The number one reason for the failure of franchisors is under-capitalisation. If you’re thinking about franchising, it’s important that you have enough capital to launch and enough capital to sustain the operation until recurring royalties can cover your overhead.
Many franchisors wrongly assume that the amount they collect from selling franchises in initial franchise fees will cover overheads. But often the franchise fee revenue does not fund the necessary infrastructure, leaving the emerging franchisor scrambling. If you’re not sitting on a at least R2 million, you may run out of cash.
When launching my healthcare staffing franchise in 2005, we estimated we needed to invest R3 million. I contributed R1 million of our own money and accessed R2 million in debt financing. We were about 18 months in when the cash began to get painfully tight.
We had overspent on unnecessary or ill-advised hiring: at least R800 000 on legal and public relations firms; R400 000 for salaried employees to do work that contracted consultants could have done, particularly franchise training; and between R400 000 and R600 000 for outside help in the first year to handle franchise sales when that role really belonged to my husband or me. We actually needed R5 million.
Add up what we overspent on though, and you see that our initial estimate of R3 million would have been adequate if we had known then what we know now. While you might avoid similar pitfalls, you should still plan on R800 000 in additional cash reserves, over and above what your financial model shows you need, for unexpected expenses. Once you’ve figured out a realistic estimate for your opportunity, the next part is pursuing the funds. Here’s a look at the most common sources.
1. Banks. The capital markets have gotten tighter, but there is still money available. Banks review lots of requests, and they are going to be more inclined to loan to those who make their job easier by anticipating their concerns.
In our first business plan for franchising, we intended to sell ten franchises in the first year, another 25 in the second year, 40 in the third year, and about 50 each year in the fourth and fifth years. Naturally, the bank questioned how we would sell ten franchises in a year without any experience. But we had thoroughly researched our competitors and were prepared to convince the bank that we could meet our goal.
These days, you might need to pitch to multiple banks before finding a lender. You will need great market research on your industry and your performance compared with peers. You must exert strong confidence in your abilities to achieve your business-plan goals and to repay the loan. And you will need to have skin in the game. Expect to give a personal guarantee for the loan.
So be prepared before you meet with the bank. Make sure your package includes the following: a full business plan; financial statements for the first five years, including a statement of cash flow; and the competitive analysis on your industry to show that your assumptions for unit sales by year, royalty revenue per year and per unit, and earnings as a percentage of revenue are within the ranges of what has occurred historically in the industry.
2. Government programmes. I scoured all the possible government programmes, concentrating on ones that were available to me and sure enough, I found one that suited me. You’ll be amazed by the number of resources that are out there, but remember, government programmes have specific mandates, so choose the ones that suit what you have to offer.
3. Friends and family. Remember how I underestimated the money we needed by R2 million? That was a hard moment. We had to access more capital and really build, or entrench and stall growth. At that point, we had 12 franchisees who had signed up because of their belief in our vision. So we tabled our pride and asked my husband’s parents, my parents and extended family for a loan.
They agreed to help us. We structured the one-year loan with 14% interest (to match their returns in the market, since they had to pull out the money to loan to us). We were able to pay it back in 11 months. We will always be grateful that they stood by us. Receiving financial help from family members is humbling and is something that stays with you, grounds you, and drives you to never have to repeat the experience.
3 Core Strategies For Building Successful Franchise Organisations
How to attract potential franchisees to invest in your business.
The most common questions I hear from franchisors are usually related to growth strategy. In other words, what are the core strategies that differentiate the successful from the mediocre?
Strong leadership determines the overall success of the organisation, but how can this be defined or broken down to actionable strategies? People often ask me how we created a franchise growth strategy that enabled us to grow to 150 units in less than three years. This is the secret sauce! When I coach my franchise executive clients, we begin with three core strategies.
As I described in my book, Franchise Bible 8th Edition, The Upside Down Pyramid strategy sets the pace for everything since it is a core belief. This will get the company moving in the right direction and keep the focus strong as franchise owners are added to the community. The Three Decision Lens Philosophy then kicks in to make sure the company stays on track and makes good solid decisions that will benefit the franchisees and the overall growth of the organisation. Lastly, the Franchise Glue creates a strategy for long-term maintenance that inspires aggressive growth and peak performance.
The following are the core leadership strategies that I identified in Entrepreneur Magazine’s Franchise Bible 8th Edition.
The Upside Down Pyramid
This strategy is a paradigm shift from the common corporate organizational structure. Typically, you see the leader at the top of the pyramid governing over the team members, which trickles down to the employees and eventually the customers.
Franchising is a very unique business model and is very different from a traditional corporation. The primary difference is that the franchise owners are independent business operators, not employees. The Upside Down Pyramid strategy flips that model on its head by placing the leader(s) at the bottom, bearing the weight of the company infrastructure on their shoulders. Franchise owners then are viewed more like the customer and supported accordingly.
The Three Decision Lens
Every decision a franchisor makes has Legal, Practical and Political implications, so these three factors have to be considered whenever a decision is made. Making good decisions is mission critical to the successful growth of a franchise organisation. Many franchisors have stumbled or even failed because of poor decisions that negatively impacted their franchisees.
The Three Decision Lens Philosophy is tool that enables a franchisor to consider the total impact of their choices before the decision is made.
The Franchise Glue
Franchise Glue is everything a franchisor does that sticks the franchisees to them. Ongoing support and training, buying power, technology tools, innovation, events and other programmes and systems that endear the franchise owners to the brand. These are the reasons that franchise owners stay with the brand and have no problem paying ongoing royalties.
Once these three strategies are implemented and the leadership spoke is in place, we can build the remaining spokes which are marketing, operations, finance and technology to head for the “hockey stick” growth of 100 units and beyond.
Like any other business strategy, the most important factor is your willingness to buy in and execute. The best game plan in the world is useless if it is not put in to action. Building a healthy and thriving franchise organisation is much like exercise. Long term and consistent exercise programmes generally lead to a healthy person.
I will be posting a series of articles that will break these three strategies down in more detail including real world examples and tips for implementation. This will allow you and your team to focus on one strategy at a time and work on implementation steps. Stay tuned over the next several weeks and try working these strategies in to your franchise business model and see how it impacts your franchise community.
This article was originally posted here on Entrepreneur.com.
The Secret Sauce To Great Franchise Leadership
The upside down pyramid puts the franchisee at the center of everyone’s effort. Success follows.
I am often asked to share the secrets of franchise success with my clients and audiences of franchise executives as I travel the country spreading the Franchise Bible strategies.
The most critical of the three core strategies is what I call the upside down pyramid strategy. This is more than a catch phrase or slogan. It must become a true belief in order for this strategy to affect a franchise organization for the better. Lets start with some basic facts to clarify.
What it is
The upside down pyramid is a servant leadership model that makes sure that franchise owners always come first. This must be genuine for all members of your team.
Franchising is different than any other business model in this way. A franchise organisation simply cannot thrive unless the entire corporate team is on board with this commitment. If it’s not, it would be like a medical team where some members simply did not care about healing the patient. It is a non-negotiable.
What it is not
This strategy is not a hand-holding philosophy that rewards lazy or non-compliant franchisees. One of the exciting outcomes from this system is seeing the franchise owners step up and go above and beyond the call of duty when they feel truly appreciated, valued and respected by the franchisor. I have seen amazing things happen from franchise communities that felt connected and part of the bigger picture.
Many franchise organisation executives have a lot of experience as traditional employers so they tend to try to “manage” their franchise owners as though they are employees. In most cases this is the beginning of the most common problem that I call the traditional pyramid model with the boss on top.
The key to remember at this point is the reality that the franchise owners are not employees of the company. In fact, the exact opposite is actually the case. The franchisees invested their hard earned money into the franchise company and pay an ongoing royalty as well. This means that they are the customers of the franchisor and the franchisor should value them as such.
How do you implement this strategy?
I have seen the good, the bad and the ugly in the franchise world. I can usually sense the company culture pretty quickly when I am among the franchise executive and support team. It is no surprise that the most successful franchise brands have a pretty solid grasp on this strategy. Here are some tips to get you started:
- Train: Introduce this strategy to your executive and support team and give them the opportunity to ask questions and learn. Remember that this may be a bit of a paradigm shift for some, so they may need time to get it down.
- Reinforce: Use ongoing reminders during your meetings, training sessions and conferences to keep the ball rolling. Your system must be based on things that you and your team will do consistently for a long period of time. A short burst of change followed by a return to the former status quo doesn’t work, so make sure you can commit and stick with it.
- Insist on buy-in: Everyone on your executive, training and support teams must buy in to this commitment for it to work. You have heard that one bad apple spoils the whole bunch. This is very true within a franchise organisation. You may have to replace team members if they refuse to genuinely commit.
Related: Col’ Cacchio: A Passion For Pizza
You have also heard the saying that the fish starts to rot at the head. The common denominator that I see in failing franchise organisations is almost always due to poor leadership. I often say that a decent business model with great leadership will usually thrive and a great business model with lousy leadership will usually fail.
Don’t feel bad if you are not the best leader for your business. I have seen business founders step aside and hire in leadership experts to run with their creation. Knowing that someone else is a better leader than you for your franchise organisation is a sign of great discernment and wisdom. If you are not sure just ask your franchise owners to give you a grade as the leader. I asked a franchise CEO recently if he would get an A from his franchisees and he said, “Probably not.” I advised him to get back to work and make sure that he can earn that A.
This article was originally posted here on Entrepreneur.com.
Get Your Franchise Running Smoothly – Even When You’re Not There
Does the thought of taking time off from your franchise outlet make you nervous? Then you have to learn to run your business instead of letting it run you.
“A sign of a successful business is one that can operate without your physical presence 24/7,” says Brad Sugars, start-up expert, author and founder of ActionCOACH. While your franchise systems and operations are designed to run smoothly and consistently, is your staff trained to be productive in your absence?
“Franchises are already by nature systematised operations, so it boils down to how you as a business owner hire and train people to get the necessary jobs done,” says Sugars.
If you know a sick day will cause havoc in your store, an assessment of how you’re running your business is needed. Are you really running a successful franchise if things fall about without your supervision? Take a step back and consider the following steps to manage your franchise without it controlling your life. Pretty soon you could book that vacation.
Determine your role in the franchise
Are you managing the franchise, taking orders, doing admin and handling every other aspect of the business? Then you’re not hiring the right people, because those roles should be filled by people who can be left to carry them out unsupervised.
“And if you don’t have the right people for the job then it might be time to start hiring, so you can free up your franchise’s most valuable resource – you,” says Pieter Scholtz, co-Master Licensee for ActionCOACH in Southern Africa.
“You need to get an idea of how you can hire people to take repetitive or administrative tasks away from you. Ask yourself: ‘Do I really need to be doing this?’” says Sugars. Your business cannot run optimally if you’re the single most-knowledgeable and capable person there.
Lead with clarity
You have long-term goals for your business, perhaps even acquiring more locations and running multiple units. While growth is good, you need to share the load and ensure everyone employed in your business is working towards the same goals, otherwise, it’ll be difficult to get there. Sugars suggests asking yourself the following:
- How will you make your vision a reality?
- What makes you different from other franchisees and business owners?
- What kind of team do you want to recruit and create?
- How does all of this deliver value to your customer?
Conveying your vision can help ensure employees know how to get to the end-goal faster and more efficiently.
Plan for long-term cash flow
Loyal customers ensure a constant flow of cash through the franchise and this requires exceptional service and the building of strong relationships. “Target your top-spending customers and establish a good relationship with them for long-term cash flow,” Sugars suggests.
Although the broader campaigns are covered by the marketing fee you’re paying to your franchisor, it’s wise to focus on your local’s tastes and suggestions when looking to deliver an experience worth returning for.
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