How to Select a Franchise Supplier
By Carl E. Zwisler, III
You are reading a Directory of Members of the IFA’s Supplier Forum presumably because you are either curious about the membership, or because you need a product or service which may be offered by someone identified in the directory. At this time Supplier Forum members are represented in 32 business categories. These Supplier Forum members are a self-selected few among the thousands of companies that offer services and products to franchising companies. The companies listed in this directory have set themselves apart from the multitude of suppliers in two significant ways. By joining the Supplier Forum they have, through their dues contribution and, often, their active involvement in the organization's activities, demonstrated their commitment to the International Franchise Association (IFA), its members, their principles, mission and goals.
They have also made an effort to develop services and products that are specially suited for franchisors and franchisees. They have generally invested time and money to better understand and serve the needs and problems of franchising systems. As a result of their interest and experience, you, as a franchise company executive should have every reason to expect that these qualifications will make them better able to provide the programs, services, products, creativity and insights that can make a franchising organization more efficient and more profitable.
WHAT ARE “FRANCHISE SUPPLIERS”?
Franchise suppliers fall into two principal categories:
1. Those providing specialized professional services to franchisors as franchisors, e.g., franchise marketing, or packaging consultants, franchise lawyers, accounting firms and financial institutions which have developed services and products for special use and application to franchising companies, franchise executive recruiting organizations, franchise brokers, franchise publications, etc.; and
2. Those providing products or services that may be specifically modified or formulated for use through a franchise system, e.g., suppliers of uniforms, Internet services, computer systems, convention services, paper goods, inventory and supplies.
Most of the Supplier Forum members identified in this directory fall into the first category. Because this category of service and product is the type with which executives new to franchising are least likely to be familiar, and about which little has been written, more attention is given to dealing with them in the following pages.
WHAT MAKES FRANCHISE SUPPLIERS UNIQUE?
The very fact that they specialize in providing services and products to a unique form of business arrangement separates the franchise supplier from others. Supplier selection decisions made by franchisor executives normally have repercussions that are far greater than similar decisions made by executives in non-franchising companies of the same size. That is because the selection of an approved product, an insurance program, advertising, or financial institution can significantly affect the profitability and opportunity of numerous businesses operated by franchisees, as well as the economic stability of their employees, suppliers and creditors, in addition to the business of the franchisor.
A decision made about the product one franchisee carries will affect requests to carry the product made by every other franchisee. The new insurance or advertising program, new machine or product offering will generate costs and expected returns for all franchisees and the franchisor. Should the wrong decision be made, the blame will undoubtedly be placed on the franchisor company executive who struck the agreement. If an inadequate franchise agreement, business or financial plan is used, extensive damage may occur before the problem is fully appreciated. If the wrong franchise sales staff or broker is selected, the franchisor may either confront inadequate franchise sales, sales to unsuitable franchisees, or franchisees suing the franchisor for violations of franchise laws. A bad selection of a product supplier can result in poor or late deliveries, poor products, loss of customers, etc. By its nature franchising multiplies the opportunities for benefit and failure. That increases the incentive to exercise care in selecting suppliers.
If you are an executive new to franchising or an entrepreneur launching a franchising program, initial choices are extremely critical. The wisdom of the franchising advice you receive and follow may only become apparent one or two years after you have acted on it. Many new franchising programs have died following a major financial investment, principally because the executive received bad advice, or because the franchisor executives failed to seek or follow good advice. If you are a franchisee or prospective franchisee seeking for a product of service, you know the suppliers you select are often critical to your success as a franchisee. By virtue of being a franchisee you already have shown an understanding of the benefits of associating with people with the experience and vision you believe will enhance your own chances for success. That wisdom should guide you in selecting franchise suppliers who have demonstrated their competence with your franchising colleagues.
WHY IS ESTABLISHING A LONG TERM RELATIONSHIP WITH FRANCHISE PROFESSIONALS NECESSARY?
Franchising is a regulated industry; thus, the new franchise executive will need to develop an ongoing relationship with the suppliers of products and services that he or she employs. For example, preparation of initial franchise documents and registrations is only a first step in a franchisor's relationship with franchising professionals. On an ongoing basis franchising professionals need to be consulted about new advertising, amendments to agreements and offering circulars, new registrations, franchise sales representatives, trademark protection matters, contract negotiations, terminations, transfers, acquisitions, financing, franchisee associations, etc. New financial statements are required annually. Updates may be required more frequently. Franchise and consumer advertising and marketing programs are ongoing needs. And a sound relationship with financial institutions is required for growth of franchisors and franchisees.
Thus, it makes sense to select franchise suppliers whom you believe will be able to satisfy your company's growing needs over the long term. Changing lawyers, accountants, advertising agencies and other suppliers may be desirable or necessary; but it always requires the new firm to thoroughly review what the former firm has done and why, and to spend the client’s time and money to accomplish the familiarization.
THE FRANCHISE EXECUTIVE SHOULD NOT ABDICATE RESPONSIBILITY FOR PROJECTS TO SUPPLIERS.
As enticing as the idea sounds, delegating total responsibility for certain aspects of a franchising program to consultants or other suppliers may not work as well as most people would hope.
Consultants and suppliers can provide invaluable assistance, but only the franchise executive can make policy decisions about the franchising business. Regardless of the type of professional supplier retained, as a franchise executive you cannot afford to forget that you are responsible for making all decisions affecting your company, and that the most successful (and cost effective) use of professional consultants requires high level interface between the executive and the professional. The entrepreneur who expects that a franchise consultant can "franchise his company" and handle all the "details," without being intimately familiar with those "details" will have selected an uphill road to success.
When developing a new program or re-evaluating an existing effort, time and money can be saved by bringing all related professionals together for discussions at the outset of the project. To call in a marketing consultant after a franchise agreement is drafted, or a lawyer after all marketing discussions have been made, is wasteful.
DON'T USE A SUPPLIER YOU DON'T TRUST.
Your first task in selecting suppliers is to identify people whom you trust, who have established a reputation for understanding the needs of franchising companies and have been working with them over the long term. Absent that trust, the relationship is not likely to succeed. If a prospective supplier tells you things about his firm's services, products or prices which sound too good to be true, a thorough investigation may be called for. Experience, references, the resources of the supplier, training and licenses are the factors usually most important in checking out a prospective supplier.
A vital element in analyzing a supplier and its products and services is the experience of the supplier in providing other franchise organizations with products or services similar to the ones you need. A supplier with years of service to franchising organizations should be able to translate wisdom gained through those experiences into value for your company.
Of course not all experiences are good. Relevant questions to ask include: For whom have you supplied this product or service in the past? What was similar and what is different from what you are proposing to supply my company? How successful was the product, service or program for that franchisor? How can that success be translated to my franchising company? Does that company still use your products, services or program? If you are still interested in a business relationship with that supplier, you should follow up the discussion by checking the supplier's references.
The reputation of the supplier and the people who work in and with the supplier's organization is important. The experiences of those who have purchased and used the supplier's products and services are at least equally as important. You should ask competitors and other franchise company executives about the suppliers you are considering. You may be surprised at how candid and helpful IFA members can be in these assessments and suggestions. Of course you should make direct contact with franchisors who have used the supplier's products and services. Do not be reluctant to ask competitors about each other. And if the supplier purports to be actively involved in franchising, membership in IFA’s Supplier Forum is an indication of the supplier's franchising commitment.
Resources of the supplier may be very important to you. Can the supplier reasonably be expected to satisfy your present needs as well as your future needs as the franchise network expands? Is the supplier capable of providing support only on a local or regional basis? Does the supplier have the plant capacity, equipment or personnel necessary to consistently deliver the necessary products or services on time in the manner required?
Who will actually provide the promised services? What are their qualifications? How much, if any, of the work will be performed by subcontractors? What is the true relationship of the supplier to those who will be producing the product you need? Within a professional service organization, what involvement will the professional you seek actually have with your company's project or case? How much of the work will be performed by junior employees or associates? How much time will the person you are negotiating with devote to your needs?
Consider the advantages and disadvantages of the franchising "general contractor" who offers to provide nearly every conceivable professional and quasi-professional service a franchising company might need. The advantages of dealing with one trusted individual in whom responsibility for franchise related concerns of the franchise company is easy to understand. The executive needs to make only one supplier selection rather than many; he can deal principally with only the general contractor concerning business details, write one check, etc. The general contractor approach can enable the new franchise company executive to concentrate his efforts on a few areas rather than many.
Of course for every advantage, disadvantages also may arise. A bad choice in selecting the general contractor could doom the franchising project. The subcontractors' loyalty may be more to the general contractor than to the franchise company. Subcontractors may be of an uneven quality. The franchise executive may find that he has more confidence in working with professionals of his own selection, especially if the professional service will be required over many years. A dispute about quality standards or fees owed for one project or aspect of the project may bring the entire program to a halt. A subcontractor could incur financial or related difficulties and become unable to complete his aspect of the project. Members of certain subcontracting organizations, e.g., members of franchise brokerage networks could, if not properly trained or motivated, embroil the franchising company in litigation.
TRAINING AND LICENSES.
Whenever dealing with suppliers of professional services, the executive should determine whether the supplier possesses the requisite licenses to carry out the tasks in question. For example, business brokers or real estate brokers may require licenses in each state in which they operate. Accountants not certified (or chartered) may not be able to provide financial statements franchisors are required by law to provide to prospective franchisees. Most states require an individual to be licensed to practice law before preparing franchise agreements and offering circulars or before offering advice on the suitability of legal documentation. Architects, builders and financial institutions may require licenses in the jurisdictions where they operate. Many qualified professionals have worked to earn the required licenses; so why should you, as a franchise executive, even consider retaining an unlicensed "professional?"
TEST NEW SYSTEMS AND PRODUCTS BEFORE COMMITTING TO INTRODUCING THEM TO THE FRANCHISE NETWORK.
Before selecting a product or system which is intended to be introduced throughout a franchise network, the supplier and franchise executive should conduct field tests to determine whether the franchise chain's needs and expectations can be satisfied. Many suppliers will prefer to test products, or systems at the franchisor's facilities and work with the franchise company to eliminate any "bugs" which could undermine the success of the system or products. Many of the greatest sounding ideas and products have been tremendous flops when rolled out to the public. You should thoroughly understand liabilities and benefits before committing to an "exclusive" arrangement with a supplier and before incurring costs on a system-wide basis. Often franchisees will want to offer their own suggestions and experience about proposed new products and systems. Franchisor executives should listen carefully to franchisees when making such decisions.
Moreover, franchisor executives must be able to adopt efficient methods of assuring that the quality of products and services provided by suppliers to franchisees is consistently adequate. You should be wary of any supplier who balks at reasonable quality assurance requirements.
CONSULTANTS CAN HELP AVOID COSTLY MISTAKES.
When considering acquiring technological developments, e.g., computer systems, software packages, etc., an independent consultant may prove helpful in identifying the company's needs, competitive vendors and systems, compatibility of systems, likelihood of early obsolescence, and questions about the ability of the supplier to support its system, etc.
HOW YOU CAN KNOW WHETHER PRICES QUOTED AND TERMS ARE FAIR.
The price charged by suppliers is always an important factor influencing the rational franchise executive's choice of franchise suppliers. Of course, you should not select a supplier based solely on the cost of his products or services. The franchise executive should undertake to evaluate the quantity and quality of the products or services that would be offered by a prospective supplier, and compare them to the price and terms under which the same quantity and quality of products or services would be produced and distributed by a competing supplier. Are the proposed services or products identical? Are you able to compare apples with apples? For some products or services, e.g., commodities, brokerage services, a market price may not be difficult to determine. For other products and services, especially "intangible" professional services, determining a "market price" can be quite difficult.
Perhaps the most difficult cost for a franchising company executive to evaluate, especially in his first venture, is the cost of hiring consultants and other professionals. What is the right price to pay for advertising services, executive recruiters, franchise consultants, accountants or lawyers? The question is even more difficult to answer if the person responsible for making the decision is himself uncertain as to the precise nature of the services being offered, what his actual needs may be, how to evaluate the quality of the proposed and finished product, and what standards may govern the supply of the product or service in the industry. The franchising company executive's dilemma may be exacerbated by the inability of the professional supplier to define the necessary scope of his services at the outset of discussions with the executive.
From the professional's perspective, the inexperienced franchising company executive often asks questions comparable to, "how much will it cost to fix a car?" Imagine the response if the car is unseen, the model and year are unknown, the symptoms of the problem are only partially described, and, as in franchising, no two models are the same.
The first step the franchise executive should take is to outline the objectives of the project, and include a proposed timetable and budget. It is helpful to have outlined in advance any steps or procedures the executive believes the professional will need to follow to accomplish his tasks.
For example, will an advertising program have to be developed in conjunction with a franchisee committee? Has the present campaign already been undertaken? Is part of the job convincing a board of directors, outside shareholders, investors or upper management of the need for the program? Are consumer surveys relevant to your company's services available? What do they suggest the company's direction should be? What past efforts have worked and failed? The executive should by no means attempt to prematurely restrict the scope of the professional's inquiry or presume that he has always properly diagnosed the problem he seeks to correct or his true needs.
After you meet with a professional, you should investigate his interest in the project, his experience in accomplishing your articulated objectives, his availability to perform the project, his ability to perform it within the required time, and how he would propose to charge for his service. Before an answer can be given, it may be necessary for you and the professional supplier to have one or more face to face meetings to discuss more details of the proposal. The executive should inquire whether he will be charged for preliminary meetings, and how much. Professionals often charge by the day or hour for their services, including for "preliminary meetings." The franchise executive should request that the supplier provide a written letter describing what the supplier is offering to provide, what the charge will be or how it will be computed, what is and what is not included in the suppliers fee, the methodology the supplier will use in performing the task, the individuals or organizations who would be working on the project, and payment and credit terms (if any).
It is imperative that when costs are being compared that they be compared for the same efforts. If in doubt about whether two competing suppliers' proposals are comparable, ask.
CREDIT AND PAYMENT TERMS.
Credit and payment terms may be an important component of a decision about selecting a supplier. Better credit or payment terms may more than offset a higher price. Credit terms may be a function of the vendor's industry and the franchise company's credit worthiness. For example, until a credit history has been established it is very common for suppliers of consulting, legal or related services to require a substantial or total prepayment for services. Unless credit arrangements are established in advance with suppliers of professional services, it is not safe to assume you will not be held to an obligation to pay invoices when they are rendered. If your franchising company may have difficulty meeting the payment terms of a professional supplier, that should be discussed before an agreement is struck. Failure to pay bills could jeopardize completion of the project, and the initial investment in it, not to mention the company's credit rating.
Franchise executives should be very clear about credit terms offered for purchases by franchisees and whether the franchisor will be expected to guarantee some or all payment obligations of franchisees. Leasing agents for major mall developers and other lessors may condition lease terms on the prior success of the franchisor and the financial capabilities of both the franchisor and its prospective franchisee tenants. They may require a franchisor to guarantee some or all of its franchisees' lease payment obligations.
After talking with two or three proposed suppliers and receiving their proposals, you should be better able to evaluate the proposals and their costs, and make an effective, well reasoned decision which should be accompanied by few surprises.
When negotiating with potential suppliers over costs, the franchise executive may be offered co-op advertising rebates, advertising allowances, volume discounts, and the like. The franchise executive must keep in mind that such discounts, rebates, commissions, or kickbacks are generally required to be disclosed to prospective franchisees in franchise offering circulars, and thus, to competitors. Moreover, under certain conditions they may be unlawful. These additional "incentives" may seem quite rewarding to a franchisor. The chances are, if one supplier is offering them to a franchisor they may be common in the industry and available from other suppliers. Regardless, the issues of disclosure and legality remain.
HOW IMPORTANT IS THE SUPPLIER'S LOCATION?
Where a franchise supplier is located is generally insignificant, unless it affects the ability of the supplier to deliver the product or adds significantly to the cost of the service or product. By their nature, franchising companies will ultimately have franchisees from many locations and will need to deal with suppliers from many different locations. In particular, many professional services may be efficiently, and effectively performed by organizations in states far from the franchising company's headquarters. E-mail, fax machines and other technological advances make the process easier every day. For many suppliers and franchise executives, whether they are housed two miles or two thousand miles apart, the principal communication vehicles are telephone calls, e-mail, fax messages and overnight courier services.
DOES IT SOUND TOO GOOD TO BE TRUE?
Franchise company executives are acutely aware that franchisors boasting about the earnings and success potential of franchisees can be quite troublesome. You should apply the same healthy skepticism to boasts by potential suppliers about features, benefits or costs which seem too good to be true. Whether its speed of delivery, price, number of franchises which can be sold or additional profit generated, before committing to a supplier you deserve to know not only about what is specifically promised (in writing), but also how and when this will be accomplished.
Ultimately, by following the steps described above, by speaking with more than one potential supplier and by using the resources available to you through IFA, the process of selecting a franchise supplier can be systematically under-taken with good prospects for a satisfactory result. The members of IFA’s Supplier Forum ask that you first look to us as suppliers when beginning the selection process. We have individual observations about the selection process which we are more than happy to share with you.
Carl E. Zwisler practices franchise law in the Washington, D.C. office of Haynes and Boone.