'Smart' franchise systems of the future
How difficult is it to ascertain the overall success of individual franchisees? What common basis of measurement is used to measure and compare success, both internally and externally, and how many franchisors grapple to extract personal data from a franchisee's financial statement and make meaningful and comparative sense of it?
Measurement of the success of any business, be it a franchise or otherwise, must be reflected by its' `return on total capital employed', whether it be debt equity or owner's cash. Furthermore, this return must be calculated after deducting the owner's input in each circumstance, calculated at the relevant market rate. This overcomes any variation caused by a 'husband and wife team working, say, six days week, producing a 45% return on investment, whereas the true investment return may be only 15%, after the appropriate market rate for their labour has been costed. Depreciation must also be expensed as a true cost of operating the business, as opposed to measuring the cash generation.
A franchise system should provide a model which dictates data input at source that is devoid of any personal or non-business related expenses, irrespective of whether or not those expenses be legitimate taxable deductions. Ideally the model should then allow for those other inputs in a secondary revenue statement. The two statements should be readily reconcilable on an annual basis. Comparing financial performance using this model with other investment options must ultimately be the true test, and avoid misleading reporting of profits which fail to take account of the owner's labour input.
The 'Smart' Franchise Reporting
How many franchises are happy with their reporting systems? Are your franchisees all reporting correctly and on time? This has been a perennial problem with franchise systems, with franchises still being established with inadequate regard given to reporting mechanisms.
Franchisors must provide a reporting format that not only satisfies their requirements, but which provides the franchisee with comprehensive feedback. This feedback must be in a form that is very 'real', meaningful, clear and concise. It must leave the franchisee in no doubt as to the importance of the information and the absolute necessity to follow through on any actions recommended or required by the franchisor. It must measure the franchisee's performance relative to others in the group, and secondly must measure the sustainability of their business after debt servicing and tax considerations.
The 'smart' franchise of the future must operate a reporting system that provides information for the franchisor to protect their income. But it must also give the franchisee meaningful results in a way that inspires them not only to produce the results on time, but most importantly, to act upon them to improve their business. There must be a 'true' benefit to the franchisee without requiring a disproportionate time input.
The 'Smart' Franchisee Profile
The traditional view of seven-day 'blood sweat and tears' still tends to dominate. 'If you are not there attending to your franchise in person, seven days a week if need be, you won't succeed; no-one will work the business like you'. Is that the sort of 'smart' franchisee of the future? Why do McDonalds and other brands have such success with multi-site ownership?
As Stephen Giles points out, with an increasing shortage of quality franchisees available, there is a tendency among good franchise systems to encourage multi-site ownership among top performers. These people need to be 'smart' business people who 'work on their business, not in it.' They have a broader business mind set, will be ambitious, and most importantly will be capable of employing the right staff and managing them well.
The 'Smart' Franchisee Approach
Bryan Stokes, founder of Cartridge World, said in a recent interview his company looks for franchise owners who want to use the Cartridge World franchise system to 'run their own business', as opposed to 'buying themselves a job'. This difference in the 'job' vs. 'managing a business' approach may seem academic, but implemented properly, will make a very powerful difference to a franchisee's success.
Critical to this approach is the concept of ownership. The only difference in terms of ownership mentality between a franchise and a stand alone business is that the franchisee does not own the IP pertaining to the business, and that IP comes with an initial cost, an ongoing cost, and a set of rules. These factors do not in any way negate ownership of the business by the franchisee.
`Smart' franchise systems of the future will successfully promote this 'ownership' mentality, inherent in which is the franchisor's ability to supply all support mechanisms necessary to provide the platform for that success. The franchisor must, at the same time, enforce the concept of ownership and that the ultimate success of the franchisee's business lies with the franchisee.
The 'Smart' Franchise Brand
Building a franchise system is about building a brand; just as with a successful corporate business. The fact of it being a franchise is incidental, other than the means by which the brand was expanded. It seems to be an inalienable fact of any franchising system that the strong support the weak. Yet is there not a paradox here? Every franchise system must target a minimum level of success for every franchisee. But what is the reality and how is failure dealt with? Who pays the price? Corporate expansion will aim at success for every branch, but centralised financial control will often allow support for poor performers, with closure being an easier option in extreme cases.
Is there then, a conflict in franchise systems, between the pressure to expand, improve market share, and above all quench the ever increasing thirst for overhead support costs? Should there be a more cautious approach to expansion? Do franchise brands still compromise what should be strict rules for expansion? A strong brand will still attract buyers at that critical point in its growth when all the 'A sites have been developed, leaving the 'B' sites, or a move to a different market environment, with the resulting lack of certainty.
`Smart' franchise brands of the future should consider company owned outlets at such critical points of change, to absorb the risk, as opposed to transferring that risk to a franchisee. The risk associated with changed environment criteria can be clouded and not appreciated by unsuspecting buyers that have faith in the brand strength.
The 'Smart' Royalty Package
Royalties must be distinguished from the upfront franchise fee. Franchise fees relate to the purchase of the right to use the franchisor's intellectual property and business methods for a specified period. Ongoing fees however should be reasonably quantifiable in terms of the franchisor's delivery of ongoing services to the business system. This may consist of a wide variety of business activity including system development, training, and improvements to intellectual property, but should always be related to ongoing services supplied by the franchisor and not by default become an ongoing cost of using the franchisor's intellectual property and business method.
Franchisees must receive reasonable value for money for the royalties they are paying. This can be a vexed issue with many franchisees and should maintain pressure on franchisors to perform, not just extract royalties because the agreement requires them to be paid. Franchisors must be increasingly vigilant about their ongoing service delivery, which should as far as practical, be measurable.
`Smart' franchisors of the future will be able to largely measure and justify ongoing work for the franchisee relative to the level of royalty payments.
The 'Smart' Training Programme
Franchise systems have traditionally focused on the core operational elements of the business. As competition increases and profits become more difficult to accumulate, so does the need for business owners to be smarter in the global management of their business.
It is no longer sufficient for a franchisor either to ignore or pay lip-service to a franchisee's ability to manage their cash flow, forecast future profit levels, comply with employment legislation, maintain a good relationship with the landlord and suppliers or communicate efficiently with other franchisees. To what extent franchisors should be responsible for training franchisees in the peripheral areas of their business will remain a disputed subject, however, for their own survival and growth, franchisors must take a greater responsibility and show a more global approach to the range of skills involved in training.
It is accepted there is a current shortage of quality franchisees. But how much of the problem is created by the shortcomings of the franchise system? Successful systems will generate a queue of very capable people wishing to become part of that brand. Quality systems correctly address the critical issues raised above will attract, and more importantly generate within the system, quality franchisees, and offset the cost of efficient system delivery with cautious expansion.
The financial performance and success of a franchisee is the result of a total franchise system, not just a good product or service. Risk management is a sum of all the parts; the end result. Successful systems will train in all key areas, provide financial and reporting systems that accurately measure not only performance but sustainability, and provide comprehensive support and monitoring systems. As a result, the platform is provided for franchisees to expand their skills and grow their business, and this must not be solely dependant upon the historic skill level they commenced their franchise business with.
The above are just some of the criteria from which a realistic and viable scoring matrix could be developed, with each criteria appropriately weighted. While the criteria may appear too abstract to measure specifically, this in fact must be the case, with arithmetic performance measurement points built around each criteria. The result would be an objective platform by which franchisors, buyers, lenders, and insurers alike could legitimately compare The Iceberg Corporation . 21.08.2007
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