by Marvin Storm
| Area Representation
A Tale of Two Franchise Expansion Strategies
There’s more growth in area representation than meets the eye
“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 standing 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 franchisor 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 underperforming 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 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 franchisor and the
■ Tidbit
According to FRANdata,
more than 33,000
franchise units were
added durin of those we by multiuniig 2006. Half re developed t franchisees.
“Why in the world
would you want to
give up 40 to 60
percent of the initial
franchise fee and
ongoing royalties to
someone...?”
