Prospective franchisors often ask me about the most difficult aspect of franchising. “Is it franchise sales?” “Is it ensuring franchisee success?” “Is it quality control?”
And my answer never ceases to surprise them: “No, it’s turning down a cheque for R100 000.”
Perhaps the single biggest mistake made by novice franchisors is to sell franchises to candidates who are not truly qualified to run them.
It’s easy to understand why this mistake gets made. A new franchisor, who has spent perhaps R400 000 preparing to franchise, finally begins offering franchises. The low close rate typical of franchise sales, combined with the long sales cycle, makes it feel as if that first franchise sale will never take place. Doubt creeps in. “Will I ever sell a franchise?” Then, a prospect the franchisor knows is marginal indicates he wants to sign the franchise agreement and pay his initial fee.
So what do you do?
Choosing the Right Franchisee
Before you take that cheque, the first thing you need to remember is that you’re in this for the long run. You can’t be a successful franchisor unless your franchisees are also successful in their own businesses.
Underperforming franchisees require much more support than strong franchisees, so they cost you more. At the same time, they generate lower revenues and therefore pay less in royalties. And, of course, failed franchisees don’t pay royalties at all and are much more likely to bring litigation against the franchisor.
You should also remember that every one of your franchisees (and every one of your lawsuits, should you have any) is disclosed in your offering circular. A sharp franchise candidate will always speak with these franchisees as part of their due diligence process.
Suppose you accept a franchisee who is unqualified, undercapitalised and lazy. Do you really think he’s telling prospects, “Frankly, the reason I am failing is that I am unqualified, undercapitalised and lazy. This is a great franchise, and the franchisor is wonderful”? Not likely.
Regardless of whether you are to blame in actuality, imagine how the franchisee is portraying your franchise: “It costs a lot more to do this than you think. And it’s a lot harder than the franchisor lets on. I never get enough support. And now I’ve lost my life’s savings investing in this. My wife has left me. My kids are gone. And I may lose my house…”
Well, I can pretty much guarantee you that anyone who talks to that franchisee isn’t likely to sign a franchise agreement with you anytime soon.
So what’s the trade-off? Increased support costs, increased litigation, reduced royalties, and a reduced ability (or maybe no ability) to sell franchises on one hand, versus a cheque for R100 000 on the other. The bottom line:
Sometimes you have to walk away.
Sorting the Wheat from the Chaff
So how do you identify franchisees who will be successful? Some criteria are easily identified. For example, some specific skill sets may be necessary for success: mechanical expertise, food-service experience, etc.
These ‘hard skills’ questions are among the first the new franchisor should address. Are you better off with experienced prospects, or should you look to train your franchisees from scratch? To answer that question, you should first figure out the following:
- What resources do you have to train and support new franchisees?
- Do you have an adequate value proposition to sell people who already have experience in your industry?
- How important is prior experience in terms of the franchisee’s ability to become profitable in their first year?
A related question is whether you should allow for ‘passive investors’ as opposed to owner-operators who work onsite. The tradeoff here is fairly basic: Owner-operators, if properly selected, typically have better unit-level performance (both from a quality and a financial perspective) – they’re more attentive to details and more concerned with quality and customer satisfaction than most managers. On the other hand, opening the franchise opportunity to passive investors can mean faster growth and a larger pool of prospective franchisees from which to draw.
Perhaps the single biggest factor to consider when choosing a franchisee is capitalisation. Inadequate capitalisation is the most common reason for franchisee failure, so every new franchisor should closely examine liquid net worth, net worth and the candidate’s credit score.
Depending on the nature of the business, your franchisee may be able to finance a portion of the franchisee’s initial investment. The amount financed is a function of what’s being financed (equipment is easier to finance than working capital, for example) and the creditworthiness of the franchisee. That said, you should be sure to take a conservative approach to each franchisee’s ability to service debt – and should walk away from those who are going to be too highly leveraged.
Of course, none of this is carved in stone. Franchisees with a working spouse may need lower working capital requirements. Alternatively, franchisors with a longer start-up period or greater working capital requirements may want to take a more conservative approach.
As you continue the evaluation process, you should also assess criteria such as intelligence. While franchisees may be looking for a ‘no-brainer’ of a business, the truth is that most businesses do require intelligence to run. And you can’t coach ‘smart’. Since most people will tell you they’re smarter than average, it’s incumbent on you to determine whether they’re good judges of their own talent. Short of intelligence tests, measures such as a candidate’s work history, academic achievements, vocabulary and general presence help to provide clues.
Likewise, most businesses require hard work, and franchisees expecting an easy go of things may wash out early. So when measuring work ethic, look for the way a prospect conducts his life. Ask prospects about their ‘average day’ and their hobbies.
Soft skills can be equally important to a franchisee’s success. Depending on the franchise, sales and/or management skills may be a franchisee’s most important asset. Relationship factors, such as honesty, personality and compatibility, also play a part – after all, you’ll be living with this franchisee for perhaps the next 20 years.
One of the often-asked questions in the area of franchise qualification is whether a franchisee should be entrepreneurial. Generally speaking, we recommend that franchisors avoid highly entrepreneurial candidates.
Entrepreneurs tend to have several definable characteristics: They tend to have moved from job to job and have frequently already started at least one business of their own. They tend to drive fast cars, have lots of traffic tickets and are frequently divorced. True entrepreneurs tend to be rule breakers, and that’s the last thing a franchisor should want.
While you may not want to exclude entrepreneurs outright, franchisors are better served targeting straight-A students with long-tenure to their corporate jobs. They tend to drive the family car through the right lane of life.
In order to assess these soft criteria, franchisors are increasingly using more sophisticated assessment tools to ‘benchmark’ the ‘job’ of their franchisees. These tools are then used by franchisees to determine their compatibility for the role.
But regardless of whether you use these tools or not, assessing the job of the franchisee – and ultimately doing what you can to assure the franchisee’s success – is the most important and the most difficult job of every franchisor.
How Strong Is Your Franchise’s Quality Control?
Your key objective as a franchisor is ensuring every one of your locations maintain the same quality standards. Why?
If you’re concerned about brand consistency as your footprint grows and you acquire more franchisees, listen up. While growth is good, keeping tabs on the quality franchisees are providing versus your company-owned locations’ efforts is difficult, but not impossible.
“McDonald’s is among the world’s most quality-oriented brands, but the value proposition and price point aren’t appropriate for steak and lobster,” says Mark Siebert CEO and Senior Franchise Consultant at iFranchise Group, an author of Franchise Your Business, The Guide to Employing the Greatest Growth Strategy Ever.
“There are, however, high-end franchise brands known for detailed attention to quality. Quality is not about what’s on the menu; it’s about consistency of the operation.”
Inconsistency ruins things
Many franchise brands risk failure by not establishing and maintaining quality for each outlet under the network’s guidelines. Regardless of whether a store is run by your company or a franchisee, if there’s glaring inconsistency in service and product quality between different locations, it’s likely to harm your brand’s reputation.
To establish the strength of your quality control standard, ask yourself the following questions:
1. Is your operational training procedure customisable?
Acquiring new franchisees is a chance to cement your training and quality processes and establish if these can be standardised, or if customisation is necessary.
“Training is equally as important as franchisee selection when it comes to maintaining the brand. The best franchisors routinely provide the most – and the most comprehensive – training to their franchisees,” says Siebert. “If standards aren’t rigorously enforced from day one, chances are these standards will continue to slip, and in the process, they’ll become more and more difficult to maintain.”
Because different locations present varying climates and market preferences, remember to customise your training materials based on respective franchisees’ markets, keeping in mind to remain consistent with your brand’s core identity.
2. Have you provided the right tools in the franchisee manual?
Duplicating your franchise’s success relies heavily on mapping out the roadmap for your franchisees and their employees to follow. The right tools will most likely yield the same results you have achieved.
“Documenting systems of operation lend a big hand in a quality control,” says Siebert. “A robust manual has multi-fold benefits and not only serves as a blueprint for operation, but as an ongoing piece of reference for even the most established franchisee, becoming the default go-to in most every scenario.”
3. Do you understand the role of supporting each franchisee?
Whether you choose to conduct on-site field visits, offer master classes like Nando’s, or check in via email or phone monthly, the ultimate goal should be aiming for higher-quality and more profitable franchisees through ongoing support and reinforcement of brand standards.
Quality control is all about commitment. For a good franchisee, that commitment comes naturally. For the franchisor, it comes at a price. But franchisors who are willing to pay that price will find their ability to build a quality brand greatly enhanced,” says Siebert.
Could Semi-Absentee Franchise Ownership Be For You?
Ready to become your own boss…for only 15 hours a week? Yes, you can become a franchisee while still clocking into work. Here’s how.
If you want to keep your current job while owning your own franchise, you may want to look into semi-absentee franchising.
“A semi-absentee model allows you to work on the franchise for ten to 15 hours per week while continuing full-time employment. Then when the time is right, you can exit your day job to focus entirely on your business,” explains Jim Judy, a consultant at Franchoice.
When you have a capable manager to oversee the daily operations of the business, you have the flexibility to work your full-time job and ownership of a fully-fledged business. But first, the following considerations need to be made:
How will the decision affect your finances?
While being a semi-absentee franchise owner may require less from you in terms of time, the financial commitment is the same as investing in a franchise as an owner-operator. The decision to become a semi-absentee franchisee should not be made before examining your needs, goals and expectations of the business. Asking yourself the following:
- Do I want to become a franchise empire builder?
- Would I like to build numerous concepts?
- How much capital do I have to invest?
Keep in mind that semi-absentee models may take longer to turn a stable profit if you’re not giving it your full attention due to spending less time working on the business.
“Semi-absentee business models are also expensive,” says Heather Rosen, president of FranNet of Virginia, a franchise advisory firm. “Because the owner must not only rent the space but hire a competent manager.”
Do you have the necessary skillset?
The key to managing a franchise while at you have a full-time corporate job is having impeccable people management skills. This is because having a manager run your business while you oversee them requires you to be comfortable with delegating and trusting that they will handle the day-to-day operations of your business.
In addition to people skills, you may think certain talents are required before calling yourself a business owner, but each franchise is different.
“Some franchisees find that the available training and the business concept allows them to use their particular talents and skills to enter semi-absentee franchising without management or business ownership experience,” say experts at Franchise Direct.
Can you balance your schedule adequately?
Even if your plan is to one day leave your job and become an owner-operator of your franchise, while you’re still on your employer’s payroll, you will need to work out ways to handle your nine-to-five tasks with your business’ success. This is an important aspect of choosing the kind of franchise to purchase. While most semi-franchisee suitable options are in retail or the service industry, ensure you’re able to keep track of the business remotely and can periodically check in on how things are going.
Insights On Recruitment That Could Affect Franchise Performance
A critical aspect of operating any successful franchise chain is getting the right franchisees on board.
You’re facing a lot of competition as the franchising industry continues to grow. International brands, local giants, and new innovative entrants to the market require you to step up your game. Not only are you geared for growth, but you need your new locations to compete with the best.
“One of the success factors for franchise systems is market penetration which is often achieved through expansion, by opening new stores with quality standards that match the brand – through franchisees,” says Ethel Nyembe, Head: Sales Optimisation and Planning at Standard Bank Group. “The wrong fit, however, can seriously set a franchise’s growth back many years or cause irreparable damage to its reputation.”
Besides the challenge of trying to make your brand more appealing to franchisees in a competitive market, acquiring the right candidates to join your franchise requires the following:
1. Draw up (and adhere to) a checklist
Not all franchisees are created equal, and even a candidate with previous franchising experience may not be the right fit for your particular brand. Alternatively, you can decide to train a potential franchisee if you see potential.
When narrowing down your list of franchisee candidates, consider the importance of this:
- How important is prior experience in terms of the franchisee’s ability to become profitable in their first year?
- Does he or she have the necessary resources to train and support the franchise?
“You need to be clear about what you want; don’t compromise on your required skills, priority traits and qualifying requirements,” advises Nyembe. “There’s too much at stake financially and reputation-wise to settle for second best.”
2. Network in the right circles
Sometimes, if the talent doesn’t come to you, it’s beneficial to seek it out physically. Industry events are a great place to come into contact with people aiming to own and run their own franchise. If not, your presence at these functions will expose your brand to more potential people to do business with.
“During key annual industry conferences and trade shows (such as The International Franchise Expo), make a point to send attendees, to sponsor or to exhibit in order to increase brand visibility,” advises Nyembe. “Also consider participating in panel discussions.”
3. Get to know your new brand representatives
While personality tests and numerous meetings can give you an idea of whether you’re choosing the right candidate, it’s important to consider taking a more advanced approach to franchisee recruitment.
“Selecting the right candidates to represent your brand is critical to your operation’s ongoing success,” says Sue McConnachie, Vice President, Quality Credit Services Limited. “These franchisees will be the face of your company and you need to trust that they will maintain your brand image.”
The selection of franchisees is crucial because, as it carries both long- and short-term implications, including:
- Reducing franchisee failure and turnover, while increasing success and profitability
- Protecting and developing your brand’s reputation
- Focusing your resources on business planning and management instead of problem-solving
- Decreasing exposure to legal implications when a franchisee’s conduct is negative or their franchise is unsuccessful
- Minimising legal and collection claims against delinquent franchisees.
Selecting your next set of franchisees requires establishing a checklist before viewing any CVs, dedicating time to seek out potential franchisees, and ensure you’re choosing people who will take as much pride in your brand as you do.
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