INNOVATIVE FRANCHISE AND MANCHISE MODELS

Franchising is a proven route to the successful international expansion of businesses in various sectors, from hotels and restaurants to high-end fashion and beauty. Babette Märzheuser-Wood, managing director of franchise advisory at Dentons, gives us the lowdown on the different solutions available for companies looking to explore franchising or manchising.

Franchising accounts for a turnover of USD 300 billion in Europe, USD 850 billion in America and USD 130 billion in Australia every year. In the hotel and leisure sector, many global brands, such as Holiday Inn, Burger King and Domino’s Pizza, have used franchising to grow in both traditional economies and emerging markets. The US hospitality firms YUM, IHOP and Dine Equity have long been at the forefront of international franchising. However, franchising is not the exclusive preserve of US mega brands. A franchise strategy can also work for companies that have never franchised before.

Benefits for all concerned

Franchising works because it offers real benefits, not only to the brand owner but also to its franchisees. There are clear advantages for companies looking at global markets. For the restaurateur, it removes the need to invest capital and other substantial resources in the venture. It uses the local know-how and connections of the franchisee to secure lucrative sites and overcome obstacles with local product registrations. A franchise strategy will see the local partner make the bulk of the investment while benefiting from the knowhow, good name and quality-assurance program of the franchisor.

Franchising enables companies to access the required capital and grow their businesses internationally without significant expenditure or external funding. Franchising also allows companies to attract high-quality local investors. These investors are sophisticated and incentivized to make the project a success in their local market. They also have a strong understanding of the local market.

Franchising not only enables brands to grow their business internationally by taking advantage of the capital and resources of local investors, but it also enables the local investor to have access to the blueprint of a strong, proven concept with a known reputation. Not all local investors have the time and resources to research a concept that fits the local market and can generate attractive levels of income without the trial and error that goes into building a new brand.

In addition to franchising, many companies use the manchise model to collaborate in this arena.

What is a manchise?

Manchising is a creative business model that combines the best of franchise with additional support in the form of management services. Manchising sits in the middle between a straight franchise and a management agreement. The manchise model opens up opportunities for investors who do not have significant operational experience. Brands are often reluctant to grant a franchise to someone who is new to the industry due to concerns that such a partner may have difficultly successfully implementing brand standards. They may, however, offer a manchise. The structure is popular in the hospitality sector for both hotels and restaurants, but there are important differences in how the model is applied.

Manchising in the hospitality sector

In hotels, a manchise is structured as a two-phase collaboration between the hotel owner and the hotel brand. During the first phase, the hotel brand typically operates the property under a short-term management agreement, often for five years. In phase two, the investor has the option to flip to franchise. During the management phase, the investor becomes familiar with the brand standards and the operating model. At the end of the management phase, the employees are fully trained. In most cases, the investor is also likely to take on the existing GM to continue operating the business after the flip to franchise. With the right planning and preparation, this makes for a win-win partnership. The model works for the brand because the business remains under the same flag and continuity is secured. It also suits the investor because they can optimize their entrepreneurial freedom and make their own financial decisions when they begin to self-manage under franchise.

Sitting in the middle between a straight franchise and a management agreement, the manchise model opens up opportunities for investors who do not have significant operational experience.

Manchising in the restaurant sector

Lately, the Middle East has witnessed many high-end restaurants entering the market. A complex fine-dining menu is difficult to deliver under a vanilla franchise. Franchising works best where the business model is simple and staff can be trained to prepare the menu items on a short training course. This is the traditional stronghold of quick-serve franchisors like KFC. In order to succeed with a more complex concept, the brand owner needs to provide additional support services and take on a quasi-management role. The manager will typically be in charge of additional services, such as food sourcing, staff training and the restaurant-level P&L. It will rely on the landlord or investor, often a hotel owner, to provide local support services, like laundry, a liquor license, staff accommodation, visas and accounting. It is important to clearly define who is responsible for what. Agreeing a fair cost allocation, ideally a fixed sum per month, for the support services received from the hotel is also critical.

Profit sharing and equity models

In a management model, the manager will be looking for profit participation to reward the management services. This would be in addition to the basic franchise royalty. In a hotel management agreement, this is known as the “incentive fee” and is generally calculated by reference to the gross operating profit. In restaurant agreements, we often see an EBITDA percentage. Another approach to profit sharing would be to offer the brand some equity in the local company. This can be a golden share or a small equity stake given in return for reduced franchise fees. Some high-end brands combine a management agreement with a profit-sharing model. Another advantage of equity participation is that the sale of the business can be coordinated with rights of first refusal secured.

What works best?

Collaboration models in the hospitality industry have become increasingly sophisticated, enabling a broader range of brands to enter new markets. Where a franchise does not offer the security and support desired, a manchise structure with or without equity participation could be the answer.