I’ve seen hundreds of businesses succeed at franchising, but I’ve also seen a number fail. While the paths taken by the successful are many and varied, the paths to franchise failure are surprisingly predictable.
Failure, like success, does not happen without reason. It happens because people made the wrong choices. Unfortunately, the mistakes we make in business are often avoidable.
Ready, Fire, Aim
Probably the single greatest mistake made by budding franchisors is a lack of planning. Too often, we find that new franchisors start out by asking their lawyers to draft their franchise legal documents without giving a thought to the importance of the business decisions that these documents contain.
Franchising is like business on steroids. Small mistakes get replicated over and over until they cause major failures.
A small mistake on a royalty – multiplied over 100 franchisees – can cost a franchisor tens of millions of rands. That is often the difference between success and failure.
There are dozens of these make-or-break decisions that an entrepreneur needs to make when structuring a franchise offer.
Closely related to the issue of planning is the ‘follow the leader’ mentality that often finds its way into the franchising process.
Many entrepreneurs will come to franchising after observing successful competitors, believing that success depends on duplicating their strategy. This could not be further from the truth.
Few of us are old enough to remember that when McDonald’s first arrived on the scene, it was promptly greeted by dozens of knock-off concepts that have long since disappeared. Why did Burger King succeed? It said, ‘Have it your way,’ and dared to be different.
Too often, we see franchisors whose business strategy seems to be to duplicate that of their largest and most successful competitor, only to find years later that the strategy failed miserably. The key to success can lie in differentiation.
But even if its competitor did a good job of planning – and there is no guarantee that it did – the new franchisor’s circumstances are different.
A different business model. Different management team. Different philosophy. Different market. Different investment requirement. Different training requirements. And if nothing else, different competitors.
Copying the industry leader’s strategy is not a strategy. It is often a recipe for disaster.
New franchisors typically have one thing in common: They are already running a successful business. The entrepreneurs who founded these businesses are almost universally resourceful, self-confident, and accustomed to substituting hard work for growth capital.
Odds are good that they built their first business without relying on outside help, so why would franchising be any different?
The business of franchising requires the franchisor to have or acquire expertise in a number of areas in which they probably have limited experience. These, to name a few, may include strategic planning, organisational development, financial analysis, franchise legal documentation, operations documentation, training, franchise marketing and franchise sales.
Related: Understanding the Terms of Agreement
I often see new franchisors relying on their internal resources and a local lawyer who does not specialise in franchising, only to repeat mistakes that were easily avoidable. Trial-and-error is an expensive way to learn franchising.
Failure to Budget
Franchising can be a low cost means of achieving rapid growth for your business. But it is not a ‘no cost’ means of growth.
To start franchising, new franchisors usually need to budget time and resources for the development of strategic plans, operations manuals and marketing materials.
They need to anticipate legal fees associated with the development of their contracts, disclosure documents and registrations.
They are likely to have accounting, printing, travel and other associated expenses as well. And they will need to invest in franchise marketing and in building the franchise organisation.
For franchisors who only want to sell a franchise or two and just get their feet wet, the investment in franchising can be minimal. But for a franchisor with aggressive growth goals, these costs can be significant.
Can’t Say ‘No’
One of the biggest mistakes in franchising can happen soon after the franchisor initiates its franchise sales efforts.
After spending a few million rand on the development of a new franchise programme, franchisors generally come out of the gates ready to sell. And when a marginal candidate comes to the door waving a cheque for R400 000, the first instinct may be to recapture some of the capital invested in franchising.
But these first few franchise sales can end up being the ones they regret in the future. Nothing is more important to franchise success (and to a brand) than the quality of its franchisees.
The best franchisors start with high standards from the outset, knowing that these franchisees will be brand ambassadors for years to come.
Perhaps the most ironic mistake made by new franchisors is that they do not fully understand the single most important tenet of franchising: Make your franchisees successful, and you will succeed as a franchisor.
Young franchisors may focus on how fast they can grow the business, when they should be focusing on making their franchisees successful.
Related: Franchise Or Start-Up?
Successful franchisees pay more royalties, require less support, provide great public relations, buy more franchises for themselves and promote the brand to prospective franchisees. Failing franchisees cost more, pay less and make it harder to sell and grow.
The greatest strength of franchising — the ability to grow largely unconstrained by the constant demand for investment capital – can also be its greatest weakness.
Sell faster than your ability to support your franchisees, and you’re likely to fail as a franchisor. Focus on their success, and odds are good that success will follow.
6 Top Tips For Reading Management Accounts
There is a golden key that reveals the secret of whether your business will survive and thrive. It is keeping tabs on the figures that summarise the strength of your business – your monthly management accounts.
There is a golden key that reveals the secret of whether your business will survive and thrive. It is not the brilliance of your business concept. It is not your talent for talking clients to sign on the dotted line. It is keeping tabs on the figures that summarise the strength of your business – your monthly management accounts.
Many entrepreneurs are usually more interested in operations and find product development or sales much more enjoyable than catching up on accounts. I sympathise – I’m one of them! So if you feel the same way, my top tip is always to make sure that you partner with or employ someone who can oversee the finances for you.
But that does not mean you can let the figure boffins and the finances take care of themselves. To function properly in your business, you need to know the outcome of your sales and development strategies – and the story of that is told in your management accounts.
If you never look at your management accounts, it is like blinding yourself in one eye. It means you risk being literally blindsided by a big surprise, whether it is heading for a significant loss or being confronted by an unexpected provisional tax payment.
Here is how Engela van Loggerenberg, our Group Financial Manager, puts management accounts in perspective for our new franchisees. She urges them to focus on six key areas:
- Priorities: Management accounts can help you pinpoint areas that you need to prioritise, whether to capitalise on growth or because they are not performing as well as you hoped.
- Strength: All businesses aim to grow their assets over time and the balance sheet in your management accounts will reflect whether and how you are achieving that.
- Control: A strong balance sheet is one that shows you have your business liabilities well controlled. The key marker here is your current liquidity ratio, which results from dividing your current assets by your current liabilities. To keep your business healthy, always aim to keep this ratio at least 2:1.
- Revenue: Ideally, you want to see your revenue grow month by month. Check your income statement both for the trend in actual revenue and also for actual against budgeted revenue to check how well your strategies are delivering results.
- Profitability: Of course, revenue is not the same as profitability. You need to know your gross profit – the basic figure of your sales less the cost of those goods – and net profit, which also deducts a range of other expenses including taxes. Track the percentage of these two profit figures as well as the actual cash amount they represent to keep a check on whether your costs are creeping up too high.
- Finance: Most businesses at some point want to finance their growth by borrowing from a bank. A set of well-regulated management accounts is a prerequisite to obtaining finance.
Your management accounts do not have to be particularly complicated to give you these vital pointers – and if you are figure-shy, the more straightforward the better.
The important thing, though, is that you do not allow yourself to be too scared to ask if there is something which is not clear to you. That is the way to keep control of this key to your business fortunes and to keep building your business from strength to strength.
A Three-Pronged Approach To Franchise Success
Danie Nel, head of business development for Cash Crusaders franchising, says the brand’s success over the past 22 years is attributed to the sentiment that “a profitable franchisee is a happy franchisee.”
What is your current footprint?
220 Stores. We’re looking to increase that number by another 20 stores for the 2018 financial year, which will then bring us to a total of 240 stores. Depending on the economy, we’re looking to grow our footprint even more to around 300 to 350 stores nationwide in the near future.
What are some of your brand’s biggest achievements that other franchises can learn from?
Our ability to read the retail market and innovate to stay ahead of times. We have recently launched an online platform where customers can sell their goods or borrow money — all online. This was a first for online retailing. One other achievement that I would wish to highlight is the launch of our mobile phone range, Doogee, exclusive to Cash Crusaders. Personally, having the honour of opening our 200th store was a tremendous achievement.
Franchisor involvement has also played a big role in the success of the organisation. Our CEO Sean Stegmann and other senior managers are as much involved in the business as any other operations manager or operator.
There is simply no ‘ivory tower’ management in our business and it makes a huge difference.
What are some of the challenges you’ve encountered and how have you overcome these?
Some of our daily challenges include securing a premises at a favourable rental and securing a franchisee with sufficient unencumbered capital, who is credit- worthy. Once the store is open, cash flow management and stock procurement is key.
In addition to this, it’s a challenge to achieve profitability immediately and to meet franchisee expectations. It’s also vital to ensure superb customer service and to retain those customers in the current retail and economic climate. I would say that our single biggest challenge is to retain and to build our customer base.
What attracts franchisees to Cash Crusaders?
Our unique retail model that allows for multiple streams of income through one business. These three profit centres include: New goods (variety of imported quality goods), second-hand goods (which we buy directly from the public, either through customers coming directly to our stores, or via our house-buy system offered by some of our stores) and secured lending (a financial service where customers can borrow money against valuables, determined at store level, and the loan is repaid within 30 days — or the contract is renewed for another 30 days with interest and service fees charged).
Why is it important for successful franchises such as yours to have a strong banking partner and how does it benefit both the franchisor and the franchisee?
Gone are the days where you just got a deposit book or cheque book and a little business loan from your bank. Banking has become more sophisticated and the technology that the bank offers is as important as its service, making life for both the franchisee and the franchisor easier on a day-to-day basis.
5 S-Words Make Your Store Site Pay For Itself
Richard Mukheibir, CEO of Cash Converters recently addressed delegates at the FASA (Franchise Association of SA) conference on the topic of choosing the best location for their business. He spoke about the 5-S technique to assist business owners with deciding which premises is best suited for their business.
The combination of continuing trading uncertainty in South Africa and the new financial year for many businesses can add up to carefully reviewing costs – including leases on premises. Choosing a site to set up or relocate your business can be just as stressful as deciding where to buy a house – and just as fundamental to its health, finances and sustainability, says Richard Mukheibir, CEO of Cash Converters.
This is not the time to snap up the property with the cheapest rental as that might turn out to be something you regret in the long run. Nor is it the time to be dazzled by the swankiest premises you can find. The potential for bragging rights could turn out to be poor value for money.
“This is a time for your head to rule your heart regardless of the industry you trade in.” he says.
The real-estate mantra of “location, location, location” works just as effectively in commercial as it does in private property but you will often be looking for rather different factors. Mukheibir shares his 5-S technique to help you begin narrowing down the areas where you will consider locating your business – first at the macro level, focus in further to the meso level, then look more closely at the micro level before you start weighing up specific sites.
Remind yourself of the medium and long-term strategies you have developed for your business. Keep your understanding of your business’s customers, purpose and growth prospects top of mind when you are selecting the areas where you will start looking for sites.
Within those areas, redline any sections where you feel the competition from other businesses will detract from your potential to grow your market. Greenline areas where there are good synergies between the people who live or work there and the demographic that you have identified as your target market.
Make sure there is clearly a good pool of potential customers for you – size definitely matters when it comes to ensuring that there are plenty of customers available to you. Look specifically for facilities that cater for the kind of customers you want to attract. Sports stores benefit from being close to schools and tertiary colleges, for example.
Although many businesses now have an online element, most still benefit from attracting customers to walk through the door. For your premises to be a good fit for your business, you should be located in plain sight and ensure that your ability to market yourself locally through signage and lamp-post posters is not restricted by local bylaws.
You will attract and retain good customers and staff if they feel they’re secure in the area. This perception includes factors such as easy, safe parking and a welcoming environment.
“Making a success of your business is not just about the product or your branding,” says Mukheibir. “It can be as fundamental as finding a site that ends up paying for itself. To do this, it must offer you a well-calculated gap in the market where the strong demand for the product or service that your business offers ensures sales and profit. If you have considered all these steps carefully, you will never worry about making rent and wages payment again.”
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