Choosing Between Franchisees Proposals

Exam Likelihood: High

The Examiner has introduced a new stream into the business during 2018. It is clearly the growth area, it is quick to grow and it can generate higher margins than the traditional business. The reasons why we believe this is set up for a Requirement 2 or 3 are:

  • Large emphasis on the stream within the AI
  • Targets are ambitious for May 2021
  • Original franchisees are coming up for renewal
  • Parts of the franchisee model is loss making
  • There are proforma layouts for Leicester 1 / Oxford 1 (pg 27 & 28)

The Possible Ways To Examine Franchisees

The Examiner could create questions around the following scenarios:

  • Franchisees restricted to one territory: Could Tracy Harris be looking to expand into additional Leicester regions / elsewhere and if Scour refused what would happen if she left the network and set up in competition?
  • Employees becoming franchisees - impact on Owned especially if they service a key customer. Developing Franchise area could be detrimental to Owned and if Scour refuses to allow other employees, then would they be demotivated and leave? 
  • Large contract covering Owned Operations region and Franchise Region with a key customer e.g. Tonto or the company owning the sports venues. Would Scour look to run such a key customer remotely or allow the Franchise network to perform this? 
  • Improving the synergies and services between the two streams (IT / processes), but also the range of services. If Scour starts offering Window Cleaning, Carpet Cleaning, etc., how can it roll these services out into the Franchise network?
  • The original 4 franchisees are coming up for renewal in Nov 2020: The Examiner could make you consider the renewal basis e.g. a renewal fee / on-going fees
  • Changing existing franchisee rates - we know Start Up Fees is loss making and transport recharges generate no profit. What would you do and how would this impact targets? Would the existing franchisees or the new franchisees be upset due to a two tiered system? Could Scour legally change the existing franchise contracts OR would the new terms be enforced on contract renewal?
  • Limited business measures in place for the Franchisees performance - Are there business measures that need to be in place, for instance average revenue from customers per franchise?

Wider Business Issues

A student's blind spot!

The types of Wider Business Issues we believe you should be considering when discussing the Franchise network and any R2 or R3 requirement are:

  • Provides a quick and cheaper method for geographical expansion
  • Target of 50 franchisees by May 2021, combined annual revenues of £15.0m and ongoing fees of £1.0m
  • First franchisee 1 Dec 2017 and 3 year contract due to expire - successful franchisees could break away
  • Non-compete clause 12 months from termination - distance specific (Be aware the actual distance is not stated in the AI)
  • Largest annual revenue of any of the franchisees is £0.5m and smallest is £0.1m. These figures are useful in order to compare a new franchisees proposed budgets against.
  • The context of the question e.g. the other parties involved. Are they existing franchisees wishing to expand? Does it involved an existing customer e.g. Tonto expanding into a franchise region?  If so there are wider issues to discuss, for instance, Tonto is one of the largest customers.

What Types Of Financial, Operational & Strategic Issues Could Be Relevant?

Firstly, it is difficult to predict as you need to be taking information from the Exam Paper and using the exam to generate your ideas. If you cannot generate sufficient ideas, you need to consider how the opportunity will impact the existing business model e.g. will it make the Franchised / Owned Operations stronger or weaker?

You should also watch out for whether any of the following points could be relevant: (if you're viewing this on a mobile phone, the table is easier to view if you turn your phone landscape)


 Impact On Franchise Impact On Owned
Compare calculations to relevant experience Leicester 1 - Budget v Actual & Forecast - The forecast could have been updated with actuals so watch!

Oxford 1 - compared to Budget / Actuals		 Franchise opportunity GP margin is likely to be higher than Owned.

Franchise is becoming a more important part of Scour's revenue mix
Challenging Assumptions
Start-up fees & costs		 Start up fee should be £10k and consistent

Start up costs - challenge against 2020 R1 results / Leicester 1 or Oxford 1

 N/A
Challenging Assumptions
Ongoing fees & costs		 Is the 7% rate the same?

Average revenue from franchisee's customers - realistic with Leicester 1 / Oxford 1 Budgets and Actual. How similar is it to R1		 N/A
Challenging Assumptions
Sale & Purchase of cleaning products		 Is the mark up on cleaning products similar to Leicester 1 / Oxford 1
and R1? If not, is there any reason given?

Are the cleaning products in line with ongoing fees?		 N/A









N/A
Challenging Assumptions - Other Remember that Scour's revenue in the calculation forms part of the costs of the franchisee (excluding labour costs for the franchisees and own sourced equipment). If the franchisee has developed the budget, is there bias?

Could you take the Franchisees budgeted profit and loss and generate Scour's Budget?		 N/A
Employees wanting a franchise Experience of Scour

Understands the Scour promise

Seen as a career path for some cleaners

Some success with Leicester 1 / others less successful using cleaners		 Loss of experienced staff

Key customer impact - prefer consistency of personnel

Upset if they do not win

May leave if do not win

Potential lack of commercial experience

Can the staff relocate quickly to start new franchise?
Franchisee wanting to expand into a second region BENEFITS


Known performance with existing franchise

Assist with renewal if one of the original four franchisees.

How would Scour manage a territory if a Franchisee didn't renew?

Understands Scour promise and ethos
 RISKS

Not all existing franchisees are successful (Oxford 1)

Can success be replicated to a second territory (Exhibit 13d - overreaching)

Increases sole trader risk (13d)

Change in franchisee network to allow more than 1 territory (more reliance of franchisee)
Existing customer expanding into a franchise region - Should franchise network be involved? FRANCHISE BENEFITS

Local knowledge and existing local cleaners

Easier to manage key resource locally

Lower risk to Scour e.g. idle time as not Scour's cleaners

Shows confidence in network / disruptive to network if Scour managed

Legal issues if Scour operate in Franchisee territory


 OWNED BENEFITS

Customers don't always like franchisees

More control over operations / quality

Consistency of key personnel in customer meetings

Other information

We hope you are finding our blogs useful. If you do, please let other students and colleagues know about us. 

We are now into the exam month and you must try and give yourself sufficient time to understand the Case Study. Students find it difficult to study for the Case Study, but the more time you do put into developing your knowledge, the better your performance will be on the day of the exam.

Future blogs will consider how to analyse new contracts, new business opportunities and investment into new equipment and technology! However, if there is anything you specifically want us to cover, then drop us an email

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