During the Internet boom in the late 90s, you could count the VC firms interested in acquiring franchise companies on one finger. Today the story is very different. VCs are expanding their scope, and we are seeing more interest in the acquisition of franchise companies, from professional and individual investors.
In fact, as the power of the organisational and financial leverage of franchising is finally being realised in the financial marketplace, franchise companies are often fetching premium valuations. Many franchise companies, already familiar with the franchise process, are acquiring complementary brands so they can leverage off their skills in the areas of franchise sales, franchise support and franchisee relations. There are also funders actively looking for franchise companies, with many more interested on a peripheral basis.
Franchising, as a means of business expansion, is largely geared toward helping companies leverage their growth. At its core, franchising is about helping companies with limited resources grow using ‘other people’s money.’ This basic premise begs the question of ‘why should businesses buy a franchise company instead of franchising a similar concept themselves?’ – especially since acquisition requires the buyer to spend significantly more capital to get into the ‘franchise business.’
The reasons companies choose acquisition are simple. First, it is difficult to create the original successful business model. Second, given the speed with which new franchisors can expand, the target franchisor may establish too much of a head start in the franchise marketplace. Finally, existing franchise companies are attractive acquisition candidates, because they have already demonstrated a market for the sale of their franchises.
On a regular basis, we hear from individuals who are eager to franchise – and yet they do not even have one profitable operating prototype. What we tell these companies is that without an operating prototype, it is virtually impossible to franchise. More important, the development of a prototype successful enough to franchise is often the hardest part of franchising.
For a business model to be ‘franchisable,’ it needs to be more profitable than a business that is simply successful. A franchise company needs to be profitable enough to allow the franchisor to collect a royalty – and still provide an adequate return to their franchisees.
For a brand new concept, a potential buyer may face two choices: buy one of the pioneer franchisors or spend six months opening the unit, six months refining it and another six months preparing to franchise the business. For entrepreneurs intent on entering a new market, the dynamic nature of franchising itself often forces them to buy, because they realise that with the time it takes to test and prove a prototype and begin franchising, they may have missed the boat if the market leaders have all sold 100 franchises or more.
And while some acquisitions are straightforward, many are made for strategic purposes. Existing franchisors acquire a new and perhaps competing brand. Manufacturers may want to acquire a channel of distribution for their own products. In some instances, the buyer may be looking to acquire a troubled franchise company or a sleepy, underdeveloped concept, raising an entirely different set of questions. But regardless of whether or not the acquisition is strategic, the nature of the strategic goals (and specific challenges posed by that strategic relationship) must be understood and evaluated.
Let the Buyer Beware: Due Diligence in the Franchise Acquisition Process
Of course, finding the franchise company to buy is only half the process. Once you have settled on your acquisition target, determined that the company is for sale and negotiated a price, you must then establish if the franchise company is what the seller has claimed. But in doing this due diligence, the acquisition of a franchise is complicated by the fact that, by definition, there are multiple interested parties in the ultimate transaction: the franchisees.
Is the Business Model Viable?
From a business perspective, the biggest concern you face when acquiring a franchise company is that the business model is not viable. There is also the potential threat that the acquisition could spawn dormant or perhaps newfound litigation.
While secondary research on the market can provide some information in this regard, the best way to unearth both of these potential problems is to undertake a systematic survey of franchisees. With that in mind, the first order of business in acquisition due diligence involves a survey of franchisees to ‘take the pulse’ of operators prior to an acquisition.
As a related step in gauging the effectiveness of a franchisor’s business model, you should conduct unit-level due diligence (if the operation is operating out of a fixed location) to assure that the franchise model and unit economics are viable. In conducting this analysis, someone with appropriate consumer-side expertise should visit a number of franchisees of different markets to examine factors such as brand and operational consistency, quality control and overall business model viability.
You should also gain insight and perspective as to how the seller measures up against its major franchised competitors. To conduct this analysis, the seller’s legal documentation, business plans, marketing plans, historical sales and marketing performance data and other materials should be reviewed and compared.
You also need to compare franchisor performance to anticipated performance to try to uncover any areas of concern. In doing so, it is important to scrutinise all variances from the norm, as even ‘positive’ deviations from the norm can be an indication of an underlying problem. For example, high close ratios in the franchise sales department may be an indicator of a great concept, great marketing and a strong sales force. Alternatively, these high ratios could also be an indication of a sales force run amok and potential disclosure issues that will surface years from now.
Strength of Management
The single most important factor in the success of any franchise organisation – perhaps even more important than the concept itself – will be the management team charged with its growth. If the existing management remains with the company being acquired, you should conduct an assessment of their abilities to grow the franchise organisation. It is imperative that you assess the franchisor’s existing organisational structure, budget and personnel needs (if any), with an eye toward evaluating what additional tools the franchisor may need to achieve the seller’s future goals.
As part of this process, you’ll want to analyse staffing ratios versus those of direct competitors and franchisors in general. One serious problem that such an analysis might uncover, for example, involves the question of whether the organisation has been intentionally understaffed (or under-resourced) in an effort to inflate earnings (and the selling price). In the case of a planned sale, a franchisor may use employee attrition or even terminations to affect this end, causing serious concerns about whether the franchisor can maintain quality and continue to grow at the current pace without staff additions.
Of course, the business issues discussed above make up only a small part of the due diligence required in any franchise transaction. And while these issues represent only a fraction of the issues that go into a successful acquisition, this process will provide you with a better analysis of the opportunity and a fuller understanding of the risk involved in a purchase.
Ultimately, like all business decisions, the acquisition of a franchise company is an exercise in measuring risk versus return. The advantages of acquisition (proven concept, existing franchise operations, and speed to market) must be weighed against the risks (increased cost, existing problems with the franchisor, etc.) if the acquisition is to provide the desired results.
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.
Are Your Employees On Board With Your Franchise’s Brand Promise?
You cannot run a successful franchise if your staff isn’t aligned to the brand’s values.
Are the people who work in your franchise outlet familiar with the franchise’s brand promise? As a franchisee, you’re required to deliver a uniform experience, so any customer who walks through your door feels like they’re at the same store the franchisor has across multiple locations. If your employees aren’t able to embody the franchise’s brand promise at every interaction, you have a challenge on hand.
“If your company’s brand promise is a warm and friendly atmosphere, you can’t deliver that if your employees aren’t warm and friendly,” says Robin William, Senior Practice Consultant at Gallup.
“Selecting the right employees is essential to providing the right brand service. Hiring people who can’t behave the way the brand wants them to will doom a service initiative.”
When employees know what’s expected of them, they’re able to keep the promise the franchise makes to customers – leading to higher customer and employee engagement, trust, and revenue.
More than a mission statement
Even if you’ve ensured every one of your staff members know the brand’s mission statement, how can you be sure they’re able to exemplify it in their behaviour every day? William suggests that you do the following:
- Create structures and mechanisms to consistently instil brand values in the franchise’s culture.
- Discuss brand behaviours daily.
- Demonstrate brand behaviours yourself every day.
- Praise the efforts of individuals who demonstrate brand behaviours.
- Hold employees accountable for not exhibiting brand behaviours.
Once you’ve clearly defined the right brand behaviours, it’ll be easier to have staff on board who deliver your franchisor’s brand promise.
Internalise the culture
Here’s a conundrum. Do your staff know what to do in a situation where a customer’s request might not be aligned with the brand promise, but the brand promise is always to deliver on customers’ requests? It’s a tricky situation, but if you’ve clearly articulated the promise, your staff will know how to “Behave the brand”, says William.
“Do whatever it takes to deliver on its brand promise. Whether it’s focusing quality, fast service, customer care, or low prices,” he says.
“Employees must execute brand and service behaviours consistently, and frequent reminders can help employees understand and internalise these behaviours.”
Empower your staff
Investing in your staff is the best way to encourage them to act in line with your brand’s promise. Once they understand why it’s important to act along the lines of your brand, they will feel empowered and motivated to do so.
Starbucks trains employees to memorise customers’ names and preferences in line with their promise of making everyone who visits their stores feel at home. Apple’s strategy of hiring nice, smart people who are passionate about service and the product aligns with the company’s belief that knowledge can be improved, but personality cannot.
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