Newport Board Group, an Advisory Firm Serving Middle Market Companies, Issues Guidance on Key Trends in the Franchise Industry

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The Franchise Industry is Adopting Technology as a New Service Focus - Expanding Opportunity for Technology Executives

For business people who have topped out of corporate employment or retired executives who want to “stay in the game,” digital franchise concepts based on your particular career experience are increasingly available.

Three trends are converging to create an opportunity for the $470 billion U.S. franchise industry to expand into new franchise concepts. Big Data, social media and rapid advances in how software is developed and deployed are enabling entrepreneurs to create and innovative packages of specialized B2C and B2B services and software—and target them to niche-markets. These specialized technology-based services can support a promising new way of defining franchisee territories--by industry or other target customer attribute, overlaid onto or instead of the traditional geographical territory. This new concept could be the next major innovation in franchising.

1.    The franchising industry continues to grow rapidly—innovating new models of how franchisor and franchisee combine to create value.

Franchising is an important part of the American business landscape, comprising about 5% of businesses in America and generating about 8% of all private sector jobs.

The genius of the franchising model, from its inception in the middle of the 19th century to today, is to provide entrepreneurs a way to expand their footprint and monetize their brand--by sharing the risk of growth with franchisees, vested managers with a stake in the success of brand.

Franchising has grown from its roots in restaurants and retail establishments into a wider variety of B2C and B2B services businesses. Intriguing new franchise businesses are popping up everywhere. A case in point: LED Source®, a new franchisor of LED Lighting, offers an opportunity for franchisees to profit from the “green” revolution. Another example of a growing number of B2B categories: InXpress®, a specialized franchise organization specializing in international shipping for small to medium-sized businesses.

Franchises are becoming more sophisticated in their business models, partnering for example with Walmart as a location for Seva®, a beauty salon franchise targeting the same middle class demographic. New categories of franchised professional services (for example, medically supervised weight loss programs) create value with a mix of local franchisee market penetration and specialized professional and technical skills provided by the franchisor (mirroring the corporate “center of expertise” that big companies deploy to provide specialized skills to their business units.)

2.    There is strong demand to buy “non-traditional” franchises from former corporate executives who have topped out of the corporate world.

This new wave of franchises we envision is poised to benefit from profound changes in the trajectory of corporate executive careers. The typical length an average corporate executive career is shortening at a jaw dropping rate. Among the causes: as they outsource to focus on their core capabilities and replace works with technology, companies are getting smaller so can afford few high level executives. A dynamic M&A market has a way of acquiring successful companies and cutting their executives. There is a growing supply of talented, successful executives, some still in their 30’s and 40’s, who need a new career and have access to the capital to buy a franchise.

Especially at the younger end of the age spectrum, there is a segment of prospective franchise buyers who would be attracted to franchises that offer continuity with what they have done in the corporate world. These are people who have honed skills in software, marketing and communications. They don’t readily see how the digital skills they have spent decades acquiring will help them run restaurants, hair salons, pet services, after school tutoring services and other traditional franchise categories.

The growing number of CEOs and other executives--who are in the prime of their career; have access to capital and are looking for a new career platform that offers more continuity with their digital experience and skills--are strong candidates to buy technology-based services franchises.

3.    Changes in the software and related services world are well suited to the franchise model.

A range of changes in the software and services industry make it feasible and attractive for software companies to consider franchising their business. For example, a “horizontal” software product that has proven its value in the market can create even more value if tailored by industry. Such a company could turn itself into a franchise selling territory consisting of vertical industries, which the franchisee would customize the software for. People who come from IT services companies or industry-specialized consulting firms with deep industry expertise would be well suited to buy franchises that offer software to a specific industry—who have deep industry expertise and want to build a company while being their own boss.

High touch software-based services
The software industry is changing rapidly. Software has become a commodity. The key differentiator between software companies and products are the related services that are tightly integrated with software—which together solve a problem or otherwise create value for the user. Small and medium businesses (SMB) are the fastest growing market for software. They approach software in a vastly different way than large companies do, often requiring high touch services from the vendor to turn software into because they don’t have the in-house resources that large enterprises.

SAAS and the Cloud

Software as a service (SAAS) is the delivery model that is replacing the premises-based model that used to require long-term commitment to the software, heavy up-front capital investment and big IT infrastructure to support and scale it. Becoming ubiquitous with the cloud, SAAS enables deployment of specialized software that requires minimal involvement by the user’s IT group. SAAS allows for more incremental software upgrades to be implemented by the vendor not the user, minimizing operational disruption. SAAS users want to work software and the services integrate with them from people who are located close to them and have a highly evolved remote support model focused on users just like them. Franchisees are well suited to provide this role.

The Franchise model: a new way to grow a digital company

The traditional models for a software company or other digital business to market software and train and support its customers is hub based, requiring a large corporate team to cover geographical areas. The alternative is to involve independent third party companies (value added resellers or VARs) to help market and support the software. But most VARs carry multiple lines of competing solutions, are trying to establish their brand in the market, and could be pursuing strategies at odds with the software vendor. Having franchisees that are exclusively dedicated selling and supporting the franchisor’s product might be better than the VAR model. Franchising will provide a vested partner whose success is tied to that of the software vendor. Franchising provides is a way to monetize investment in a software company’s IP through increased scalability, profitability and overall customer retention.

For business people who have topped out of corporate employment or retired executives who want to “stay in the game,” digital franchise concepts based on your particular career experience are increasingly available. They may well be a better fit with your experience and capabilities than traditional franchise concepts such as dry cleaning or food service—that would take you out of your comfort zone. And you just might get in on the ground floor of what becomes a major new category of the franchise industry.

Mark Rosenman is a partner in the New York office and Mitch Alcon is a partner in the New England office of the Newport Board Group.

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