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Expansion will stream after cash flow is balanced and bills paid
by Jerry Wilkerson

If someone claims to know what will happen in the business of franchising through 2009, don’t believe him or her. It is going to be that kind of a year. A multiple of answers and voices are more fitting, and a great deal has to do with which industry faces disappointment and which flows through successfully. However, do not calculate out the prosperous possibilities that franchising transports to national and global competition for financial success. Be advised, this is not a chronicle about good and bad franchisors.

Franchising firms will traverse some very defiant marketplaces, while stretching cash flow, paying excessive costs for quality lead generation, and begging for credit to operate while helping franchisees buy into the system. Credit remains a foremost stumbling block in 2009. Most industries under the big tent of franchising suffer from the credit crash, others will not. Retail real estate is cold, with malls across the country foreclosing in 2009, shuttering franchise-leased space with little notice. We will see hotels, shopping hub big box stores, and strip centers go dark, as commercial mortgages fail and lenders walk away, stung by huge financial losses and devaluation of property.

Chains now look exhaustingly to their leadership to rewire the business plans for survival. Outside franchise consultants, retail experts and business industry specialists will be in demand to solve the retail vagueness and economic puzzle. Job losses will race to nearly double-digit scores as the nation and the world heads through a prolonged recession. This recession has already produced penny-conscious buyers putting a needs test to everything they purchase. Overall spending will be down in ’09. Perceived mid-level shopping, where retail is king, has the products the shopper is content to buy. Now, find that sweet spot and start selling.

Branded chains will provide reward points to stabilize customers while insuring repeat buyers. Spending habits change by the day with fewer stores available to buyers, who stake out their territory for shopping and drive only in that area. The coveted age group of 20 to 40 now understands the financial insecurity and risks that come with frivolous buying. Careful spending changes retail’s approach to this market, and many of the industries within franchising.

Paring of store inventories will produce faster product turnaround sales while catching new wave products, all helping to move through the season quickly. This will aid in bringing shoppers back. It is not your mother or father’s kind of marketing. This is niche servicing. Mom and pop will gain plenty of attention from franchisors in the care industries, including home and health, entertainment, education and physical fitness.

For those who have built solid branded chains, and are ready to spin them off to a venture capital or private equity firm, think again. What you valued your system at last year, is not what it is worth today. Plan on working longer to build up same store sales, add new units, a stronger royalty stream through innovative products and services while improving equity value, or sell for less. Franchising has never been a good bet for quick-change leadership. You must know your franchisees, their family members, personal financial position, even health, and embrace this entire package. It is a way of life, not a road to financial welfare for the founder or investor management.

Franchising is still in command with a staggering 41 to 43 percent of our nation’s total retail sales and service dollars pouring through the system, according the International Franchise Association figures. It’s an employment engine on fire and it produces wealth right through economic hard times. You don’t need an MBA to succeed. One and all are in it together to win. Franchising is the profitable wonder machine that plows through challenges and persistently produces success.

The modern method of franchising is a powerhouse for investors too. They clamor to buy branded systems, rework them, build up the value, and sell them to another investment team. Franchising is a colossal international movement of broad-based business segments. The business of franchising is a privilege filled with responsibilities, a series of successful habits predicated upon a few great thoughts implemented by good employees, and driven by visionary leadership.

In franchising, we let others do the pioneering, and then, with franchisees, we do it bigger, more quickly, and efficiently in large numbers. The founder took the time, economic risk, built the business model, while showing the franchisee how to do it, upgrading the system along the way and pave the route with training. The franchisor must do all the testing and costly up-front mistakes in the marketplace. Time and again, franchising is to succeed through the work of others.

A dynamic relation between the franchisor and franchisee exists to promote the growth of the chain. This allows for solid communications, superior customer experience, and street-driven sales knowledge flowing in both directions. Each party shares in the commitment and vision as they march lockstep to establish values, foster brand development, create corporate culture, set marketing directions, and cultivate bottom-line-enhancing worth.

Franchising invites everyone to join. And 2009 will be an especially challenging 12 months, while it crosses all lines of society and embraces almost anyone who is ready, willing, and able to work. In franchising, the success of both the franchisee and the franchisor is truly dependent upon the success of each other. That symbiotic relationship thrives on the willingness to prepare for success. Through constant and consistent training of the franchisee, franchisors strive to improve and to increase the system’s value, and thus the value of the individual units. But each entity must be willing to invest in the other.

Successful franchisees are captivated by the business while investing in their future. They should be infatuated with the force that goes into the thriving development expansion and basic commerce of the brand they buy into for growth. They will possess good work habits, business ethics, people skills, and a burning in the belly to win.

At the same time franchisors in 2009 become so because they have come to wisdom through success and failure alike. Very little wisdom emanates from just success alone. I’ve found that franchisees buy into the system because they are betting on the quality of the franchisor’s failures as much as the quality of the success. Franchisors must eliminate the franchisee’s reason for failure. To remove risk, franchisors are obliged to consistently test, refine, and add to their products and services that augment the brand value for both parties.

For the last year in this decade, what will make franchising successful in this strapped economy are the franchisors’ tested methods of doing business and their unending search for good franchisees to grow the system with new units. They’re looking for someone who wishes to borrow as much as the other is willing to lend, and at the same time remain focused on the common progress of that system. Franchising itself is bountiful enough for the non-pioneer and the pioneer to walk next to each other equally.

With this demanding economy, nobody said that franchising was easy or that it didn’t take hard work to be successful. The key to what makes the business of franchising thrive so soundly lies in the people who make it run. Essential knowledge for any employer is that there are three ways to get a job accomplished---you do it yourself, you employ someone or you forbid your children to do it!

Without a quality workforce and unwavering management, the franchising system of business could not provide the excellent price points, branded quality, consistent training, and elevated efficiency of service for which it’s celebrated worldwide. Success in franchising implies optimism, mutual competence, and fair play. Franchisors have to hold a high opinion of the worth of their company, what they sell, and feel that the product or service they provide is the best their employees can produce for their business. Franchising makes the world a much better place in which to live and work, and acknowledges everyone’s success throughout a branded system. Franchisors comprise faith in their organization and their staffs, that they have a profound desire to help others succeed. Clear, defined vision and consciousness allow them to generate the fusion of people working together with franchisees.

In this global economy, franchisees pay less attention to what franchisors say and more attention to what they do. This brings even more focus on the franchise system workforce. A dynamic franchisor hires quality people whom he or she encourages and enable to become the finest employees they can be. Those destined for success never underestimate the ability of their workforce to exceed their expectations as they labor toward a better tomorrow.

If you are a franchisor planning to succeed in an economy filled with valleys, hills, mountains, rivers, tight credit and techno-driven business plans, the following guideposts will help you navigate this brave new world:

  • You must be a risk taker to discover the new opportunities and lose sight of the shore to find the ocean.
  • Make the ordinary the extraordinary and look ever forward into a Technicolor marketplace that is changing under your feet.
  • Assemble a management team that shares your passion with an unyielding workforce. Time should not be boundaries.
  • Be obsessive about commitment to execution. Clearly focus on achieving one goal at a time and know it when you get there.
  • Possess an uncompromising, steadfast moral business compass. Work reflects your life along with what you are and who you are.
  • Match your business with other businesses that complement and embrace your zeal and values. One and one make three in this economy.
  • Be confident enough to help and encourage others along the way. This responsibility may not be fulfilled, but will always be rewarded. Everyone around you is a teacher. Continue teaching your franchisees through bottom-line enhancements.
  • If you can’t explain it to your mother or grandmother, you really shouldn’t be doing it.

You cannot demonstrate leadership by pointing in the direction you want to go and telling people to go there. Leaders go to that place. They show the way. People will follow their leader. We must instill passion in the workplace and let people know it is a mistake to believe they are merely working for the company. Always strive for employees to work with you and not for you, just as franchisees work for themselves, in their units, but not by themselves. For franchising in 2009, it’s seeing what other people don’t see and pursing that vision first.

In the new-fangled economy, successful franchise executives prove that what counts is not what you get for your life’s work, but rather what you become by doing it. The enrichment of other lives defines franchising accomplishment. The best franchise executives know their ideas today can turn to dust or weave magic. It all depends on the talent that rubs against them, and their franchisees. People always support what they help to create.

Leadership and management is a commodity in the new franchising world---you’ve got to have money to invest in these people just like gold, blue chip stocks and rated bonds. The risk is relatively low and the investment return consistently a solid yield. Earnings follow the investment in this case. Franchisors must recognize in this business environment that management leadership is capital formation upon which they can hedge their bets with the best possible candidate the market pool has to offer.

If a franchisor is not making this vital investment today, the company will fail to grow and prosper in our hyper-competitive mercurial marketplace and economy. The captains of today’s franchising systems must also have wondrous vision, dauntless drive, searing intellect, fearless spirit and a profound character, along with a well-honed, competitive instinct. It is a requisite that they surround themselves with managers who resonate energy, passion and a resolute will to win under difficult financial challenges. This creates investing dynamics in a complex, exceptionally protracted, and combative human resource arena.

In the coming years franchisors will need access to skilled and experienced franchising talent to thump the competition and sell more franchises. The high performance leaders understand how the systems management framework must mature with the brand. Essential capital investment in people builds the corporate future and system infrastructure. This singular endeavor shapes the success of the franchisor more than any other single item in the annual budget.

The business environment in 2009 will change as fast as the tides of the oceans around the world. Therefore, franchisors will be looking for franchisees from every conceivable source to contract into their system. With a franchise contract, you never really sell anything and you don’t close the deal with a check. You simply start the relationship process with that confirmation agreement. Every month franchisors must earn another check---the royalty. It’s the franchisor’s responsibility to keep the business profitable and persistently build the bottom line with new products and services. This is what franchisees are buying into and what validates the franchise system year after year.

First-rate franchisors will try to surround themselves with strong, driven, ever inquiring franchisees. The second-rate franchisors will surround themselves with mediocre franchisees that will question the system and bend the rules to their perceived needs. The third-rate franchisors will surround themselves with anyone who can pay the franchisee fee and who really doesn’t care to remember the rules, work hard, or plan to be in one place for long.

These franchisees are the ones who will say that they agree to the contract in principle when they truly mean they haven’t the slightest intention of carrying it out in practice. They seem to always know more about their market than the franchisor, are late to pay royalty checks, and want to call secretive franchisee meetings at the annual convention to discuss the discord between themselves and the brand management. Franchisors that bring these sham operators into the system will fail in the shortest of time with this economy, likely taking the brand down with them if cash flow in the chain is poor.

In ’09, we all need to listen and, on occasion, put ourselves in the other person’s billet. Do we really understand what someone said, what he or she want to accomplish, the essence of his or her position? Have we tried to accommodate their requests? Is it possible to do more than expected, yet keep the deal in place while providing for a fair, just, and equitable long-term relationship? Let us all work toward that goal.

I learned a maxim from some of the best hagglers in the world on Capitol Hill, my beat you could say for a decade. We have all met rascals who, in a fifty-fifty proposition, insist on getting the hyphen too. Successful, collaborative negotiations lie in finding out what the other side really wants. Then show them the way to get it while you also get what you want or need to run your organization. Work with potential franchisees and adjust your program to fit the shrinking business economy.

As with all binding accords of legal consequences, it is important to remember that the big print giveth and the small print taketh away. Franchisees should read the contract in full---every word---and understand it. Knowledge is what one gets from reading the small print in a contract and experience is what one achieves from not reading the agreement. Franchisors must spend time on this process; take out as much small print, backup rules, can’t do’s, and make the agreement more transparent. This will bring on board a new group of investor operators in 2009.

International franchising will continue to be an exceptional business model for franchisors that can adapt to the global sales and development program, and have enough on board revenue to weather the economy. China and India will continue to be rather strong, although slowing somewhat along with global economics over the experience in previous years. The Euro Region is as well, a tested marketplace for franchising, as is the Middle East to a lesser extent, and the Australian’s sense value in franchising too. All will improve with the economy as ’09 runs the gamut and bowls into 2010.

Foreign governments in ’09 will see franchising as a way to implement change, develop new local business, create social infrastructure, generate jobs, as well as other positive economic changes. Franchising affords enormous upsides in training people and educating vast numbers of owners and managers in the art of operating a successful business. People are willing to work harder because franchising drives hope into their communities seemingly overnight.

Revamping, rehabilitating, and reengineering old branded systems will engender customer returns and loyalty. The doom loop cycles are shocking a number of franchisors into reality. Once a company is in the loop, turnaround becomes harder to achieve. We have seen goliath brands with gray beards forced back to their core business as they address poor marketing plans, reevaluate their products, and services, rehab tired units, retrain from top to bottom, stress customer service with every breath, while structuring a new business plan. The brands that do not make these changes will have windows full of closed signs posted about through this frigid economy.

Veteran operators tell me that they have learned to be circumspect with their customers’ on/off again behavior and infatuation with new things. There are two American public mindsets: one that drives short-term fads and the other that shapes long-term behavioral trends. The test for franchising is to spot and separate the non-market drivers from those of real change. Savvy franchisor executives indicate they intend to be more guarded this year from volatile market swings.

Franchisors clearly indicate that there is a consciousness of conviction emerging, overriding their business fears for 2009, which exhibits their firm grit to succeed. They are determined to show the way, an attitude that is tough to beat during financial challenge. They state with confidence that the economy will pick up in 2010. People, their buying instincts, huge budget-motivated modifications, will have altered the retail global geography enduringly. Consumer spending will have shrunk, retail habits altered, service enhanced, products better made, and our society a healthier environment in which to grow and develop new business.

The high level of interest in franchising today is from uniquely qualified prospects, looking for investment return in their life journeys. Capitalized individuals with strong management experience, dependable work ethics and discipline, can achieve and thrive within the franchisor’s system. These franchisees are higher educated and increasingly diverse in their investing tactics. Consequently, franchised concepts must evolve to meet changing demographics, age, convenience and the self-limiting driving-to-shop ratios forever in play due to the energy jam the world around.

Two primary forces in the economy drive franchise sales. First is unemployment. Every time there is a one tenth of a percent increase in the unemployment rate, nearly 150 thousand potential franchisees hit the marketplace, according to Mark Siebert at the iFranchise Group, a global franchise consulting organization. The other factor, he says, is credit. With the credit crisis, many franchisors are experiencing difficulty in selling franchises even to qualified buyers.

I anticipate that will change in ’09. The SBA has announced modification of the 7A loan program, the traditional backbone of franchise finance activities. The adjustment will allow banks to peg their interest rate to LIBOR (the bank’s actual cost of funds) instead of the prime rates. Conventionally, there has been about a 3% (300 basis points) spread between the two. Essentially, because the interest rate allowed under the old SBA program was tied to the prime rate, banks became reluctant to loan as the spread between prime and LIBOR narrowed. Under the new program, SBA loans can be tied to prime or LIBOR. This move, according to Siebert, should substantially loosen the SBA lending environment, and in the process, spur franchise sales throughout 2009.

Franchising remains a tremendous locomotive for employment and a huge slice of the American pie. The business of franchising is literally the yellow brick road---a global Main street of business for all to use. Over the years a common thread has wound its way into the business of franchising, weaving the tapestry of global business with a free spirit and successful stride through the constant ebb and flow of enterprise. Predicated on men and women who trusted themselves, successful franchising executives dare to format and take control of their own business futures in these times of fiscal, social, and family financial trauma. Franchise management is individuals with conviction and courage to blaze new trails, and confidence to assume the necessary risks up front. They have faith in themselves in 2009, in their methods of doing business, and an uncanny willingness to share their concept with others.

The secret of franchising in 2009 is in the consistency of franchisors to pursue new and improved products and a concerted effort for higher quality personal services. From this stage, their franchisees attain steady and stable bottom-line enhancements. In other words, my success is your success, from which many around the world will benefit. In franchising, our actions create a legacy that inspires others to dream, to learn more, to do more, and to be more. One must remember along the course of opportunity that the highest achievements are never solo events. We reach our best mark in life with the help of others and their belief in us.

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Jerry Wilkerson is a former president and executive director of the International Franchise Association (IFA), in Washington, D.C., and founder of Franchise Recruiters Ltd.®, an international franchise talent acquisition corporation with offices in Toronto and Chicago. He recently marked his 32nd year in franchising.


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