THE PITFALLS IN FRANCHISING:PART TWO

In the January/February 2005 issue of Franchising we met franchisors ‘Bill’ and ‘Betty’, who had fallen into the first five most common pitfalls in the business. They may not be the franchisors from hell, but you won’t see them at FCA breakfasts or at any of the expos either.

Each one of their experiences reflects real-life situations encountered by Franchise Developments in working with franchisor and franchisee clients around Australia.

As we pick up their story, Bill is still recovering from his bout of stress-related illness and Betty is somewhat jet-lagged after so many trips spent trying to bring the interstate franchise run by Bertha up to scratch. However, both are determined to persevere so as to help prospective franchisees avoid the remaining pitfalls that bedevil the Woolly Widget franchise system until its takeover by Walter’s Worsted Widget group…

Pitfall #6: Too much too soon

Spreading yourself too thinly is a real danger for the overly ambitious franchisor, particularly in a country with the geography of Australia. It is far better for a new franchise to establish itself and flourish in one area before moving on to the next. Franchises that try to start up in a number of far-flung locations at the same time are less likely to make an impact on the market than if they make a concentrated effort in one spot.

Other disadvantages of a scattergun approach include missing out on economies of scale, high franchisee support costs, too much travel for corporate staff and less impact from advertising. Opportunities for everyone to meet face-to-face are also less frequent, which slows down the building of the corporate culture that is vital to the success of a franchise from its earliest days.

For example: Bill and Betty’s experience with Bertha was not solely the result of poor franchisee training. Because she was the only interstate franchisee, it was harder to build and maintain a good franchisor/franchisee relationship. Instead of leading to economies of scale by adding to franchise numbers, this sole interstate franchise was costlier to service than any other.

Pushing a franchise system to achieve too much too soon may be the result of naivety, greed or pure ego. If you feel tempted to do too much too soon, take a good, hard look in the mirror and think again about the funds franchisees have put in your hands — and whether you want to keep their trust. If your franchisees become disgruntled as a result of your unreasonable ambition, you may be hindered in recruiting new franchisees. This leads to further financial stresses on your system and could possibly jeopardise its survival.

Pitfall #7: No news is bad news

Poor communication is a sure way to weaken a franchise system, both in the start-up phase, when everyone is getting to know one another, and later on, when you have expanded into other cities, states or even overseas.

It is important to have regular communication channels like meetings (which can be local, regional, state or national), newsletters and intranet chat rooms to exchange information and ideas, recognise achievements and build corporate culture. It is particularly important to have good communication in times of change. Otherwise rumours fly, which can destabilise the whole business.

For example: However ill-advised or ill-prepared they were, Bill and Betty really wanted their franchise to succeed, but they were so busy putting out fires they didn’t make time to communicate regularly with their franchisees. Existing franchisees began muttering, “They don’t want to know about you once you’ve signed on the dotted line...”

Unfortunately, this was the message that reached prospective franchisees conducting due diligence. This, and the general sense of distrust that began filtering through Woolly Widgets, affected the franchise’s viability. As a result, Bill and Betty had to launch a huge rescue operation, again wasting precious time and money.

Pitfall #8: No visible means of support

Most franchisees believe the old maxim that franchising is about being in business ‘for yourself but not by yourself’, and are prepared to invest their hard-earned dollars to achieve this. If you do not deliver the support franchisees believe they have paid for, you are indeed riding for a fall.

As mentioned, good communication is one key element of an effective franchisee support program. Others include:

• Trained and capable franchisee support staff.

• Sound initial and ongoing training for franchisees.

• Comprehensive, well-written operations manuals that are regularly updated.

• Regular and structured field visits.

• Cost-effective marketing that optimises the value of the advertising levy.

• A telephone help desk available for extended hours or 24/7.

For example: Although Bill and Betty visited their franchisees regularly, the meetings were unstructured and undisciplined, with no formal agenda. Critical issues were often left undiscussed, or up in the air. Woolly Widget franchisees began to lose faith in the system and to discuss things among themselves, excluding the franchisors and raising the spectre of rebellion. Franchisee sales revenue declined, further eroding the viability of the franchise.

Pitfall #9: What documentation?

Poorly drawn-up Franchise Agreements cause pain to many franchisors and franchisees and can trigger visits to the mediator or, at worst, the courts. Although most Franchise Agreements have common features, there is no one-size-fits-all document, like a will form from a newsagent, that can be bought off-the-shelf.

To protect yourself and your franchisees, make sure the franchise agreement is:

• Drawn up by experienced legal advisors who understand franchising.

• Accurately drafted.

• Tailored to your specific offer.

• Consistent for all franchisees.

• Reviewed and updated regularly to respond to market changes.

Once the Franchise Agreement is in place, use it to discourage yourself from making excessive concessions to get people on board, which puts existing franchisees offside, as well as complicating matters when it might come to reselling the franchise.

Believe it or not, we have also come across situations where Franchise Agreements have not been executed. When negotiations have been successfully concluded with an applicant it is absolutely imperative that the agreement is executed, paid and filed.

For example: Bill and Betty completed negotiations with one franchisee, Belinda, and started building work on her outlet to the value of hundreds of thousands of dollars. However, Belinda hadn’t actually signed the contract and had trouble obtaining finance. Bill and Betty were left to carry the cost, at least in the short-term.

Other documents important to success are manuals and marketing material. Combined with training, manuals are the means of communicating your intellectual property, which is what attracted franchisees to your system in the first place. They are a great teaching aid, help operators achieve consistency and instil confidence.

The quality of your manuals is a direct reflection of your commitment to franchisee success. Time and money invested in getting manuals right, and keeping them right, will reap dividends in terms of satisfied franchisees who will be your ambassadors when prospective franchisees ring around to check your performance as a franchisor.

Franchise recruitment will also be assisted by having quality marketing material to give prospective franchisees and their advisors. Unfortunately, we have also encountered situations where there was not much of substance behind a glossy disclosure document.

Your documentation – the Franchise Agreement, disclosure documents and manuals – is where you finish, not where you start. It should dovetail and summarise all the work you have put into avoiding the first nine pitfalls.

For example: Bill and Betty forgot to include any performance benchmarks in their franchisee agreements. When they challenged a particular franchisee, Brett, about his performance, he successfully argued that they had no grounds for terminating him because the Franchise Agreement did not cover this situation.

Pitfall #10: Square pegs, round holes

Just as some people are not suited to being franchisees, some are not suited to being franchisors. Be honest with yourself. Successful franchisors demonstrate the following in large measure:

• Leadership ability.

• People skills.

• Entrepreneurial skills.

• Operational skills.

• Management skills.

The first three qualities are indispensable – the remaining two can be provided by others, as long as the franchisor is an effective delegator. The ability to delegate successfully becomes increasingly important as a franchise expands, requiring the franchisor to let others manage day-to-day tasks while he or she takes care of the big picture.

This is where we encounter that other old franchising maxim — that successful franchisors work ‘on the business, not in the business’. If you cannot see yourself getting there, perhaps franchising is not for you.