Franchisee-owned franchisors are very rare, and account for probably less than five percent of the total number of franchise brands operating in Australia. 

Fewer than 55 out of approximately 1,100 franchise brands are owned (and controlled) by their franchisees. 

While these franchises on the surface might look the same as any other franchise their underlying DNA is very different.

Here is a brief overview of what sets franchisee-owned franchisors apart from the mainstream.

Franchisee-owned franchisors

In franchisee-owned brands, the franchisees own the franchisor, and usually control most – if not all – of the voting shares. Typically, these are unlisted public companies which must abide by many of the same reporting and regulatory requirements as listed companies that trade on the stock exchange.

Shares are either issued for a nominal amount (eg. $1) or at a certain value to provide initial capital for the franchisor. Share ownership is usually restricted to franchisees only. External shareholders are very rare, unless they are former franchisees who have been allowed to retain their shares under the terms of the company’s constitution, shareholders agreement or both.

Because the shares are often limited to franchisees, they are rarely sold on their own. But they might be transferred or cancelled and reissued to a new franchisee if an existing franchisee sells their business.

A franchisee-owned group, as an unlisted public company, must have a board of at least three directors, and a company secretary. Most franchisee-owned groups will have boards of between six to eight directors, the majority of which will be franchisee shareholders. In addition there will be at least one external independent director to ensure that the board addresses the needs of the company as a whole without favouring any one franchisee (especially franchisee directors).

This is unlike public companies where franchisees could potentially become small, minority shareholders via the sharemarket, in franchisee-owned unlisted public companies franchisees have either full or majority ownership control of the franchisor.

Simple fee structure and financial transparency

Unlike mainstream franchises where franchise fees (also known as royalties) may be charged as a percentage of a franchisee’s gross sales, franchisee-owned groups typically charge substantially lower fixed fees for services such as support and IT.

Additionally, many franchisee-owned brands may have initially started-out as a buying group, and consequently will often negotiate group discounts for inventory and consumables required by franchisees, and also receive rebates from suppliers on these purchases.

Franchise rebates

Recent media coverage and the franchising Inquiry has thrown the issue of rebates under the spotlight, mostly because of concerns that franchisors are “double-dipping” by charging a royalty on sales, as well as inflating the cost of goods to franchisees by forcing them to buy with suppliers who pay the highest rebates.  The net result of this practise can squeeze franchisee margins too thin, and cause franchisees to go broke.

In franchisee-owned groups, there is no royalty charged on the top line, so no double-dipping. Further, the rebates should still result in overall cheaper prices to franchisees compared to what they could achieve for themselves. Finally, most franchisee-owned groups will share their rebate income with their franchisees by contributing some to the brand’s marketing fund, or refunding a portion directly back to the franchisees.

Additionally, franchisees can usually buy extra services (eg. bookkeeping, local area marketing, inventory management, merchandising, etc) from the franchisor on a straight fee-for-service basis.

As unlisted public companies, these franchisee-owned franchisors must be completely transparent to their franchisee shareholders, and provide a detailed financial breakdown of their activities each year in the annual report and the annual general meeting of shareholders.

Focus on franchisee, not franchisor, profits

Shares in franchisee-owned groups are held by the franchisees and are generally only traded when a franchisee sells their business, or in some cases, cancelled altogether with a new share issued to the new owner. Consequently there is little or no capital growth, and dividends may rarely – if ever – be paid. 

Instead of being rewarded by share growth and dividends, franchisee shareholders are instead rewarded by their franchisor’s focus on growing franchisee profitability and improving franchisee welfare. 

Mainstream franchisors with royalties based on franchisees’ sales will be naturally inclined to focus on sales growth, potentially to the detriment of franchisee profit. This was exemplified by one of the findings of the franchise Inquiry which noted that mainstream franchisors can potentially manipulate their business models in order to transfer profits from the franchisees to the franchisor.

While profit is necessary to sustain a business’ future reinvestment needs, franchisee-owned groups typically earn very modest profits because they reinvest heavily in improved services and support for their franchisees each year.  For example, in lieu of share dividends, franchisee shareholders are rewarded by business services to grow the profitability of their own individual businesses.

Strong sense of community and values

The head office teams of franchisee-owned franchisors have much greater empathy for their franchisees, because they are both their principal stakeholders, as well as owners. This drives a strong set of values in the group, and facilitates a sense of community among franchisees and support personnel often far stronger than that found in mainstream franchises, because every franchisee is “one of us”, more so than a potential head office perception of “us and them”.

Higher levels of franchisee satisfaction

Franchisee-owned groups typically score substantially higher satisfaction results than mainstream franchises.  While franchisees in any group can become dissatisfied, franchisees who own their franchisor have much greater capacity to influence those things which cause them dissatisfaction through the influence available to them via their ownership and board representation. Equally franchisees are more likely to focus on the greater good than their own self interest out of consideration for their peers.

Franchisees also typically stay longer in franchisee-owned groups, and due to their higher satisfaction levels (arising from sound profits, among other things) are more inclined to become multi-unit operators.

The nature of the businesses are different

Franchisee-owned brands often operate in stand-alone locations, and sell products or services which are usually high-value, low-frequency purchases (eg. market niche specialists in paint, irrigation equipment, hardware, tools, floor coverings, cameras, leisure services, etc).

Consequently, these often operate from large-format free-standing premises, well clear of shopping centres with restrictive lease conditions. Franchisees are more likely to hold their shop leases in their own name, and in some cases may even come to own the building too.

It is very rare to find a franchisee-owned group in fast-moving, low-value businesses, such as fast food, cafés and restaurants, which are commonly associated with mainstream franchising.

Greater flexibility in franchisee-owned franchisors

Many franchisee-owned groups were originally formed as buying groups to help existing businesses pool their purchasing power to get better prices from suppliers. Existing independent businesses in the same industry may choose to opt-in to join these brands to improve their buying power, and subsequently discover the many other benefits of being part of a branded group.

However, there is typically also a greater level of individual flexibility in how franchisees operate their businesses in these groups. This is partly because the franchisor is less likely to be as highly prescriptive outside certain core requirements as in a mainstream franchise, and also because individual franchisees have greater freedoms to satisfy the needs of their customers locally. (For example, not all paint stores that sell paint for houses, will also sell paint for cars). 

Individual flexibility in business operations exists in all franchises to some degree or another but tends to be greatest in franchisee-owned groups.

Franchisees can be highly effective franchisors

This article has summarised a few of the key elements which set franchisee-owned groups apart from mainstream franchises, and which create major points of difference in the nature of the relationship between a franchisor and its franchisees.

Franchisee-owned groups can be highly effective franchisors due to their focus on the welfare of their franchisees, and provide business growth and opportunities not found in mainstream groups.

A special Round Table Forum for CEOs and officeholders of franchisee-owned franchisors will be held in Melbourne on Tuesday, November 19.  For more information, contact jason@franchiseadvice.com.au

This article has been updated to reflect a change in venue and date for the Round Table Forum for CEOs.