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Franchisors

Should you Offer Financing?

What franchisors need to know about helping franchisees get financed.

Mark Siebert

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One of the most common problems in the franchise sales process is helping prospective franchisees secure financing for their new investment. As a franchisor, should you offer financing to your franchisees? Or should you just not get involved? How much help is too much? And when should a franchisor say enough is enough?

Options for Franchisee Finance

In addressing this issue, you should first realise there are a myriad of options for franchisee financing assistance. These range from a relatively low level of involvement (such as assistance in the development of a business plan) to a high level of involvement (such as providing direct financing to franchisees).

The level of involvement that a franchisor should have in the finance process should be based on several factors: size of investment, nature of the assets financed, the profile of the targeted franchisee, the ability of the business model to carry financing, the financial strength of the franchisor and the relative demand for the franchise in question.

Since significant involvement on the finance side involves some degree of risk, the first question you should address is the extent to which your involvement is necessary to meet development goals. In essence, if you are not having any difficulty selling franchises, a minimalist approach will certainly suffice. Provide outlines for business plans, but do not put any of your hard-won assets at risk.

There are also some non-finance alternatives to easing the franchisee’s financial burden that would open a franchise opportunity to a wider market of prospective franchisees. Some new franchisors have chosen to reduce or waive franchise fees altogether for their initial franchisees. Franchisors who double as manufacturers or suppliers may offer discounts or extended terms on initial inventory. But franchisors should beware. If these provisions are structured as an ‘introductory offer,’ they need to be disclosed.

It is a New Business

While a franchisor thinking of getting more involved in the franchise finance process may initially look at the advantages of providing financing to franchisees, the downside can be considerable.

Yes, providing financing assistance can increase the number of prospective franchisees who might otherwise qualify for your franchise, but these same franchisees are likely to be the worst credit risks with the highest likelihood of loan default. And there is certainly an argument that we should allow Charles Darwin to sort our prospects for us. Any time a franchisor is taking on any incremental exposure in the lending process, the default rate on these franchise loans should be of substantial concern, and should not be overlooked.

Likewise, it is important to understand that providing limited guarantees, credit enhancements or direct loans to your franchisees will encumber your balance sheet with contingent liabilities that may, in turn, make it much more difficult for you to obtain a loan should the need arise. Such a posture may make it difficult or impossible to build that new building, finance additional corporate growth or acquire that competitor. In essence, this financing can eliminate the very leverage you were trying to create when you turned to a franchised growth strategy in the first place.

Moreover, most franchisors are distinctly unqualified to get into the lending business. First and foremost, they are not in the lending business, which is ultimately a business of assessing risk and assigning a fee to that risk. And equally important, the franchisor who gets into the direct lending business has a built-in conflict of interest that could easily cloud his or her judgement.

Even if a franchisor can overcome the difficulties of mastering this new business, many will not qualify from a financial perspective. To provide a meaningful guarantee of any type, you must first evaluate your own creditworthiness – as each such guarantee will encumber your assets, and a fast-growing franchise can rapidly outstrip its balance sheet. And, if those guarantees come due because of loan defaults, that debt can easily consume an organisation.

Get Paid for Your Risk

If you do choose to provide some form of credit enhancement or otherwise assume risk on behalf of your franchisees, you should treat this credit enhancement as any other part of the value proposition – and turn it into a profit centre.

It is not enough to benefit from the existence of incremental franchisees. The economic benefit you receive from those fees and royalties represents your return for the value proposition you have created by being a good franchisor.

Over time, even the best finance programme is likely to see some defaults, and you should seek to offset those defaults by realising interest on those loans – enough to offset administrative costs, forecast defaults and still provide some profit.

As a franchise consultant since 1985, Mark Siebert founded the iFranchise Group, a franchise consulting firm, in 1999. During his career, Mark has personally assisted more than 30 Fortune 1000 companies and over 200 startup franchisors. He regularly conducts workshops and seminars on franchising around the world. For more than a decade, Mark also has been actively involved in assisting U.S. franchisors in expanding abroad. In 2001, he co-founded Franchise Investors Inc., an investment firm specializing in franchise companies. He's on the board of directors of the American Association of Franchisees and Dealers and the board of advisors to Connections for Community Ownership, which encourages minority business and job development through franchising.

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Franchisors

3 Core Strategies For Building Successful Franchise Organisations

How to attract potential franchisees to invest in your business.

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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.

Related: Selling Your First Franchise? Consider These Key Pointers

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.

Related: 3 Ways You Can Innovate And Improve As A Franchisee

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.

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Franchisors

The Secret Sauce To Great Franchise Leadership

The upside down pyramid puts the franchisee at the center of everyone’s effort. Success follows.

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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.

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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.

Related: 3 Challenges To Establishing A Franchise System And How To Overcome Them

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.

The challenge

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

Leadership tip

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.

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Franchisors

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.

Diana Albertyn

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“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.

Related: How To Write An Operations Manual For Your Franchise

“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.

Related: 3 Steps To Ensure Your Franchisees Flourish Your Support System

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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