By Greg Nathan
A good reputation is essential to achieving success in business, and in life. People are innately cautious when it comes to trusting others, and reputation is the main criterion we use when deciding whether or not to lower our guard and buy someone’s products or invest in their business. Another word for reputation is brand.
Over the past 12 months, the franchising brand in Australia has been damaged by adverse media coverage and a Parliamentary Inquiry where hundreds of unhappy past and existing franchisees have shared their stories. This has unsettled the market, causing a drop in enquiries from prospective franchisees, and a tightening of credit from lending institutions. On the positive, this has been a wake- up call for all of us with a passion for franchising, and a belief in its power to contribute to a better society.
The following strategies are aimed at rebuilding confidence in the franchising brand, not through PR and spin, but through sound business practices that have been shown to promote strong franchise networks. While they are written with franchisors in mind, they are also relevant to franchisees and advisors to the sector. It’s no coincidence that the franchisors who practise these strategies are faring better.
1. Monitor and review unit-level profitability
Thanks to technology and some excellent financial management products and platforms such as XERO and MYOB, useful business data is now easily accessible. There is no excuse for franchisees and franchisors not to be collecting and using data to track the financial health of their businesses. While the sophistication of financial benchmarking systems will vary between networks, at the very least every franchisee should:
- Have a monthly P&L using an agreed chart of accounts.
- Know the sales breakeven point at which their business is starting to make a profit.
- Be tracking five Key Performance Indicators that correlate with the future health of their business. (These will usually relate to customer satisfaction, staff engagement and productivity, customer spend, and marketing )
Franchisees should also be discussing these numbers in quarterly meetings with the franchisor team. In most cases, this will be a field consultant, who should also have ready access to these numbers and know how to interpret them.
2. Have a remediation program for franchisees at risk
When someone becomes a business owner, they are in effect going into battle for market share against competitors who, in many cases will be trying to take them out. Franchisors need to stop hiding this brutal truth from their franchisees and start equipping them with the necessary tools to survive and thrive.
Our statistics indicate that around 10% of franchised businesses are going to get seriously sick or injured in this battle for market share.
Some will go down in the early stages due to a lack of working capital. Others may start all right but later find themselves weak and vulnerable from a lack of sales and the unrelenting stress of business.
Every franchisor needs an Intensive Care Unit (ICU) to tend to these businesses. And they need to be tough on compliance to agreed actions designed to help the business survive. Yes, ICUs are expensive. But the emotional, financial and reputational damage of letting franchisees perish without receiving adequate support is, in the long run, far more costly. If the bulk of franchisors took this responsibility more seriously we wouldn’t have a Parliamentary Inquiry at the moment.
3. Assess franchisee satisfaction against internal and external benchmarks
Let’s move the discussion from ICU to ACE, which stands for Advocacy, Commitment and Engagement. Fifteen years of research on thousands of franchisees has enabled us to develop a deep understanding of the factors that result in franchisees wanting to be advocates for your business, commit to staying in the business, and engage fully with brand initiatives. If franchisees are to have an ACE Mindset, they need to:
- Enjoy running the business
- Be making a reasonable profit
- Have confidence in the franchisor team
- Feel a sense of belonging to the franchise network
- Have access to useful systems and relevant support when they need it
- Be informed and consulted about important matters impacting on their business
Franchisee satisfaction in these areas can be reliably measured and benchmarked. Franchisors need to be seeking regular feedback in these important areas to remain on their game.
4. Include franchise profitability and satisfaction in franchisor KPIs
Make no mistake, the most important stakeholder in a franchise network is its franchisees. If they are profitable, satisfied, and consistently delivering great customer experience, all other stakeholders, including the franchisor company, will prosper. Franchisors would thus be wise to link the bonuses of their executives to these measures.
There are many other benefits to this strategy. For instance, the previous tip highlighted the strong empirical relationship between a franchisee’s profitability and their willingness to recommend the franchise business opportunity to others – essential for attracting new franchisees to a network.
In another study on the relationship between franchisee satisfaction and business performance, we have also shown how, the more franchisees believe their franchisor cares about their success, the more proactive they are in growing their business and engaging constructively with network initiatives1.
5. Invest in building and maintaining a healthy franchising culture
While we have worked with over 500 franchise brands, I would only select 5% for an elite category of the truly great. These companies share the following characteristics:
- They have maintained consistent yearly growth in like-for-like sales for over 20 years, (not just a growth in units).
- They constantly innovate and reinvent themselves to ensure their products and services remain relevant to their end customers (which probably also explains the first point).
- Their strategic decisions are made with reference to their culture, their brand values, and what is right for their customers, staff and franchisees – not just their
- They are clear that, in addition to the industries they operate in, they are well and truly in the business of franchising, and they ensure they are good at
This last point means they train their franchisor staff and their franchisees in what it means to be part of an interdependent business relationship where everyone operates under the same brand and needs to collaborate in order to maintain a competitive edge. This education on how to maintain a healthy franchising culture should be ongoing and embedded into a franchisor’s leadership training and franchisee conferences.
There is no room for mistrust, big business bureaucracy, disrespect, or petty politics in a franchise network. The culture needs to be one where franchisor staff and franchisees understand “we’re in this together”.
In summary, to create healthy franchise relationships we need strategies that engage both the head and the heart. We need to also remember that, for many franchisees, this is more than just a business or a job, it is their life. If things don’t work out, it’s not just a matter of them finding something different to do. Helping people to retain their dignity in the face of failure is something we could all probably do a lot better.