Your Own Franchise, Part 2 - Assignment Example

? Franchise of the of the Table of Contents Table of Contents 2 Introduction 3 All Insurance Company & Franchise Model 3 Legal Rights as a Franchisee 4 Financial Obligations of Franchisees 5 Market Segments 6 Determining a Site for Franchise 7 Possible Challenges 8 Phase Evaluation 9 Conclusion 9 References 10 Introduction In the previous assignment, it has been mentioned that the study will consider different aspects of franchising in context to Allstate Insurance Company. In this paper, the researcher will focus on issues like legal rights of the franchisee, financial obligations of franchisees, market segments for this franchise, factors involved in determining a site for the franchise, possible challenges and current phase of franchisee. Background of Allstate Insurance Company will be briefly discussed in the next section in order to develop situational framework for this paper. Allstate Insurance Company & Franchise Model Allstate Insurance Company was founded in 1931 and became publicly traded in the year 1993 (Allstate, 2013a; Bond, 2012). In USA, Allstate Corporation is regarded as largest publicly held insurance company that offers both personal lines property and casualty insurance services (Allstate, 2013a). As of 2011, total asset of the company is hovering over $125 billion while it was ranked 93 in Fortune 500 list. Allstate Insurance Company business model focuses on developing chain of franchise owners’ or entrepreneurial individuals who are ready to act as “Allstate Exclusive Agents” and sell wide range of financial and insurance products of Allstate Insurance Company to customers such as auto insurance, property insurance and investment services (Allstate, 2013b; McCarthy, 2010). As of now, Allstate Insurance Company offers $50,000 as liquid cash to entrepreneurial individuals to start the franchisee while the total cost of investment for franchisee owner may vary with local state price variance (Allstate, 2013b). While granting insurance franchisee to agents, Allstate Insurance Company also varieties the risk taking capabilities of franchisee owners in terms of their financial abilities and network building capacity. Franchise owners need to use the brand names of “Esurance*, Allstate*, and Esurance” while promoting and marketing Allstate Insurance products like life insurance cover, retirement insurance cover, health insurance covers, fixed deposits, auto insurance, home insurance and fixed deposits (Bond, 2012). Legal Rights as a Franchisee In case of working under the trademark Allstate Insurance Company, individual agents holding the rights to sell Allstate Insurance products are being classified as franchisee owner while Allstate Insurance Company can be classified as franchisor. From 2000 onwards, Allstate Insurance Company converted all of its existing franchisee as independent operation in order to get tax advantages while legal rights of these franchisees are being governed through ‘independent contractor’ norms (Napaausa, 2013). Although, Allstate Insurance Company converted its franchisee owners to independent agents but job description remained unchanged. Therefore, legal rights of independent contractor or franchises remained disregarded in case of franchisee-franchisor relationship for Allstate Insurance Company. As par Employee Agent (EA) agreement, franchisee owners are needed follow all the employee responsibilities on behalf of Allstate Insurance Company yet they would not be liable to get compensation like federal unemployment compensation or contract compensation (Napaausa, 2013). As par Section XVII, Section XVII.B.2 and Section I.A of the EA Agreement, franchisee contract can be terminated without payment of commission or non compliance of responsibilities mentioned by Allstate Insurance Company (Judiciary, 2012). Legal rights of franchisee is being dominated in EA Agreement while some undue favor has been given in favor of the franchisor such as minimum accountability for supporting actions of franchisee, contract with franchisee can be terminated without any valid reason, elimination of employee specific benefits, elimination of Agent Pension Plan etc (Napaausa, 2013; Judiciary, 2012). Financial Obligations of Franchisees From franchisee owner perspective, having Allstate Insurance franchisee can be regarded as symbol of independence but in practical context, certain financial obligations are associated with such contract. According to Napaausa (2013) report, Allstate Insurance Company offers $50,000 as liquid cash to entrepreneurial individuals to start the franchisee and 5weeks to 7 weeks free training program is being conducted for franchisee owners. Another thing is that more than 1.5% of agent’s gross property-casualty is being paid by Allstate Insurance Company to franchisee owners in order to cover office expenses (Napaausa, 2013). From 2000 onwards, franchisee owning individual agents is being disregarded from such operating expense covering benefits. Therefore, franchisee owners only get $50,000 as liquid cash from the company and rest of the capital covering operating expenses like payment of salary to staff, pay of rent, payment for buying insurance equipments etc. As a new franchisee owner, one has to pay 10% property-casualty commissions while for franchise owner having previous experience with the insurance company, rate of 6.5% is being applied while renewing the contract (Napaausa, 2013). Even today, a franchisee owner can get 1.6% “Office Expense Allowance” if they qualify the norms specified by Allstate Insurance Company. As of 2013, franchisee agents need to purchase computer and phone equipment by themselves and they are not eligible for getting any kind of financial support from franchisor. Under the independent contractor program, franchisee owners can not only work independently but they are eligible to earn “economic interest” on behalf of the franchisor. An Allstate has the right to sell the business to other “qualified buyer” and they do not need permission from franchisor. However, due to presence of unreasonable qualification criteria, only 10% buyers have been qualified as par business norms of Allstate Insurance Company. Therefore, financial obligations of franchisees with Allstate Insurance Company can be criticized for being biased to the franchisor and putting excessive financial burden franchisee owner. Market Segments Consideration of research work of Harmon & Griffiths (2008) reveals the fact that profitability of franchisee depends on its ability to identify potential market demands and their capabilities to fulfill the requirement. In such context, for a small time franchisee like the researcher cannot take the risks to cover a large market of general and life insurances covering life insurance cover, retirement insurance cover, fixed deposits, auto insurance, home insurance, fixed deposits and health insurance covers etc which need investment of huge capital without surety about return. To avoid the return, franchisee of the researcher will starts its operation by covering only the market segment of auto insurance. For next 2-3 years, my franchisee will only offer Allstate Insurance Company branded auto insurance covers to customers. Although, auto insurance market segment is highly competitive due to presence of many players registered under National Association of Insurance Commissioners (NAIC) norms but the sector is growing at double digit growth rate (Claims Journal, 2013). Considering the Consumer Price Index (CPI), in the last 10 years, total cost of maintaining and driving vehicles in Auto has increased almost 70% while medical insurance cost has increased 45% (Claims Journal, 2013). On the other hand, demand for auto insurance covers has outpaced demand for other insurance covers. In such growth scenario, an auto insurance franchisee owner can attract more customers by recalibrating underwriting and rating factors or covering Bodily injury (BI) expenses (Claims Journal, 2013). Presence of such alternative factors has influenced the researcher to believe in future potential of auto insurance sector and take the decision to offer only auto insurance products under the franchisee contract with Allstate Insurance Company. Determining a Site for Franchise While discussing franchising model in Australia, Frazer, Weaven & Wright (2008) stated that selection of suitable location or site for the franchising operation play vital role in directing the future success. As an entrepreneur planning to enter Allstate Insurance franchisee contract, one has to consider multiple factors being associated location selection for the franchising operation. Factor 1- past business growth and size of the city should be considered because in a small city with limited business growth, it will be difficult for the insurance franchisee to sell insurance covers to large numbers of customers which will hamper business growth of the franchisee. Therefore, large population area where most people having cars will be selected as site of operation (remember, the franchisee will offer Allstate Insurance Company branded auto insurance covers) (Frazer, Weaven & Wright, 2008). Factor 2- employees are needed to run franchisee, therefore, the franchises site will be selected on the basis of locations from where it will be easier to access skilled human resource pool. Factor 3- location for the franchisee should be near to the location of Allstate Insurance Company offices. Such convenience will help the franchisee owner to contact easily with Allstate Insurance authorities during contingent period. The franchisee location should not be opposite to the location of competitors, other insurance franchisees or established insurance companies. Otherwise, presence of the newly established small insurance franchisee wouldn’t be felt by customers due to presence of other companies (Frazer, Weaven & Wright, 2008). Possible Challenges Consideration of research work of Doherty & Alexander (2004) reveals the fact that franchisee contract should be viewed from legislative and financial perspectives rather than only relying on only marketing aspects. Same arguments hold true for individual franchisee or agent contract for individual entrepreneurs with Allstate Insurance Company. The study has found some key challenges associated with franchisee contract with Allstate Insurance Company. Challenge 1- franchisee owners only get $50,000 as liquid cash from Allstate Insurance Company while there is limited financial help a franchisee owner can get from the mentioned franchisor to cover other operating expenses. Due to conjoint effect of economic crisis, fluctuating oil prices and inflations pressure, value for money has been depreciated and operating cost has been increased. In such context, it becomes difficult to cover all the operating cost by using only $50,000 that has been acquired liquid cash from Allstate Insurance Company (Napaausa, 2013). This challenge can be addressed by sourcing additional fund from alternate channels like equity capital or debt from banks and financial institutions. Challenge 2- it has been reported that Allstate Insurance Company puts additional pressure to franchise holders to cheat customers or avoid paying insurance claims (Judiciary, 2012). Such unethical pressure can lead to decrease of credibility and trust of the franchisee holder among customers. In the long run, such bad words of mouth can even dampen business growth of the franchisee. Following government specified ethical codes and not entertaining unlawful demand of franchisor can be the way for franchisee holder to address this challenge. Challenge 3- according to report presented by Judiciary (2012), as par Section XVII.B.2 of EA Agreement, most of the benefits of franchisee contract is being directed in favor of Allstate Insurance Company. For example, according to Section XVII of EA Agreement, Allstate Insurance has the right to terminate the franchisee contract in voluntary manner (Judiciary, 2012). Such biased nature of the contract can create challenge for new franchisee owners planning to sell Allstate Insurance branded auto insurance products. Franchisee holder can addresses these challenges through period negotiation with franchisor at different points of time and try to follow all the pertinent clauses of the contract in order to keep the good relationship with franchisor. Phase Evaluation At the current scenario, the researcher has already approached Allstate Insurance Company by talking with local Agent Recruiter. However, Agent Recruiter is doing the background checks (verification of educational details, checking banking transactions for last few months, personal information). In such context, the researcher is negotiating with Agent Recruiter of Allstate Insurance Company regarding amount of Venture capital, numbers of employees will be required to run the franchisee business smoothly. The next logical phase will be to go through the franchisee 5 weeks to 7 weeks training program of Allstate Insurance Company and understand the auto insurance products of the company in detailed manner. A plan for business operation in the franchisee will also be prepared in the next phase. Conclusion It is evident from the above analysis that the researcher will bound to face certain challenges regarding franchising contract with Allstate Insurance Company but despite such challenges, the study has also found the sign of growth opportunities while selling auto insurance products through franchising contract with Allstate Insurance Company. In conclusion, it can be said that franchisee owner is needed to maintain close relationship with Allstate Insurance Company in order to conduct the business in sustainable and profitable manner in future years. References Allstate. (2013a). Allstate Overview. Retrieved from http://www.allstate.com/about.aspx. Allstate. (2013b). Become an Allstate Agent. Retrieved from http://www.allstate.com/careers/Agent-opportunity.aspx. Bond, R. E. (2012). Bond's top 100 franchises. (4th ed.). Oakland, Calif.: Source Book Pubns. Claims Journal. (2013). Competition in the U.S. Auto Insurance Market Benefits Drivers. Retrieved from http://www.claimsjournal.com/news/national/2013/07/23/233407.htm. Doherty, A., & Alexander, N. (2004). Relationship development in international retail franchising. European Journal of Marketing, 38(9), 1215-35. Frazer, L., Weaven, S., & Wright, O. (2008). Franchising australia 2008. Brisbane: APCFE, Griffith University. Harmon, T. R., & Griffiths, M. A. (2008). Franchise perceived relationship value. Journal of Business & Industrial Marketing, 23(4), 256-63. Judiciary. (2012). Mario Deluca-vs.-Allstate Insurance Company. Retrieved from http://www.judiciary.state.nj.us/opinions/business/bus_disputes/ALLSTATE_120109.pdf McCarthy, K. E. (2010). Recreational vehicle dealer franchises. Hartford: Connecticut General Assembly, Office of Legislative Research. Napaausa. (2013). lstate Insurance Agents - Employees or Independent Contractors? Retrieved from http://www.napaausa.org/Upload/IC%20v%20Employee.pdf. Read More