By Eric Parker

In the current South African economy, franchisors are experiencing an increase in franchisees who are either struggling to make a profit, are marginal or went into a loss-making scenario as a result of the Covid pandemic.  We have noticed more franchisees coming under immense financial strain during these challenging and uncertain times.

A franchisor needs to assess whether their business model and support structure is adequate to ensure that franchisees have the best chance of making a success of their business. Franchisors also need to consider if anything needs to change within their business model to accommodate the changes the market has been experiencing, just like the curb-pickup in the food industry that didn’t exist before.

In a well-run established franchise, these changes should be in place so that the performance can be upheld:

  1. Each franchisee should have a business plan with an annual budget.
  2. The franchisor should receive monthly income and expenditure reports from each franchisee.  This enables benchmarking but also the early detection signs that the franchisee might get into unfortunate cash flow problems or sustain a good cash flow for when any unforeseen crisis may arise.

Step 1   Detecting the Franchisees with problems

Franchisors should implement an “intensive care program” for struggling and loss-making franchisees. As soon as one detects that the franchisee is already in or about to get into financial difficulty, place them in “intensive care”.  This will alert all the franchisor’s staff that the franchisee requires special care and provides the support team the ideal opportunity to approach the franchisee, communicate and/or to indicate the concern and suggest potential solutions or assistance to address and eliminate existing problems.

Step 2   Developing and implementing an “Intensive Care Programme

  • In conjunction with the franchisee, develop an “Intensive Care Programme” that is tailored to the franchisee’s needs and current situation.  It will usually involve aspects of training, marketing, coaching and mentoring, stock control etc.
  • Compile a list of restructures and actions needed to solve the problems.
  • Finalise an action plan with timing deadlines and clear responsibilities.

Note:    At this stage we do not recommend royalty reductions, holidays or breaks as a quick fix financial aid solution, but rather for the franchisor to accept the royalties and invest some back e.g., increased local marketing, additional support, assistance, etc.

Step 3   Analyse the Franchisee’s financials

A careful analysis of the franchisee’s financials will indicate the extent of the problem the franchisee has experienced to get to an underperforming stage and the ability to turn it around.  The following steps may be taken:

  • Request rent reduction with the landlord.
  • Try to arrange extended payment to suppliers.
  • Review the stock situation within the franchise and evaluate how you could optimise it.  You may need a ‘sale’ to liquidate slow moving stock.
  • Reduce costs wherever possible without downgrading the quality of the brand or service.
  • It may be necessary to approach a financial institution for an additional loan.  The banks have programmes in place to help franchisees in these difficult times.

In general, a franchisor should analyse a franchisee’s financial performance on a monthly basis and benchmark to the group norm, this will assist the franchisor or support team to identify issues early on.  Covid has been the exception to the rule as the financial impact has been unpredictable and ever changing for businesses alike

Step 4   Consider the role of existing, experience Franchisees

Often these ‘Intensive Care’ situations can be brought to the attention of the ‘Franchisee Council’.  An experienced franchisee may have experienced similar situations and the franchisor could request an experienced franchisee in close proximity, to mentor the ‘intensive care’ franchisee.

Step 5   What happens if the ‘intensive care’ activity fails?

This is never a good situation to be in! Best to implement change before it worsens. The franchisor could possibly try find a new franchisee to purchase the outlet if the current franchisee isn’t coping however, the following steps need to be considered:

  • Is the site still suitable or does the franchise need to re-locate?
  • Does the outlet need to be refurbished/revamped?
  • What will a fair value be for the business if it needs to be sold?
  • Will an existing, experienced, successful franchisee be prepared to purchase the outlet?
  • The franchisor should not be greedy and try to facilitate a sale as quickly as possible.
  • Avoid legal intervention at all costs.  The negotiations should be done in a mature, responsible manner.

In conclusion these are unusual times and need action that consider what problems have been experienced through no fault of either the franchisor or the franchisee.