When the going gets tough, Travis Fegan, manager in the Melbourne office of global accounting and
business advisory firm PKF, believes franchisors have a big role to play to ensure the glory days of franchising are not a distant memory.
Australian franchising is entering a new and challenging stage of its life cycle. The phenomenal growth that the industry has enjoyed is coming off the boil and confronting franchisees and franchisors alike with issues which they have not previously encountered.
Among those who are beginning to feel the pinch are franchisors who have failed to deliver on the big promises they made when entering the market. In some cases, these franchisors were in such a hurry to put a store on every street corner that they paid scant attention to the business acumen of those seeking franchises.
The price being paid for that approach is that growing numbers of franchisees are now finding that rather than being licenses to print money and enjoy the good life, franchising is hard work. For some, the going is decidedly tough. Their rose coloured glasses have given way to a growing sense of disenchantment.
In recent months, evidence has emerged of franchisees going to their franchisors, cap in hand, seeking various types of financial relief because success is taking longer to achieve than they had 2007anticipated. Some are seeking rent relief or a moratorium on paying royalties. Others want their franchisors to buy back or buy into their businesses or go co-guarantor on their existing or proposed borrowings.
On the other side of this coin are franchisors who now face the prospect of having to bail out some of their franchisees or suffer the brand-damaging humiliation and embarrassment of perhaps seeing some stores close. At the same time, franchise chains which are just getting started or which want to expand their operations are having difficulty finding good quality franchisees. It seems that all the baby boomers who wanted to get into franchising and had a decent redundancy package have already made the jump.
A helping hand Franchisors have every right to feel apprehensive about their new environment.
However, they should not be in too much of a hurry to replace struggling franchisees or to close underperforming stores. Shutting the doors should be a last resort because of the long term damage it can cause the brand and the disquiet it can sow among other franchisees in the chain. Nor should franchisors hastily reject requests from franchisees for interim assistance.
If the franchisee met stringent and comprehensive selection criteria when he or she was appointed, there is every chance that a relief package might save the day and allow the struggler to survive and eventually prosper. If an existing franchisee lacks the necessary business acumen but has other essential skills and the passion to succeed, franchisors should consider providing free or subsidized access to accountants, lawyers and other specialists who offer seminars, workshops and other forms of group or individualized training, education and professional assistance.
Access to such support mechanisms should also be offered to new franchisees whose previous employment did not expose them to the mysteries of running a business, nurturing and leading a team, complying with regulatory requirements and grasping the concept of a cash payment and cash receipt book.
Another lesson the industry can learn from the current situation is that having a store on every corner is rarely as profitable as having well run stores in strategic locations. One major international franchise chain learnt this early on in Australia after seeing margins drop when stores encroached on each others' territories.
The company changed tack – putting more emphasis on selecting the right candidates, putting stores only in prime locations and offering its best people two or three sites, thereby enabling them to profit from economies of scale. It also saw wisdom in encouraging prospective franchisees to work in another franchisee's business, without pay, for several months so they could learn all aspects of the business before taking the reins of their own operation.
The age-old dilemma in franchising is how franchisees should be selected. Do you take on someone who can run a business but needs to learn about the product, or someone who knows the product and needs to learn about running a business? There is no easy answer to that question but one thing is clear. Franchisees succeed only if they are good at both. Unless a prospective franchisee has dual skills and experience, he or she will need help either in learning to run an enterprise or learning about a new product.
Realism hits home Franchising in Australia has experienced rapid growth. Four years ago, there were reportedly 600 franchise systems in this country. Two years ago, the figure was 800 and this year it has risen to 1,000. Further growth is unlikely to come, as it has in the past, from promising prospective franchisees the key to the good life. Fewer and fewer people now believe that franchising is a magic panacea for their financial and lifestyle worries. In fact, many franchisees now look on franchising quite differently from how they and their predecessors did. This is especially so when it comes to premises within shopping centres.
Centre owners and landlords do not like extending the terms of their leases. Accordingly, anyone who takes over a franchise which has used up say four years of a 10 year lease has only six years of guaranteed tenure during which to produce successes, recoup their investment and reap the profits of their hard work. This insistence on 10 year lea in shopping centres means that the seller has a rapidly diminishing asset.
The further into the lease the existing franchisee progresses, the less likely it is that someone new will take over their business, and if that does happen, they won't pay a high price for the privilege.
By the same token, this insistence on 10 year leases offers a prospective buyer a sometimes impossibly small window of opportunity to do well. It is no surprise therefore that many franchisees have dispensed with the idea of ever achieving a high capital gain, accepting instead that the best they can do is draw a high wage from their business until such time as their lease expires. This is a classic example of one of the downsides of franchising that many franchisees failed to see, or even suspect, until their own circumstances changed or their leases got closer to expiry.
In this new, tougher setting, no one is going to believe the promise that franchising is a sure way to get rich quickly. Franchising growth and success will come from the efforts of franchisees who are better selected, better equipped and better supported than the generations that went before them.
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25-Jul-2007