Penny from the Big Bang Theory was informed on numerous occasions, over a period of time that: “Your ‘check engine’ light is on”. Her response evolved from “Mm-hmm”, “yeah it’s okay” to “yeah, I gotta put a sticker over that”. In our experience, many franchisors fail to perceive, recognise and address real problems that could ultimately reduce the success of the franchise network as a whole.
Some franchises are adopting rearwards strategic indicators by basing future performance based on past performance, which is no true indicator or guarantee of future results. The impact of poor decisions won’t necessarily surface immediately, it takes time to unfold in the network, if they are eventually ignored it would lead the network into a situation where they need turnaround strategies to survive.
Franchisors should adapt forward-thinking, strategic indicators and plans that can help solve problems and drive the network to greater success.
Franchise Network Drivers
1. Franchisor capitalisation and infrastructure
- The franchise leadership team needs to have the necessary leadership and skills to drive the business and the capacity to achieve results.
- The team should not get caught in daily operational problems, therefore losing focus on strategy planning and execution as well as network growth
- The franchisor needs to identify opportunities and set effective strategies to pursue and capture new markets, retain existing markets by ensuring that the brand is unique, profitable and valuable in comparison to other brands
- The franchise team need to have the ability to identify and act accordingly to potential competitive and disruptive threats
- The franchise team needs to have adequate support resources in the form of Field Service Consultants or Area Managers to adequately support the network on a regular basis.
- The ability to scale the business is a crucial part of growing franchise network. In our experience getting a new franchisor through the early stages of franchising is the most difficult barrier. New franchisors usually have a capital or capacity barrier that prevents continuous growth, this can be ascribed to various factors e.g.
- the business model,
- the market,
- brand equity,
- staffing, etc.
Franchising is initially a very capital and time intensive expansion method and the franchisor will only start seeing a return on investment once the network reached 15-20 franchisees (each franchise network situation might differ). Even if a franchise has endless resources available to scale a business quicker, it’s important that they caution the growth – realistically a franchise can open 10 outlets a year to ensure that each new franchise has adequate start-up support and that the franchise team have the necessary resources to continuously train and support the network.
2. The franchise business model
- The competitive environment is continuously changing – new competitors are on the rise and product/service offerings are evolving (no business, not even a well-established franchise network can afford to remain stagnant and blind to the market situation).
- Economic and environmental changes influence the revenues, profitability and continuity of some franchisees. Costs are on the rise, therefore extending the ROI period as well as resulting in the undercapitalisation of new potential franchisees.
- Turnaround strategies are crucial for every franchise network as a precautionary measure in case serious problems or situations arise.
- The franchise business model needs to be right, if there are problematic areas or flaws a franchisor will struggle to grow past the early stages of franchising to a national brand.
3. Recruitment and the quality of potential franchisees available
- We are experiencing that franchisors in the early stages of growth are anxious to proceed with enquiries from interested potential franchisees, even though these candidates might not be the right franchisees for the brand. They need to be cautious of this, and take the time to evaluate and find the right franchisees as franchisee selection is critical for the survival of a network
- The access and availability to funding required for franchise investment, limits the potential of franchisees that have the unencumbered cash requirement in the current economy. Franchisors should be investigating various funding solutions or structures for potential franchisees that are of high calibre and also consider incurring some risk in the form of stock buy back guarantees. This will have a positive influence on the risk appetite of banks.
4. The franchisee-franchisor relationship
- Franchisees need to be motivated and willing to invest time, money and energy into this venture to pursue and capture local opportunities and defend potential threats.
- They need to be empowered and entrusted with the necessary ability and skills, this can be achieved by training and support
- Franchisees need to have the willingness to be guided by the franchisor, therefore they need to trust and believe in the brand and franchisor
- Franchisors should manage franchisee satisfaction
- The only way to achieve a profitable and sustainable franchise is where there is a balance between franchisor-franchisee benefits and relationships.
These 4 network drivers should enable a franchisor to perceive, recognise and address real problems with forward-thinking, strategic indicators and plans to ensure the success and continuity of the franchise network.