Franchise Companies Should Understand Risk Management to Be Successful

Risks. We all take hem throughout our lives starting with asking someone out on a date, buying a first home, moving to a new city or launching a business. Most of the risks one takes during his life will be taken on his own. So it should be with personal risk one is most familiar.

Risk-sharing is not a new concept at all. Early in my career I worked in the San Francisco Bay area. The Chinese community there helped each other get into business through an interesting concept that was known by outsiders as the "Chinese Banking System." Basically, neighborhood businessmen would meet and any of them could present a budding entrepreneur that they were willing to sponsor. The young entrepreneur would make the presentation to the group and the sponsor would let everyone know how much of the investment he was willing to make in the new business. Other people in the room would then make an offer to invest. The investment was guaranteed first by the entrepreneur, and secondarily by the sponsor. The point is that the owners of existing businesses saw the value proposition in assisting others in starting businesses. That meant there were more people to do business with and those who became successful could join the investment group and offer assistance to future entrepreneurs.

Lending Partnerships in Franchising

Partnering with a lender within the context of the franchise industry can have many different meanings. In the simplest sense, the relationship between a franchise organization and a lender simply involves the lender offering financing to current and prospective franchisees of a particular franchise system. The franchise company maintains a cordial relationship with the lender who may devote some additional resources to a particular relationship because the relationship provides a steady stream of transactions. This type of partnership will most likely be managed by a sales representative whose primary job is to act as an advocate for the franchise firm and push as many transactions as possible through underwriting.

This is a most interesting time in the franchise industry. Many of the dynamics currently in place are causing an evolution of the franchisor-lender relationship. This evolution will take the form of true partnerships between the franchise company and lender wherein both the risks and the rewards, associated with franchise system expansion, are shared.