When a company first decides to franchise, they’ll rapidly learn that this decision is only the first in a series of decisions that’ll ultimately affect their success or failure as a franchisor. Even before getting to the crucial issues of fee determination, the questions will fly fast and furious. How fast should I grow? Where should I expand? Should I sell franchises close to my existing company-owned operations? What support should I provide? What will it cost me?
What many neophyte franchisors fail to realise is that the answers to these and other related questions will ultimately determine the success or failure of the franchise company.
It Starts With the Goals
Any new franchisor should begin the process by gaining an understanding of what specific goals you’re hoping to accomplish through franchising. You can get so wound up in the day-to-day operations of the business that you fail to realise the business is there to serve your needs, not the other way around. So you should take a step back and ask yourself where you want to be at some point in the future. Do you want to sell the business or pass it on to your heirs? If you want to hold on to it, do you want to achieve some specific financial goals, and if so, when? If you want to sell it, when, and for how much?
Let’s say you want to sell your company in five years and you know the price. Start by subtracting an estimate of the current value of your existing business from your desired selling price, and that’ll tell you the growth in valuation that you need to achieve your ultimate goal.
Armed with this information, you can then work backward into a game plan. To do this, you divide your required growth in valuation by an assumed multiple of earnings (based on the selling price of ‘comparable’ businesses) to learn the earnings your business will need to generate to achieve that goal. Then, based on a variety of factors, you would make assumptions relative to overall profitability to provide you with an indication of what revenue level will allow you to achieve that selling price. Then look at estimated unit level performance, back out an estimated royalty, and divide royalties per unit into that revenue level to achieve a rough approximation of the number of franchises that’ll need to be operating to achieve your goals.
You then develop a game plan based on staging that number of franchise sales over your five-year planning horizon. And, voila! Everything starts to fall into place. Once you know how many franchises you need to sell each year, you can set your marketing budget based on an assumed marketing cost per franchise sale. You can develop a hiring plan based on staffing ratios relative to franchise sales person effectiveness, field support ratios and other measures of an efficiently run franchise organisation. In fact, this process will tell you virtually everything you need to know in order to develop a successful franchise development programme.
Of course, the process outlined above has been vastly oversimplified for this article. We haven’t made provisions to account for franchise fees, product sales and other sources of revenue. We haven’t discussed the complexities of properly establishing an earnings multiple or estimating franchisor profitability. The truth of the matter is that this process, in practice, requires a substantial amount of forethought, planning and financial analysis – and often in numerous iterations – before a reasonable game plan can be established. But in every instance, it starts with goals and ends with strategy and tactics.
And while goals should drive strategy and strategy should drive tactics, there are some rules of thumb that apply to virtually all new franchisors.
Don’t Try to Eat the Entire Cow With One Bite
You’re generally well advised to get your feet under you as a franchisor before stomping down on the accelerator. The problem is many people get into franchising in the first place as a means of leveraging their assets. They don’t have the people or the capital to develop company-owned units as fast as they would otherwise like, and so franchising provides the magic pill for low-cost growth.
Unfortunately, one of the biggest advantages of franchising – the relatively ‘unfettered’ nature of the franchise growth process itself – can be one of its biggest problems. Without capital constraints, a franchisor can literally sell itself into a position in which it can’t provide adequate support to its new franchisees. This can lead to franchisees who fail, franchisees who don’t open or franchisees who feel disaffected. This initial burst of speed can ultimately be responsible for locking up the brakes a year or two down the road.
My advice: Don’t grow faster than your ability to support your franchisees. And until you know just how much and what type of support they’ll need based on practical experience, you should err on the side of conservatism.
Over-support your initial franchisees. Make sure your first franchises are wildly successful, even at the expense of more rapid growth, because franchise marketing is driven by word of mouth. Remember: If your franchisees fail, you fail. But nothing drives franchise sales as well as wildly successful franchisees. Nothing.
Stay Close to Home
A corollary to this first rule is that the new franchisor should stay as close to home as possible. Getting back to the previous rule urging you to over-support your initial franchisees, I advocate initial marketing efforts that’ll limit franchise growth to within about a three-hour drive time of your franchise’s headquarters. That way, if an initial franchisee is in need of assistance, you (or your staff) can get up in the morning, be at the franchisee’s operation by the start of business, and still be home at the end of the day.
But more important, it means you can respond instantly to a franchisee’s problems or requests. You don’t need to book a flight and a hotel room, and will never have to wait two weeks to get an advance booking discount with an airline.
This local approach will provide you with economies when it comes to the franchise side of the business. Franchise marketing can be done more effectively. Rather than relying on national publications that may be too expensive for the new franchise, you can focus on less costly local media. The support will not only be easier to provide, but it can be provided more economically – not only from a transportation perspective, but from a staffing perspective as well. Clustered support allows fewer field support staff to handle more units, thus producing reduced cost combined with more ‘face time’ with your franchisees.
Likewise, this more local approach offers you a number of advantages with your consumers. Consumer advertising can be clustered, as can the operations themselves, leading to a bigger brand presence. A franchisor with units spread across the country can never obtain any brand dominance, whereas a franchisor with units only in Johannesburg will have a significant footprint, and can achieve economies of scale in both purchasing and in advertising. And since you have already built a reputation locally, your franchisees will be better able to take advantage of your existing goodwill.
Rules, Like Thumbs, are Meant to be Broken
Ultimately, however, all the decisions relative to a ‘best practices’ growth plan relate back to goals and the marketplace in which you’re operating. Conservative growth carries its own risk – the risk that while you’re growing slow and steady, you’re possibly losing the race to a more aggressive competitor.
And thus, while the easiest and most reliable growth plans will be conservative and local, risk tolerance and an assessment of your market’s direction must also play a role in the assessment of the most appropriate growth strategy.
Ultimately, it’s a balancing act. You need to provide adequate support to your franchisees to help ensure their success. But the faster you intend to grow, the more people you’ll need to hire in anticipation of providing that support. This leads us back to the basic risk-reward equation – it’ll be the franchisors that best manage this equation that’ll ultimately enjoy the greatest success.
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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