When someone invests in a franchise the franchisor will want to know how committed that individual is to the task of operating and building the business. So how far does commitment extend, and is there room for another project in the franchisee’s life?
Of course not every franchise system demands an attention span in excess of 60-hours, and some networks are constructed on part time or investor-level involvement. But as a general rule, franchisors are expecting the franchisee to devote their time and energy to sustaining and developing the brand they represent, to uphold standards, and to extend themselves to reach their personal, and sometimes group-based, goals.
If early on, even before the franchise agreement is signed, there is misunderstanding about the depth of practical and strategic work required by the franchisee there will be inevitable disappointments, possibly even disputes as the reality of the task hits home.
Financial diversity
So if there is a plan to continue with an existing family-run business, it’s important that issue is raised with the franchisor at early discussions.
Bert Cotte, senior field support consultant at McDonald’s Australia, says “This is a tricky subject to talk about, but if we all agree that the aim is to have a well aligned financial focus on the business, then hopefully a healthy level of transparency follows.
“The franchisee’s financial diversity is something that they will have to consider as part of their wealth building plan. It is however important that the investments outside of the franchise business do not drain funds from the business, and more importantly do not distract the franchisee’s attention and energy.”
Perhaps there is a property or investment portfolio that will demand attention, and funds, to maintain. The question the franchisor might ask is whether that will detract from the role of building the franchise business.
“In my experience, passive investments can provide financial diversity to the franchisee without negatively impacting the franchise business. Running another business at the same time is challenging on a lot of fronts for both the franchisee and the franchisor,” says Cotte.
Franchise system
The demands of a retail business, and food retail in particular, are easy to identify: seven day trading allows little room for a personal life, certainly in the first few months of a greenfield site when the business is being established. But even office-based and mobile franchise models will more than likely have extra demands beyond the customer interaction.
It is important to understand the extent of the after-hours role of a franchisee: will there be day to day administration to manage once the business hours are over, will there be client follow-ups and appointment scheduling to complete in the evenings, will the franchisee need to work on the business strategy at weekends, what sort of business networking and community involvement will take place out of hours, is the franchisee expected to undertake training in their own time?
Some franchise models do provide franchisees with administration services such as lead generation, appointment scheduling, invoicing and bookkeeping; others have well-integrated IT systems that both ease and speed up the admin process for franchisees responsible for their own back-office.
These can lessen the load for franchisees, but the three key demands of time, energy and application remain.
Working capital
If a franchisee intends to run multiple businesses, or to invest the results of their labour in home renovations or the traditional trappings of success – cars, boats and holiday homes – being open and transparent with the franchisor about their personal goals and their long term commitment will only serve both parties well.
Mark Fernandez, director of Business Development Alliance, says ‘The key is to have sufficient working capital at all times, in the good times and the bad. I would challenge you to firstly know what the franchise systems determines is a ‘healthy working capital’ amount and to have contingencies in place to cover the difference in a time of need. This may reduce your exposure to losing all those ‘toys’ that you have purchased. “
Running a second, alternative business is not the same as expanding the franchise business through multiple units: while the day to day demands of a multi-unit franchisee will become more strategic and less hands-on than it is for a single unit operator, the business has one purpose, one philosophy, one set of challenges.
Of course the question about multi-tasking in franchising isn’t just relevant to franchisees; franchisors can be guilty of too splintered an approach to the franchise business as well.
As part of the due diligence process it is worthwhile for a franchise buyer to uncover the full extent of a franchisor’s entrepreunership and satisfy themselves as to the franchisor’s role in and commitment to the franchise system if there are multiple business operations under their guidance.
Honesty is essential for both parties.
Franchise buyers need to clear about why they are looking to operate more than one business, consider whether a particular franchise model is the right fit or if there is a better way to match their goals, and pinpoint what business skills they can employ to ensure smooth running of their businesses.
7 KEY ACTIONS
- Be transparent with your franchisor about your goals
- Spend a day with a franchisee to understand the reality of the role
- Find out if there are other franchisees in the network who run a separate business: how do they manage it, how does the franchisor respond?
- Talk to an accountant about the right business structure and the tax implications
- Get a legal opinion on the risks and responsibilities
- Ensure your family understand and accept the demands of multiple business ownership
- Have a clear plan of action and exit strategy