GREAT HABITS OF SUCCESSFUL FRANCHISORS
FranchisingAuthor :
John Sotos 
Lawyer, Sotos LLP
Specializes in domestic and international franchise, licensing and distribution law with a large national and international client base. Represents franchisors in connection with franchise transactions, workouts, defaults, purchases and sales of franchise networks, master franchising and creditor and debtor rights on both franchisor and franchisee insolvencies. Extensive experience in all aspects of trade and co-operative associations.
INTRODUCTION
In these trying economic times, it is more important than ever for franchisors to take stock of their practices not only to ensure survival, but also to emerge a stronger and more competitive business when the economic downturn ends.
Without fail, every recession results in the failure of a significant number of seemingly successful franchisors, resulting in untold loss not only to the franchisor but also to its franchisees and a whole host of suppliers such as landlords, bankers, distributors and service providers.
Yet, just as there are failures, many more franchisors grow stronger and create value for all their stakeholders. What is it then that distinguishes these thoroughbreds from the rest? From my experience, the following are the most commonly observed practices.
1. FRANCHISEE INTAKE
Successful franchisors review and revise their franchisee intake criteria on a regular basis. As they learn more about the attributes of their most successful franchisees, they redefine the profile of their prospects. For example, in times of economic downturn, prudent franchisors seek and accept better capitalized franchisees who have more of their own capital to invest because it may very well take longer to get a unit to break even.
For their part, good franchisors revise franchise sales quotas downward in challenging economic times rather than rushing to attain a target that will potentially lead to disputes that will cost many times the initial franchisee fee to resolve.
Good franchisors do not maximize growth by accepting marginal candidates. Quality rather than quantity is the hallmark of their franchisee intake criteria.
2. UPFRONT FEES DON'T PAY THE BILLS
The theory behind franchisors charging upfront fees is to compensate the franchisor for its investment costs in the selling process. Upfront fees are not profit centres by design. Good franchisors do not look to upfront fees to pay this week’s payroll or next month’s rent. Otherwise, the long-term viability of the franchisee gets sacrificed for the short-term cash needs of the franchisor. Just as franchisees need to be better capitalized, so do franchisors.
3. SITE SELECTION
It is important for franchisors to focus on the right real estate, not just any real estate. As operational factors change, so should the nature and cost of real estate. As competitive pressures reduce the available margin of the unit franchisee, successful franchisors revise their guidelines for acceptable rent downwards.
If, for example, the shutting down of a major plant has put 20% of the people in a town out of work, a number of households and past income demographics are no longer valid criteria for site selection for that market. Securing a great location at a rent that will not sustain the business of the franchisor is foolish. Good franchisors have strict site selection criteria and adhere to them.
4. MISSION / BRAND VISION
Great franchisor organizations are very protective of their brand and how it is promoted in the marketplace. These same franchisors have a mission and a vision statement that is not only understood but internalized by their employees, their franchisees, and also to a large extent by the franchisees’ customers.
The mission and vision statement is supported by a statement of principles or values, (such as being the low-cost leader or the healthy food leader) that leaves little room for doubt. Most importantly, however, good franchisors have senior management who fully support the mission and vision statement adopted by the company and do not just pay lip service to it.
Having a mission and vision statement however is not enough. Good franchisors constantly measure the franchise system for conformity in order to ensure that they are on track. Franchisees are not asked to implement or adhere to a standard unless corporate stores are in full compliance.
5. FINANCIAL TRAINING
Financial training for franchisees is one area that distinguishes great franchisors from everyone else. Such franchisors ensure that their franchisees understand every detail of their business from a financial perspective in order to better manage profitability as well as to deal with impending issues in a very timely fashion. These franchisors also make sure that their franchisees prepare and produce financial statements frequently and in any event, no less than quarterly and most often, monthly, so that the franchisees know how they have done and what they need to do stay on track. Awaiting an annual statement prepared by an outside accountant six months’ after year end is a recipe for disaster.
In addition to training franchisees in understanding financial statements, good franchisors ensure that their field consultants are in full command of operating store financials and can slice and dice them in ways that are meaningful for franchisees.
While most franchisors require franchisees to provide them with their financial statements monthly, quarterly or annually, few actually go to the trouble of collecting the information and training their field people in interpreting what they see, comparing against the performance of others in the system, comparing against industry performance, and then guiding franchisees to alter practices that will enable them to get back on track.
New franchisees are often unaware of tell-tale signs of problems to come and even if they do see them they may not know how to properly respond. Good franchisors provide their field representatives with the tools to enable their franchisees to take timely corrective action.
6. FRANCHISEE EMPOWERMENT
Great franchisors give their franchisees the tools enabling them to be successful. They work cooperatively with the franchisees without relinquishing control of the essential elements of the system. Good franchisors work with their franchisees to share best practices in resolving issues faced by the system. Successful franchisees are always eager to share what they have learned with their peers but few franchisors facilitate such simple revenue or margin enhancing practices. With the virtually costless teleconferencing facilities available today, it is a crime that every franchisor does not avail itself of the opportunity to learn from the best operators in the system by facilitating exchanges of operating knowledge amongst its franchisees.
7. SUPPLIES AS A REVENUE SOURCE
With the exception of manufacturers of proprietary equipment or supplies, successful franchisors do not seek to profit from the purchase of supplies or services by their franchisees beyond recovering supply costs and other reasonable amounts which benefit the system as a whole.
Not surprisingly, the practice of too many franchisors requiring designated suppliers to sell products to franchisees at high prices so that they can extract additional revenue has become by far the greatest source of franchisor-franchisee disputes. This practice negates one of the most fundamental premises of franchising.
Good franchisors provide their franchisees with the competitive advantage of collective purchasing. If franchisees cannot procure their supplies or services at a better price than they could as independents without any volume purchasing power, why exactly are they paying their royalty and the upfront fees? Greed and corruption have destroyed a lot of businesses and will surely destroy such franchisors.
Ray Kroc, the founder of McDonald’s franchising, was scrupulous about avoiding pitting himself against his franchisees and to this day McDonald’s does not earn a nickel of profit from the supply relations of its franchisees.
8. LITIGATION AVERSION
Good and great franchisors rarely allow disputes to reach the litigation stage because it is destructive and consumes time, money and resources that could be better spent growing the system. Even in the franchise context, the old adage of where there’s smoke there’s almost always fire has a lot of credibility. Complaints, whether founded or unfounded, are dealt with either by resolving or discrediting them but never allowed to fester and compromise the brand and the system.
Business people do not wake up in the morning and decide to litigate. Litigation is the direct and immediate result of not having or shutting down communication channels. In military terms, franchisee litigation is akin to a mutiny. While some mutinies are opportunistic, most result from a lack of leadership by the franchisor. Good franchisors have open lines of communication and resolve problems on a case by case basis rather than allowing them to become systemic.
Good franchisors enjoy a record of limited litigation by or against their franchisees. But it is not because they do not have differences with them. It is because they find creative business solutions before any difference has a chance of mutating into a legal problem! If direct negotiations do not result in a resolution, mediation is a great way to help resolve disputes. Calling a lawyer and having a notice of default issued simply transforms a business issue into a legal issue. The problem with this approach is that lawyers cannot solve the business problems, and so it should come as no surprise that outcomes are never satisfactory for either party. On the other hand, experienced franchise lawyers can contribute greatly to finding appropriate solutions for business problems.
CONCLUSION
Franchisors who observe best practices in their franchising operations enjoy better performance and greater financial rewards for all their stakeholders. In difficult economic times, anything less may prove fatal.
In these trying economic times, it is more important than ever for franchisors to take stock of their practices not only to ensure survival, but also to emerge a stronger and more competitive business when the economic downturn ends.
Without fail, every recession results in the failure of a significant number of seemingly successful franchisors, resulting in untold loss not only to the franchisor but also to its franchisees and a whole host of suppliers such as landlords, bankers, distributors and service providers.
Yet, just as there are failures, many more franchisors grow stronger and create value for all their stakeholders. What is it then that distinguishes these thoroughbreds from the rest? From my experience, the following are the most commonly observed practices.
1. FRANCHISEE INTAKE
Successful franchisors review and revise their franchisee intake criteria on a regular basis. As they learn more about the attributes of their most successful franchisees, they redefine the profile of their prospects. For example, in times of economic downturn, prudent franchisors seek and accept better capitalized franchisees who have more of their own capital to invest because it may very well take longer to get a unit to break even.
For their part, good franchisors revise franchise sales quotas downward in challenging economic times rather than rushing to attain a target that will potentially lead to disputes that will cost many times the initial franchisee fee to resolve.
Good franchisors do not maximize growth by accepting marginal candidates. Quality rather than quantity is the hallmark of their franchisee intake criteria.
2. UPFRONT FEES DON'T PAY THE BILLS
The theory behind franchisors charging upfront fees is to compensate the franchisor for its investment costs in the selling process. Upfront fees are not profit centres by design. Good franchisors do not look to upfront fees to pay this week’s payroll or next month’s rent. Otherwise, the long-term viability of the franchisee gets sacrificed for the short-term cash needs of the franchisor. Just as franchisees need to be better capitalized, so do franchisors.
3. SITE SELECTION
It is important for franchisors to focus on the right real estate, not just any real estate. As operational factors change, so should the nature and cost of real estate. As competitive pressures reduce the available margin of the unit franchisee, successful franchisors revise their guidelines for acceptable rent downwards.
If, for example, the shutting down of a major plant has put 20% of the people in a town out of work, a number of households and past income demographics are no longer valid criteria for site selection for that market. Securing a great location at a rent that will not sustain the business of the franchisor is foolish. Good franchisors have strict site selection criteria and adhere to them.
4. MISSION / BRAND VISION
Great franchisor organizations are very protective of their brand and how it is promoted in the marketplace. These same franchisors have a mission and a vision statement that is not only understood but internalized by their employees, their franchisees, and also to a large extent by the franchisees’ customers.
The mission and vision statement is supported by a statement of principles or values, (such as being the low-cost leader or the healthy food leader) that leaves little room for doubt. Most importantly, however, good franchisors have senior management who fully support the mission and vision statement adopted by the company and do not just pay lip service to it.
Having a mission and vision statement however is not enough. Good franchisors constantly measure the franchise system for conformity in order to ensure that they are on track. Franchisees are not asked to implement or adhere to a standard unless corporate stores are in full compliance.
5. FINANCIAL TRAINING
Financial training for franchisees is one area that distinguishes great franchisors from everyone else. Such franchisors ensure that their franchisees understand every detail of their business from a financial perspective in order to better manage profitability as well as to deal with impending issues in a very timely fashion. These franchisors also make sure that their franchisees prepare and produce financial statements frequently and in any event, no less than quarterly and most often, monthly, so that the franchisees know how they have done and what they need to do stay on track. Awaiting an annual statement prepared by an outside accountant six months’ after year end is a recipe for disaster.
In addition to training franchisees in understanding financial statements, good franchisors ensure that their field consultants are in full command of operating store financials and can slice and dice them in ways that are meaningful for franchisees.
While most franchisors require franchisees to provide them with their financial statements monthly, quarterly or annually, few actually go to the trouble of collecting the information and training their field people in interpreting what they see, comparing against the performance of others in the system, comparing against industry performance, and then guiding franchisees to alter practices that will enable them to get back on track.
New franchisees are often unaware of tell-tale signs of problems to come and even if they do see them they may not know how to properly respond. Good franchisors provide their field representatives with the tools to enable their franchisees to take timely corrective action.
6. FRANCHISEE EMPOWERMENT
Great franchisors give their franchisees the tools enabling them to be successful. They work cooperatively with the franchisees without relinquishing control of the essential elements of the system. Good franchisors work with their franchisees to share best practices in resolving issues faced by the system. Successful franchisees are always eager to share what they have learned with their peers but few franchisors facilitate such simple revenue or margin enhancing practices. With the virtually costless teleconferencing facilities available today, it is a crime that every franchisor does not avail itself of the opportunity to learn from the best operators in the system by facilitating exchanges of operating knowledge amongst its franchisees.
7. SUPPLIES AS A REVENUE SOURCE
With the exception of manufacturers of proprietary equipment or supplies, successful franchisors do not seek to profit from the purchase of supplies or services by their franchisees beyond recovering supply costs and other reasonable amounts which benefit the system as a whole.
Not surprisingly, the practice of too many franchisors requiring designated suppliers to sell products to franchisees at high prices so that they can extract additional revenue has become by far the greatest source of franchisor-franchisee disputes. This practice negates one of the most fundamental premises of franchising.
Good franchisors provide their franchisees with the competitive advantage of collective purchasing. If franchisees cannot procure their supplies or services at a better price than they could as independents without any volume purchasing power, why exactly are they paying their royalty and the upfront fees? Greed and corruption have destroyed a lot of businesses and will surely destroy such franchisors.
Ray Kroc, the founder of McDonald’s franchising, was scrupulous about avoiding pitting himself against his franchisees and to this day McDonald’s does not earn a nickel of profit from the supply relations of its franchisees.
8. LITIGATION AVERSION
Good and great franchisors rarely allow disputes to reach the litigation stage because it is destructive and consumes time, money and resources that could be better spent growing the system. Even in the franchise context, the old adage of where there’s smoke there’s almost always fire has a lot of credibility. Complaints, whether founded or unfounded, are dealt with either by resolving or discrediting them but never allowed to fester and compromise the brand and the system.
Business people do not wake up in the morning and decide to litigate. Litigation is the direct and immediate result of not having or shutting down communication channels. In military terms, franchisee litigation is akin to a mutiny. While some mutinies are opportunistic, most result from a lack of leadership by the franchisor. Good franchisors have open lines of communication and resolve problems on a case by case basis rather than allowing them to become systemic.
Good franchisors enjoy a record of limited litigation by or against their franchisees. But it is not because they do not have differences with them. It is because they find creative business solutions before any difference has a chance of mutating into a legal problem! If direct negotiations do not result in a resolution, mediation is a great way to help resolve disputes. Calling a lawyer and having a notice of default issued simply transforms a business issue into a legal issue. The problem with this approach is that lawyers cannot solve the business problems, and so it should come as no surprise that outcomes are never satisfactory for either party. On the other hand, experienced franchise lawyers can contribute greatly to finding appropriate solutions for business problems.
CONCLUSION
Franchisors who observe best practices in their franchising operations enjoy better performance and greater financial rewards for all their stakeholders. In difficult economic times, anything less may prove fatal.