A franchisor’s first few franchisees can be their greatest marketing tool or biggest hindrance in franchising. They will be the people that prospects will be contacting to get a better understanding of several aspects of the franchise system – many of which the franchisor cannot directly talk about. With that in mind, it is key that start-ups as well as small and mid-sized growing franchisors consider who their franchisees should be. Here lies the tension between the owner/operator vs. the passive owner/investor. Historically, many concepts such as fast food restaurants, car repair concepts, etc., believed that it was vital for the majority owner of the franchisee to have complete skin in the game and have the franchise serve as his/her livelihood. The franchisee was expected to run the business and live in geographic proximity to the units. In fact, several concepts would not permit a franchisee to gain a second unit until they could prove that they could effectively operate the first.
The other end of the spectrum has the owner/investor – this franchisee generally makes their livelihood from a different profession such as a doctor, financier, CPA, etc., and hire managers with no ownership interest to operate the units. These passive franchisees have the financial capacity to own multiple units but do not seek to run the day to day operation.
Generally, established franchisors have broken away from the owner/operator concept as a practical franchising matter. Yet, for start-ups and smaller systems, it can be important to make sure that the franchisee has total commitment to the brand and is on the ground making sure that the unit is being operated correctly on a day to day basis. A start-up may be presented with an investor who is willing to purchase multiple locations but who has no desire to partake in the day to day operations. It can be quite difficult to pass up on a prospect who is well-healed but seeks a passive role (this is not to say that there aren’t investors and groups out there that have proven success in owning and operating units).
While there is no “right” answer to this issue, it is something that every start-up should think about at the onset. How much value do you place on having a franchisee that treats his unit as his livelihood vs. an investor that will rely on a general manager with no ownership interest. Is it a wise business move to provide an investor with multiple units before they have demonstrated their ability to run one unit? Who is the right franchisee for your system at the beginning?