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Attention Franchisors and Franchisees: A Successful Franchise Shouldn’t Require Extraordinary Performance

Guest post by: Ed Teixeira

Article Overview: In a prior article I presented a number of reasons why some franchisees fail. One of the reasons for the failure of a particular franchise was that the franchise program was flawed. The following article attempts to explain how franchisors and franchisees can address this specific issue.

Attention Franchisors and Franchisees: A Successful Franchise Shouldn’t Require Extraordinary Performance

In the article I wrote several months ago entitled “Understanding Why Franchisees Fail Will Help your Evaluation Process”, my objective was to educate prospective franchisees and existing franchisors as to how to better relate to the factors that lead to franchisee failures. This article expands on one of these factors. An excerpt from that article: “The franchise program is flawed shows a situation, where the sales and/or gross margin dollars needed to meet expenses, including paying royalties may be difficult to achieve. It may require extraordinary performance to be profitable.” This can eliminate franchisees that do a good job but not an extraordinary job. This situation can be corrected by the franchisor. The Franchisor: A franchisor should structure their franchise program in such a way that franchisees can earn a fair return on their investment based upon good performance. If it’s a start-up franchise program there should be a proto-type or model operation that the franchise is based on. Then the sales and gross margin necessary to achieve profitability would flow from this model. The royalty and ad fund contributions should reflect the aforementioned fact. To take this a step further; if the business model for the franchise was well managed and profitable, then the franchisor should understand how much added expense in the form of royalties and fees the new franchise can absorb. Unfortunately, in some cases a 5-6% royalty and 2% ad fund contribution is added on with the expectation that the franchisee can generate additional sales and/or gross margin to cover this added 7% plus earn a profit. If the business model earned 20% pre-tax and a new franchisee did just as well as the founder then their pre-tax income would be 13% after fees. Franchisors have to take a realistic approach when it comes to the level of performance their franchisees can be expected to achieve. The Prospective Franchisee: An individual looking to purchase a new franchise needs to perform comprehensive due diligence. A critical part of this process involves constructing a pro-forma income statement that provides a financial model of the franchise. The inputs for this model will come from the franchisor, existing franchisees and information contained in the Franchise Disclosure Document. Developing a pro-forma is a way to determine if the sales and gross margin results will require reasonable effort. Simply put; does the pro-forma indicate that the franchisee must achieve a top sales number to reach break-even and earn a profit? I cannot over state the importance of this activity. Many prospective franchisees become overly optimistic in their sales projections which can lead to a shortfall in their future profits. Both franchisors and prospective franchisees need to recognize whether future franchisee profits will require extraordinary performance. Franchisees that follow the franchise program execute correctly and achieve good results should earn a reasonable return on their investment.

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Article Tags: franchise program, franchisees, franchisors



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Re: Info for would be franchisers... - [quote="Sebastien":1d29sdv1]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to. I just want to mention that all these magazines are NOT franchisee oriented. I mean these magazines are for franchise professionals. If you're looking to buy a franchise, you won't find much information in there. To answer your question, getting published in Franchise Times was fairly easy. I don't want to brag too much but I think I am known in the franchise industry. I was the marketing guy at Franchise.com for a few years before joining my new company, the World Franchising Network. So people know me and I have a very good relationship with Nancy Weingartner, the Managing Editor at Franchise Times. I was talking with her at the last Franchise Expo South in Miami and she mentioned she'd like me to be profiled. I was like "ok, sure!". I like this franchise executive profile thing in Franchise Times as it is rarely BS. People are usually really natural in there.[/quote:1d29sdv1] Thanks for the follow up Sebastien! And I can't say that I'm surprised that networking with the right people and managing your relationships with them properly are the keys to being published. I guess the old adage holds true of "it's not who you know, but who knows you" that's important.
how much for a franchise fee? - Dear Colleague There is no easy answer to this question. Things to consider: [list=] The sizeof the Franchise Clent base Expected Turnover Intellectual Property costs (recoup) Number of Franchises Number of employees Original Set up costs Franchise admin costs An example: A franchise that I was involved in setting was to a simple "lawn mowing/home repair" franchise. The Franchise included national/local advertising - preparation of client lists - general admin - central accounting etc The Franchise involved 300-500 clients - and an annual turnover of about $300,000 . The annual franchise fee was $30,000. Hope that this gives you some idea Take care Ian[/list]
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Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.


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