Take a quick look at what it takes to reach a high franchise rating.
Australia has for many years lacked a universal and objective way to address and promote franchise performance. This has made it difficult for quality franchise systems to be recognised and fuelled concerns that reported poor performance in the sector is endemic.
In 2019 the Australian Franchise Ratings Scale™ was launched to promote transparency and recognise the performance of Australian Franchise systems. So far almost 30 systems have been rated and this number is expected to grow significantly in 2020 as brands look a for a point of difference to attract new franchisees and promote improved access to finance.
How does the rating system work?
A set of seven standards have been developed to enable a consistent evaluation of Australian franchise systems. The foundation of these standards comes from defining and measuring what good performance looks like.
After the application of an objective and rigorous measurement framework an overall performance outcome is achieved which is depicted in a graduated star rating scale.
1. System performance
The outcomes for this standard are algorithmic and are based on a time series assessment of the number of units in a franchise system together with trends in openings, closures and transfers. This data is extracted from five successive years of disclosure documents.
Franchise systems scoring highly in this category are showing:
- low churn rates
- a low level of closures
- a steady level of transfers
- disciplined growth in unit numbers
2. Franchisee financial performance
This is a major component of the ratings process and is weighted accordingly. The ability of franchisees to make a reasonable financial return from their business, and one that meets the expectations they had entering the system is critical to the overall health of the franchise system.
Franchise systems scoring highly in this category are typically able to show:
- A clear view of the financial performance of their franchise network (the deeper and broader the data the better the score)
- The substantial majority of their franchisees are:
- maintaining or improving their topline revenue
- maintaining or increasing their bottom line profitability
- having their financial expectations met
- An ability to segment performance to identify underperforming units
- Benchmark data and KPI inputs that help franchisees to effectively plan and improve their performance
3. Franchisee engagement and satisfaction
A key indicator of a healthy franchise system is the satisfaction of its franchisees. Regular monitoring can also provide effective early warning signs of business stress and pressure on the business model. If these lead indicators are missed or not addressed in a timely manner they can lead to major problems and create substantial brand risk.
Brands scoring highly in this category are generally able to demonstrate:
- Regular (preferably external) measurement of franchisee satisfaction levels
- The sharing of those outcomes
- Disciplined action plans to address issues or opportunities for improvements
- Solid participation levels in surveys, conferences and scheduled meetings
- Above average (or sound and improving) engagement levels
4. Establishment and support services
This category covers positioning new franchisees for success, optimising the success of existing franchisees and the effective support of underperforming franchisees.
Brands scoring highly in this category can typically demonstrate:
- A structured training/onboarding program
- A comprehensive, documented and proven franchisee recruitment process (for single and multi-unit operators)
- A strategic and documented site selection process
- The engagement of external specialists for specific data and profiling services
- A clear awareness of the early warning signs of underperformanceSpecific examples where their intervention has been able to support or turnaround individual unit performance
5. Franchisor financial performance
Seldom reported in the media but common in the franchise sector is the high level of support franchisors often provide to stressed small businesses in their network. Short term royalty relief, rental subsidies, reduced marketing contributions and additional field support are all examples of mechanisms that we see being selectively utilised by franchisors to help honest, hardworking franchisees.
However this support comes at a heavy cost to the franchisor so their capacity to assist is equally as important as their willingness to do so. A financially weak franchisor creates significant risk to emerging and mature franchise networks alike.
To achieve a high score in this category franchise systems need to be able to demonstrate:
- Stable or improving top line revenue
- Stable or improving bottom line profitability
- Prudent earnings retention and balance sheet leverage
- Sound liquidity levels
6. Lender relations
With access to finance challenge a recurring theme in franchising it has never been more important to be “lender friendly”. While the major Australian banks have pulled back on franchise lending in recent years, savvy franchise systems are still finding ways to promote improved finance access for their new and existing franchisees.
The Franchise Ratings Scale gives credit to brands that can:
- provide evidence they have multiple lending programmes in place (banks and other providers), or
- provide evidence and related information packs from briefing sessions with lenders, or
- make available portable lending reports to promote improved finance access for their franchisees.
7. Compliance and assurance
While workplace relations has been the central and most publicised compliance theme of recent years, good quality franchise systems recognise that effective compliance covers many other aspects.
The Ratings Scale allocates high scores in this category for brands that can demonstrate the existence of a disciplined and structured compliance framework. These will typically include workplace relations and other key risks deemed relevant to the particular franchise system.
In practice many of these seven categories or standards are interrelated with poor performance in any one area generally impacting other areas.
Brands that have achieved high ratings so far have all been able to provide strong, fact based evidence to back up the achievements and positive direction of their franchise system.
Check out the top rated brands in Australian franchising… including First Class Accounts; Poolwerx, Gutter-Vac and FCF Fire & Electrical; Lottery brands; Quest Apartment Hotels; Foodco’s Muffin Brea, and Jamaica Blue; Ferguson Plarre, Pack & Send.