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HOW FRANCHISING CAN WORK IN TOUGH TIMES

by Dr Callum Floyd
 


The current economy is difficult for many businesses including franchised companies. The earthquake in Christchurch has added to the burden of businesses in that region or further afield. Business confidence surveys generally indicate pessimism and challenging conditions are anticipated - according to the latest Franchising Confidence Index – for both franchisors and franchisees.

Yet despite the difficult business environment, we still see standout high performers. Indeed at a franchisee level, there are often a small proportion of high performing franchisees that do particularly well. At a franchisor and system level, there are also some franchise systems that continue to perform well. Furthermore, there are some franchise systems operating in cyclical sectors that are bucking the trend – unlike their competitors.

There are, therefore, always good investment opportunities in franchising – even in tough times. But you have to be realistic and know what to look for. An essential point to remember is not all franchisees (yes that means you), franchisors and business sectors are created equal. Let’s take a look at some key factors relating to what to look for in a franchise system, and yourself!

What To Look for in a Franchise – Essential Elements of a Strong Franchise Model
What are some of the advantages of buying a franchise versus going it alone in this environment? Why should I buy a franchise and what should I look for? Buying a franchise should provide you with the following key advantages:

  • Profit! C’mon, the franchise should provide you with a great return - right?! Yes it should, but you need to recognise not all franchises are created equal - and some sectors are tougher than others. A franchisor will normally have one franchisee that is producing exceptional profits. But how are their franchisees fairing generally. I’m risk averse so I would be looking for as much information as possible to increase my conviction here. Whether a Greenfield site (where no franchise currently exists) or a resale situation (where you are buying an existing business), I would be finding detailed financial information on existing network sites. In particular, understanding how sales, margin and profits are trending. If returns are declining and/or look meagre - move on. There are plenty of different opportunities out there. Bottom line, a great franchise should provide you with the opportunity to make better returns. There are systems providing good returns for franchisees, even in the current environment. Go forth and find them.
     
  • Access to a turnkey or near turnkey business. You shouldn’t have to muck about or waste money and you wouldn’t want to at the moment. If you are not given the keys to a business which is ready to run, you should at least be provided with a clear guide or plan on how to get started. Buying a franchise should eliminate much of the tough work, expense and required experience associated with negotiating a lease, designing layout and fitout plans, organising and negotiating with suppliers, etc.
     
  • Access to great systems and training. You should get access to a top system for operating the business, including clear success factors and efficient processes. These should be encompassed within great manuals and training programs provided by the franchisor. You should also receive on-the-job experience. Training provided should ensure you have the skills and experience needed to operate successfully. Make sure you can recognise and understand what is required and be critical of your own ability to make it work.
     
  • Marketing and purchasing advantages. In addition to a recognisable brand, a strong franchise should provide you with excellent marketing and purchasing advantages you wouldn’t have access to as an independent. On the marketing side, the franchise should provide you with a ‘marketing machine’. This does not mean customers will fall over themselves to get in your door, or that the franchise does the marketing for you. This is never the case. The hard work is up to you. But the franchise should provide you with the tools, systems and training you need to be able to obtain your own customers efficiently and cost-effectively. On the purchasing side, you should get great prices for equipment and any products you sell. This is essential. Make sure prices are well below what you could achieve on your own.
     
  • Ongoing support and mentoring. You will often hear it said that by purchasing a franchise you are ‘going into business for yourself but not by yourself’. This should be, but is not always true. When it is, it can contribute strongly to your performance. You should be provided with wide-ranging and in-depth ongoing support. Whether it be related to products/services, operational training, help with HR issues, marketing guidance or benchmarking information, ongoing support should be focused on helping you make your business more profitable. Make sure existing franchisees have ‘felt’ the profit focus from their franchisor.

Line different franchises up on the above criteria and get the insights on each from existing franchisees.

What to Look for in Yourself – 10 Key Elements to Personal Success in the Franchise Business
The above is something of a short-sharp guide in what to look for in a franchise opportunity and franchisor, but what about some self-reflection? The reality is that you do need to look hard at yourself and what you will be doing. Your performance will strongly depend on it. Based on experience working with many franchisors and franchisees, I believe the following ten points are crucial, particularly in current turbulent times. Follow them and I believe you could be a high-performing franchisee within many a franchise system.

  1. Commit to the business. Great franchisees have one mission: ‘To make a success of this business come hell or high water’. Read ‘Made in America’ by Sam Walton (the founder of Walmart) to truly understand the meaning of commitment and dedication to a business.
     
  2. Dedicated focus on the business. Don’t get distracted. Many franchisees reach a stage in their development where they either take time out or reduce the quality of input into their business. This can have a telling impact on franchise business performance.
     
  3. Keep sufficient capital in the business. Other priorities often compete/emerge, such as a bigger house, a boat, a new car or other investments. These have a direct impact on business viability and required flexibility when the economy turns rough.
     
  4. Business planning, with clear goals and objectives. The adage ‘failing to plan is planning to fail’ may be clichéd, but it is absolutely vital for all franchisees. Have realistic clear goals and objectives and know what is required to achieve them. Then commit to working and achieving the plan.
     
  5. Understand the business model. Get to know the business model inside out. You need to master your business. Know what is and is not crucial to drive success. Understand the path to growth, including required investment and key constraints.
     
  6. Execute the fundamentals, again and again. Good franchises provide the blueprint and key tools for success. It is your job to execute fundamental success factors over and over again. Don’t let one area fall behind.
     
  7. Don’t try and change the system. Franchise systems by definition provide a system and set of rules. Understand the reasons for constraints and systems. Most will be there to protect the brand and help derive crucial value for all stakeholders - including yourself.
     
  8. Exceed customer expectations. Satisfied customers want more and recommend more. Do the maths!
     
  9. Motivate and empower your staff. A pay check and a commission is not enough. Find ways to really engage your staff in the business.
     
  10. Control your expenses. Sam Walton notes this factor as an area where you can always find competitive advantage. Furthermore, he states that you can make a lot of different mistakes and still recover if you have an efficient operation. Or you can be brilliant and still go out of business if you’re too inefficient.

Why is Sam Walton relevant to this list? Sam Walton became a Ben Franklin franchisee in the USA in 1940. Along with his brother, he became the largest Ben Franklin multi-unit franchisee with 19 units. He turned many stores around against all odds. Later he developed a new retail format and founded Walmart. Walmart is now recognised as the world’s largest retailer.

To round up, I believe that good profits can be made by buying a franchise in the current environment. But in addition to the required investment you need the right skills, the right sector and franchisor and execution. The ball is in your court.

 
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Dr Callum Floyd is owner and editor of both Franchise-Chat (www.franchise-chat.com) and Franchise Wire (www.franchisewire.com). He has a Masters and PhD researching franchising, and is Co-Owner of Franchize Consultants (www.franchize.co.nz), New Zealandís leading and award winning franchise development company.

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