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.
Make Your Business A Good Neighbour
Take your business from invisible and struggling to a thriving neighbourhood landmark.
Is your business invisible to your customers? You may have fewer customers than you would like because your business does not seem relevant to those in your neighbourhood. This is an even bigger mistake than not being able to reach beyond your direct trading area.
To appeal to people – customers – you should also present your business as a group of people who help other people. This can be helping supply them with goods they need to buy, helping provide them with loans or simply being a reassuring and consistent presence in your neighbourhood.
As our Local Area Marketing Manager, Juan Botha, tells Cash Converters’ franchisees, this is about blending and fitting in like a neighbour. It is about give and take. And all of that adds up to community engagement.
Here are six of his top tips:
- Introduce the family: Cultivate a friendly, welcoming atmosphere in your shop or office. Introduce new staff to regular customers. Make sure that new customers can get to know staff through your in-store welcome boards and name badges.
- Find your partners: Identify the gatekeepers in your community and create partnerships with them. Think about approaching sports clubs, schools, church groups, sewing circles and book clubs.
- Snatch some selfies: If you have local celebrities as customers, take a selfie and post it on your social media: “Guess who came to say hello today . . .” Build relationships with local heroes and you will be able to call on them to host your in-house fun day or charity drive.
- Give back to business: Be involved in local business chambers and groupings as more than a participant. Show you are a good business neighbour by facilitating speed networking, hosting a speaker or sponsoring a sound system or catering for the next meeting.
- Adopt a cause: Identify a local charity and rally support for it.
- Help the community: Launch or participate in a community project – anything from an area clean-up or helping repaint school classrooms to planting trees or a community vegetable garden.
Building relationships helps you build your business’s reputation. That is because you can make people start to feel a certain way about your business and influence them positively towards you. Then, when they need something that you supply, you will be top of mind.
That neighbourhood warmth creates a sense of ownership. These prospective customers will already know how you can benefit their lives and so are more likely to become your regular customers.
They will be acting on the fact that people remember you for the experience you give them. As top American writer Maya Angelou said, their memories will be shaped by how you make them feel – not how or what you make them think. Relationships may be intangible but they can bring real value to your business.
Why Your Franchise Should Adopt A Shared Value Business Model
Stay ahead of the curve in an evolving business environment and unlock business growth by addressing social issues.
Have you heard the term ‘profit with purpose’ in your business ownership circles, but not sure how exactly it could be applied to your franchise? As a franchisor, entrenching this model into your core business strategy could see your current growth potential multiply – along with the communities that play a role in your business’ success.
“By leveraging resources, market access, scale and their capacity for innovation, businesses can advance and accelerate development while generating commercial returns.”– Serial entrepreneur Cindy Langeveld.
Considered the key to profit and progress, the shared value business model enables your franchise to go beyond just ticking the CSR box. Here’s why and how your franchise can start establishing partnerships for business growth:
Indicates your business has a conscience
Not only is a profit-first business approach is no longer viable for long-term business growth, the role of the consumer is becoming more prominent – and they are leaning towards buying from corporations that demonstrate conscientious business practices. Donating blankets to a charity is good, but how are you impacting those involved in the value chain that sustains your business?
Chicken franchise chain Nando’s, for example, creates shared value for the key players in the success of their brand – the small farmers in Southern Africa who farm their unique African Bird’s Eye Chillies used in the PERi-PERi flavour.
This farming initiative was started ten years ago in Mozambique with just six small farms. Today it includes 1400 farmers and produces in excess of 360 tonnes of chilli across Southern Africa.
Ensures your profit creates progress
While implementing shared value business models helps consumers see your business in a better light, it’s important for the initiatives that stem from it have a visible, positive and measurable impact on the communities concerned.
“I’ll never forget my first impact assessment. I sat with one of our farmers and a translator who told me about the impact growing chilli crops for Nando’s was having on his life and his community” recalls Sam Hirst, Nando’s PERi-PERi Farming Initiative Manager.
Nando’s has grown and sustained its network of farmers through learning and improving on the process, despite the challenges involved. Empowering the small farmer has required unprecedented effort and working very closely with farmers every day and every step of the way to overcome challenges such as generating working capital to set up the infrastructure the farmers needed, managing unpredictable weather conditions, and high transactional costs.
Creates sustainable partnerships
The purpose of implementing a shared value business model is so make a sustainable difference in both your business’ growth and that of the communities involved in your supply chain. For Nando’s the motivation was the potential impact the chilli farming could have in its communities.
The franchise has consequently invested in providing these farmers with the tools and skills for sustainable farming. Investing in technologies and various new processes has enabled Nando’s to secure prices and contracts directly with the farmers, avoiding potential negative economic impact on the farmers’ financial security.
3 Employment Best Practices To Apply In Your Franchise
Brand new to franchising? As a first-time franchisee, you may need some guidance on managing your recruitment processes within your business.
You’ve just hired your first few employees. Congratulations. As an owner-operator who is also new to business ownership, navigating the human resources aspect of your franchise may be daunting, especially when growth is imminent. Your franchisor offers support, but may not want to play a huge role in recruiting and managing your staff.
“Employee management and HR compliance is a tricky topic, especially with the relationship between franchisors and franchisees. Depending on what HR support the franchisor can and cannot provide, the franchisee may be on their own in this all-important area.” – Dean Haller, President and founder of HRSentry
This, however, doesn’t mean you’ll have to blindly search your way through human resources practices, hoping you’ll eventually get it right. Invest a little time into learning the basics, and you’ll make the best decisions until you can afford to hire an HR specialist – and pick up some expertise along the way.
1. Equip newcomers with the tools for success
Consider the type of information, tools and training your new recruits may need to function productively in their new work environment – and ensure they get it. “Studies indicate that most new employees decide whether to stay or leave a company within the first six months, so be sure to be welcoming early on to help them feel part of your team,” advises Haller.
“If you’re thoughtful of your employees’ new experience, they will become more productive and engaged, and thus, more likely to stay.”
Remember the first time you went through the manuals while familiarising yourself with the franchise concept? A new employees’ experience is similar as they have to take in a lot of new information while acquainting themselves with their new workspace, colleagues and systems. Make the on-boarding easier, by reasonably introducing each aspect during orientation and training.
2. Remain stern on performance standards
Once both parties are satisfied with the training and support offered, new staff should be made aware of expectations and receive continuous and constructive feedback on their performance based on these.
Should employees fail to meet their KPIs, it’s important you’re able to identify if your best efforts have failed and whether termination is an option. “Don’t procrastinate. Make sure all performance-related reasons are documented clearly,” says Haller. “Treat the person with dignity and respect –not only because it’s the right thing to do, but because it’s good business practice and can help you avoid any potential legal action against your business in the future.”
You can avoid this situation early on by hiring employees whose CVs not only meet your business’ operational needs, your company culture too.
3. Acknowledge and reward hard work
During key periods of business growth, it’s easy to overlook good performance. And even when you acknowledge your best employees, sometimes money in the bank isn’t as meaningful as creative tokens of appreciation.
“Get creative,” says Haller. “Provide flexible work schedules, interesting assignments, or a gift certificate to a great restaurant or spa. Be mindful that it’s costly to replace a good employee, so reward your employees with some kind of benefits if you can,” he adds.
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