to obtain the required finance externally?’

A word of warning - be very careful in choosing a business partner who needs to finance future expansion plans, as that could involve paying high interest rates or mortgages, something that will eat from the profitability of the business.

Another consideration in choosing a franchise partner is whether you are dealing with an individual or a group of investors. It can be risky if you are dealing with the manager of a group and you don’t know the investor personally, as all the factors will be related to who ultimately calls the shots. And managers can change, while the owners in general remain the same. Ensure you know who makes all the financial decisions and who is ultimately the final decision-maker.

Finding an ethical partner with a proven track record, and whose values are in line with your values is also key. There are many things that can go wrong, or get misguided over a long period, and it helps knowing the actual investor or board director personally in case something ‘sensitive’ ever happens.

Last but not least, it is important to define your expansion strategy well before choosing a business partner or partners. Your expansion plan will determine whether you want to strategically have one partner for a full region, or whether you want to have a different partner in each country.

The advantage of having one partner per region is that it gives you less of a headache, as you only have to train one franchisee and deal with only one person for the entire region, which therefore demands fewer resources from you. In theory when you have one partner, once the systems are in place, the expansion is just exponential and things should in theory operate smoothly. However, is if it turns out that it is ultimately not the right partner, then you will have no good partners in the entire region. Putting all eggs in one basket is sometimes dangerous.

Having separate partners in a region means you will require a bigger support team to manage all the partners. But you can also expand faster as each franchisee will be opening simultaneously. Many different partners in a region also gives you the advantage of being able to charge multiple individual country fees, rather than having only one partner who will be negotiating a lower single territorial fee.

In conclusion, before you approach a franchisee, or reply to one who approached you, to expand your brand out of your territory, I recommend you focus on your requirements and expectations. Then evaluate the potential partner’s financial capability, his business ethics, area of coverage and experience in the business.

And once you have gone through the process of strategically shortlisting your potential partners based on the criteria above, meet them over coffee and see how the conversation goes...