How can a franchisor help a franchisee failing with their finances? McGrathNicol Restructuring partner Jason Ireland and director Damien Pasfield share their experience and insights.
Franchising systems allow individuals to leverage a proven business model as a way to de-risk what is effectively a start-up.
A franchise support network is helpful where a franchisee may not have experience or expertise because in many cases this is their first business venture.
On the other hand, it means franchises have fewer levers to pull if performance is ‘off plan’. This is because the strategy, systems brand/marketing, pricing and purchasing (i.e. cost of goods) are all generally controlled by the franchisor.
Failing franchisee finances
Identifying and managing under performance therefore often requires franchisor intervention.
However, two of the most common contributors to franchise under performance are persistent operating inefficiencies and failure to achieve or maintain scale.
Operating inefficiency often shows as a failure to control variable costs (wastage/shrinkage), roster inefficiency and/or excess overtime, or unnecessary expenditure.
In addition, every franchise operation has a fixed cost base requiring a critical mass of revenue. Periods of slowing or declining sales quickly erode profitability and are a lead indicator of under performance.
If individual franchisees are struggling with their finances it’s important to recognise they are likely to be the exception rather than the rule. The franchisees themselves need to take responsibility for what they can control but they may also need help to diagnose any specific issues contributing to their under performance.
Top tips for franchisors managing under performing franchisees
Ensure access accurate and timely information
Good information is critical for decision making for both franchisors and franchisees. It helps determine the reasons for under performance and where to focus energies.
Novice franchisees may need some assistance preparing or interpreting this information. A failure to provide information, or delayed / inaccurate reporting from franchisees are all red flags for franchisors.
Conduct and share benchmarking
Comparing franchisee performance across the network and sharing this data with the franchisees enables them to identify areas contributing to their under performance. Such benchmarking can also help franchisors focus on those operators that need closer monitoring/support.
Support better practice
The key to turning around failing franchisee finances is to help franchisees identify best practice in the network. What are the financial and operational characteristics of the more profitable locations? What is it other franchisees are doing that this franchisee is not?
Franchisors then need to provide the necessary support to assist them with better business practice. Where the model works elsewhere, it’s often about helping them get the basics right.
Be proactive in engaging and providing help
Franchisees too often ignore or delay discussions with the franchisor out of fear of the consequences, not recognising the benefits of early engagement and the assistance that may be available. Extra training, field support and local area marketing initiatives are all helpful in easing communication with franchisees and addressing under performance.
Franchisee profitability and sustainability is critical to the success of a franchise system not just because franchisees are the source of royalties, renewal and other service fees.
Both franchisors and franchisees need to actively contribute to effectively turn around under performance.
Professional business advisors can help franchisors assist their franchisees. Find an expert here.