The average consumer probably associates franchising with the popular fast casual restaurant across the street from their office, their favorite gym down the street, or some other brick-and-mortar building where they obtain routine or specialized products and services. Franchising, however, covers a broad scope of industries and many operate without a brick-and-mortar location where the products or services are provided. These industries include on-demand auto care, residential or commercial cleaning, home and yard maintenance or upgrades, senior care, pet care, consulting, and advertising services. Further, innovative brands are increasingly taking traditional brick and mortar concepts and converting them to mobile operations to capitalize on changing consumer tastes and interests and reduce overhead costs.
These non-brick-and-mortar and mobile franchise systems can result in unique opportunities and challenges for the franchisor. As you work to develop such a franchise system, we recommend accounting for the below issues in your Franchise Disclosure Document (“FDD”).
- Territory Composition
There is a lot to think about as you define the composition of an optimum franchisee territory. We’ve written about this subject in more detail in another post [Link here] but want to highlight a unique consideration for non-brick and mortar systems.
In mobile franchises, the customer’s location is generally even more important than it is in brick-and-mortar franchises because the products and services are often delivered to the customer’s location, whether that be an office or residence. To maximize chances of success, the franchisee should (i) have enough potential customer locations within its territory to have a sufficient revenue stream and (ii) be able to service them in a cost-effective manner. This often means that the customers are not too far away from the franchisee’s base and that clustering of appointments is possible.
For example, a pool maintenance franchisee would need a territory size that has a sufficient customer base – people with home pools. The franchisee would also want the density of the pool owners to be high enough so that it could schedule its labor force strategically.
- Out of Territory Opportunities
Another decision point is whether franchisees can provide products or services to customers whose locations are outside of the territory boundaries. Most franchisees want some degree of protection against other franchisees servicing customers in their territory. However, there may be good reasons to permit this in special circumstances.
If the business model is one where a franchisee can reach service capacity, it may make sense for all parties involved to permit the adjacent franchisee to be able to service the customer temporarily. The substituting franchisee gets additional revenue, the franchisee whose territory has the customer gets the customer information to follow up for additional sale opportunities, and the franchisor receives a royalty on the revenue generated. Or, in businesses where referrals depend on relationships, a franchisee may need to be able to service the referral in another territory to preserve the personal connection.
Additionally, not all franchisee territories will be contiguous – whether that is because the brand is still growing or whether it is simply because the demand for the brand products and services is concentrated in population centers. This structure may leave customers in an area that has not been assigned to any franchisee. Many franchisors create policies to address how franchisees can service these customers. There are some cautions in doing so: (i) if the franchisee becomes too dependent on out of territory customers it may not dedicate its attention to market penetration in the assigned territory and (ii) it can be a practical challenge to transfer that out of territory customer to a different party if the franchisee has a longstanding relationship to the customer.
- Item 19
Item 19 of the FDD contains the disclosures that help to answer the prospective franchisee’s question, “How much money can I make with this franchise?” Franchisors can choose not to include any information in this item, but many do. Most commonly franchisors disclose Gross Sales numbers and sometimes costs, expense, and profit values.
All disclosures included in Item 19 must be capable of being substantiated and must have a “reasonable basis.” Franchisors of non-brick and mortar franchise systems need to think carefully about the nature of the territories they award to ensure that it is reasonable for a prospective franchisee to be able to achieve the same results under the current offering as franchisees in those territories. This consideration includes details such as the size, composition, and population of the territory. Ideally, a franchisee should be able to compare apples (what it receives as a territory) to apples (the types of territories granted to franchisees whose results are in Item 19).
The laws around Item 19 do permit franchisors to create subsets of data, and this may be a helpful way to address differences among franchisee territories. This is especially true if the differences are correlated with different financial results.
For instance, a franchisor may want two sets of Gross Revenues disclosures if its first 30 franchisees received materially larger territories than its most recent 50 franchisees. A franchisor may want to create multiple data sets based upon geography if the demand for franchisee goods and services varies by climate and season. By way of example, pest control businesses in Florida may enjoy a longer service season (and consequently higher revenues) than their fellow franchisees in Wisconsin.
Mobile franchise systems can fit specific customer needs and offer options to franchisees who want to work outside of the typical brick-and-mortar model. If you would like to learn more about setting up mobile franchising or non-brick and mortar franchising, please contact Carlie Smith or Ritchie Taylor at Manning Fulton.