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What (good) franchisees want

Guest post by: Rod Young

Article Overview: With 850 business format franchise systems in Australia and high levels of employment, the “war for talent” is intensifying among franchisors for quality franchisees. Good, “proven” franchisees are now in a position to choose between franchise systems. Rod Young reveals what successful franchisees expect from a franchisor.

What (good) franchisees want

Employment opportunities have expanded enormously in Australia over the last 5 years and unemployment has dropped in that period to record lows. Simultaneously, franchising has been growing at a substantial rate. In 1998, there were 693 franchisors established in Australia. In the most recent "Franchising Australia 2004" survey conducted by Associate Professor Lorelle Frazer of Queensland's Griffith University, there were 850 franchisors offering franchise opportunities in 2004. Thus, since 1998, over 30 new franchise systems have entered the competition for franchisees each year. The survey also showed that there were over 50,000 individual franchise units operating in Australia in 2004. Clearly, substantial competition for franchise owner/operators exists not only amongst the 850 franchise systems, but also from the 20% of existing franchisees who are interested in selling their franchises.

The conversion of a company-operated store, managed by a paid employee will, in almost every case, improve both top line revenue and profitability when converted to franchise-owned operation. Attracting a "quality" franchisee replicates this phenomena. Examining the performance of many franchised networks, not only does the system, brand and marketing clearly make a difference to the performance of the network as a whole, but individual store performance is also significantly influenced by the calibre of the owner/operator.

Some of the best and most valuable businesses in franchised networks have been destroyed by incompetent franchisees that have been poorly selected by franchisors. In addition, many franchisors have been influenced by franchisees wishing to exit the system. Conversely, many very good franchise owners are purchasing run-down or struggling franchises and turning them into extremely profitable ventures. An excellent example of this phenomenon is Wayne Hosking who is the largest franchise holder of Cash Converters stores in Australia. Wayne has built a successful group of businesses by not only opening greenfield locations but by acquiring poorly operated Cash Converter stores and weaving his particular brand of magic. Wayne applies the franchisor's operating systems together with a charismatic and focussed management team, which has built his business to a 7-store network.

Poor performing franchise networks and those not nurturing their best franchisees will create a flight to quality franchisors by their best franchisees. Naturally, the better franchise networks attract the very best franchisees.

So how do franchisors retain quality franchisees like Wayne Hosking and attract new high calibre franchise owners to their networks?

What franchisees want

Honesty and integrity



While the specific features of each franchise system are quite easy to compare, the quality that most good franchisees value is the relationship with the franchisor and the level of trust existing in that relationship. Good franchisees want to work with franchisors knowing they can build an asset for the future and that they have a common interest with the franchisor in building the brand. There are numerous examples of an underlying distrust between a franchisor and its franchisees. This erodes not only the ability to maintain good people, but the motivation for franchisees to do all that is necessary in their enterprise to build the brand and delight the customer. Many of the best franchisors earned their franchisees' respect by conducting their business with honesty and integrity. This is a quality that cannot be bought or hired. The franchisor and its staff must build it.

A Concentration on compliance

Interestingly, the biggest complaint some of the better franchisees have is that their franchisor is not tough enough in enforcing the operating standards and presentation of the network upon every franchisee. A tolerance for mediocre performance and turning a blind eye to non-compliance will result in lower standards across the network, devaluing the brand and ultimately causing a franchisor's better franchisees to look elsewhere.

Brand presence

Being part of a recognised and growing network instils a sense of pride in each of the company's stakeholders. Franchisees want to be associated with success. Therefore, the brand and public image of their franchisor's network is an important consideration by many franchisees when choosing a franchise system. The franchisor's brand acts as a magnet, drawing interest from quality franchisees.

Traffic building advertising

Business people want the opportunity to talk to new customers every day and have their existing customers motivated to come back to do business again. Effective advertising programs help to build sales and profitability, while also creating activity for the franchisee and their staff. The best franchise networks have good systems in place to measure the effectiveness of advertising campaigns, incorporating feedback from franchisees as to the success or failure of individual advertising initiatives. Many networks, including one of Australia's largest advertisers, Forty Winks, have an advertising committee established, with both franchise owners and head office executives integral to the decision making process. This ensures that the people closest to the customer provide their hands-on feedback from the coalface to guide advertising outcomes.

Management information systems

The management of any good business requires good management information systems (MIS). A feature of the best franchised retail networks is the ability to generate high quality information from point of sales systems. Better franchisees seek this detailed management information so that they may more effectively manage the day-to-day operations of their business. They also have aspirations of a multi-franchise operation and know that good MIS are critical to their success. Rather than spending every hour in their franchise, many of the best franchise owners communicate from their office in real time with the staff at their franchise.

Comparative analysis

Providing an understanding of how a franchisee is performing relatively within the orbit of their network is a valuable management tool. Good franchisees seek to benchmark themselves against their peers and then work to lift themselves in the rankings. Franchisees are driven to improve by improvements in profitability and the need for social recognition. Accordingly, it is important for a franchisor to be transparent with the performances of the good, the bad and the ugly within the network, in order to incentivise better franchise owners to improve by competing for top position.

Above average profit

The average income of a franchisee in Australia today is approximately $70,000 in wages and profit. This, of course, includes the small service franchisees, which occupy large numbers within the galaxy of franchising in Australia, as well as the high profit retailers such as Forty Winks, Hairhouse Warehouse, Red Rooster, Cash Converters, Boost Juice and Healthy Habits. The reality is that in order to compete for the very best franchisees, franchisors need to develop their franchise systems so a quality franchisee may earn at least $100,000 annually and potentially as much as $200,000-250,000 or more from a single unit. While this may seem a substantial sum, remember that the very best franchisees in the very best systems are earning incomes in this range and above. Further, in most circumstances these are high calibre individuals with the capability of running a small corporation. There are franchisees in Australia that are earning multi-million dollar incomes operating franchised businesses. Franchisors competing for the very best franchisees need to meet the income opportunities of the executives in medium to larger corporations to attract the right talent.

Opportunity for multiple ownership

It is informative to look at well-established franchise systems in the United States. Subway has approximately 17,000 franchised stores in the US and while there are 8,000 owner/operators, 4,500 own just 1 unit. Almost 3,500 or 44% of the total network own multiple locations. It's also very interesting to note that only 150 of those 8,000 owners own more than 10 stores. What does this mean? Good franchise owners want to grow. They want the ability to own and operate multiple stores. This need is in line with the previous point regarding profit margins, as high profit franchise systems are capable of multiple ownership more readily than modest or lower profit systems, where the work / reward equation is less attractive.

Training for staff

The best performing businesses have well trained and qualified staff, who understand how to impress the customer with their enthusiasm and product knowledge. These staff are a business's biggest brand advocates. Quality franchisees want franchisors to provide them with opportunities to train their staff and help them develop their people. This is done by implementing development programs and regular training sessions from head office, often including a combination of in-house and on-line training. Many good franchisors involve their suppliers to help deliver high levels of technical and product training. Ongoing training sessions in which the franchisee can send their employees to both new induction training courses and refresher courses for more experienced staff and the ability to deliver train-the-trainer programs for franchisees to better facilitate training at store level is highly valued by better franchise owners. This must be reinforced with good operations and procedures manuals, which can be used as the curriculum for training by franchisees at store level.

Conferences

Conferences not only give good franchisees the opportunity to take a break, get out of the business and gain a broader perspective on their business, but also offer them a learning experience and the ability to network with their peers in the franchise network. These conferences should be well structured to provide training on how to improve the profitability and performance of individual franchise businesses. Direct contact with the franchisor, in order to communicate the direction and vision of the business is critical for franchisees' long term vision of the system. A conference location that is convenient to get to and return from quickly are more valued than holiday destinations, as the best franchise owners bring their key management and as many staff as is reasonable. This enables the value created by the learning environment of the conference to be passed on to employees, who are given the opportunity to see the big picture for the franchise network.

Competent franchisor staff

One of the key frustrations good franchisees suffer is that they have more experience and/or expertise than operations or head office people, who are charged with the responsibility of providing direction, support and services to franchisees. As a good franchisee matures, their requirements often shift from being spoon-fed to creating opportunities to improve profitability and expand the business. Therefore, the nature of the relationship with the franchisor may need to change from that required by a new franchisee. Recognising this need, Managing Director of the Stockdale and Leggo retail estate chain, Michael Beliavera, does this very effectively with his top performers. Rather than teaching his long-standing, and very experienced and profitable franchise owners about business operations, he has taken a unique approach. Michael has developed a "coterie" of his top 10 franchise owners and has formed a CEO network that he attends personally with these top franchise owners. Discussion are focused on wealth planning, business and staff development, and growth, to deliver to the mature requirements of top performing franchise owners.

Innovation

Any good franchise system cannot remain static. It must continually innovate to not only keep in front of competition but to continue to drive growth and profitability. The source of much innovation in good franchise systems is drawn from the ideas of some of the more experienced franchise owners. These people want to provide input to the system, to have their views heard and feel their ideas are considered. It is almost common knowledge that the Big Mac, Fillet-O-Fish, playground concept, breakfast menu and even Ronald McDonald himself were initiated by franchisees. Innovation conveys to good franchisees that the network is vibrant, growing, and not resting on its laurels or complacent about further development. Good franchisees are deterred by networks that are so rigid as to stifle innovation. Peter Richie, the founder of McDonald's in Australia acknowledged recently that during the early nineties, the McDonalds system was so inflexible that it almost squeezed innovation out of the business. This inevitably led to the exit of some quality franchisees.

Communication

Simply sending a newsletter to a franchise owner or establishing an internet chat-room is not what good franchisees consider to be effective communication channels. Successful franchisees seek meaningful communication directly with the franchisor and the most senior head office staff about issues relevant to their business. These are often quite different from the issues other, less experienced franchise owners in the group face. The best franchisees operate some of the best stores in the network and in addition to assisting innovation, have great value to give in shaping the future of the group. These franchise owners become disenchanted if their ability to communicate their ideas is stifled or delegated to junior head office personnel. In short, good franchise owners want to be valued for their experience as well as their contribution to the group. Franchisor recognition of the value good franchisees can contribute goes a long way towards building loyalty and commitment from experienced franchise owners.

It is little wonder that the most successful franchise systems have incorporated processes to motivate, encourage and retain their best franchisees. Some franchise systems offer discounted initial franchise fees for additional franchises acquired by their current franchisees, to encourage those qualified to operate multiple stores to grow. This policy recognises quality franchisees' value and acts as an incentive for franchisees to take on new challenges and stay with the network.

The "churn rate" of franchisees is relatively low, with the average franchisee staying with a franchise network for 7 years. However, anecdotal evidence among franchise networks indicates that if franchisors cannot provide sufficient opportunities and relationships, better franchisees are economically capable of 'jumping ship' relatively easily. Successful franchisees are consistently earning in the range of $150,000 to $250,000 and above. These extremely valuable businesses are in demand by not only the broad franchise buying public but by asprational junior franchisees who are interested in trading up to better stores. With the ability to crystallise the value they have created, franchise owners can exit a system with $500,000 to $1,000,000 from the proceeds of the sale of their business and have the economic power to choose virtually any franchise network to operate in. The best franchise networks are on the lookout for these quality franchise owners and will entice them with more valuable opportunities.

However, watch out for "entrepreneurial seizure". Many very successful franchise owners have been inflicted with this disease. It is contracted when a franchise owner believes their success is solely due to their skill, talent, ability and good looks and the franchisor is lucky to have them in the system. Experience has shown that this less-than-humble attitude has ultimately led to economic disaster, by becoming belligerent franchisees and destroying the value previously created in their business.

This disease is also often contracted immediately after franchisees have sold a successful franchise in return for substantial cheques. Failing to understand their success was attributable to a combination of their skills and ability, combined with the franchisors system, these individuals have decided to strike out on their own. Purchasing a non-franchised business or smaller franchise chain has led them only to discover that the unique skill sets that made them such successful franchisees within the framework of a broader system are inadequate to run another business. This has resulted in substantial losses for such franchisees.

In summary, a genuine respect by franchisors for the value of their better franchisees will, coupled with honesty, integrity, and fair and transparent dealings across the whole network, attract and retain quality franchise owners who have much to give. As the competition for quality people intensifies, the requirement that franchisors understand what successful franchisees need, expect and desire is a necessity - not an option.

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Screening franchisees and due diligence - [quote:dabbss2r]What do you guys think? If I come to you and say "if you buy a franchise, I'll give you 4 more for free". What would you think?[/quote:dabbss2r] Interesting post... I think this is a good example of what NOT to do if you aspire to be a franchisor. His impatience will get the best of him in this case. I can see the AHA lightbulb flashing above his head as he schemes out his brilliant solution "what if I just gave away all these territories and that will inflate my numbers and make me look bigger and attract more franchisees." I've seen this type of strategy before in my own industry. The results aren't very good... Without good screening measures in place, you'll see more failures. What's a better selling point? - I have a small core group of successful franchisees that were qualified and screened before buying into the system. It was a win / win situation for everybody. Give them a call and see for yourself. OR - I have dozens of franchisees with multiple territories. Here's short list of the successful ones, give them a call. The others aren't doing so well because they really shouldn't have bought into the concept in the first place. Why? A bunch of reasons that could have been identified early on if we had done some screening and they had done their [i:dabbss2r]Due Diligence[/i:dabbss2r].
Re: Franchise skills - [quote="saraloves":1n1pw9z6]Why would you be looking for franchisees without technical skills? You're a computer services company, right?[/quote:1n1pw9z6] Because franchisees don't have to be the technicians. In many cases the franchisee is the "business man", here to create and grow the business, not to operate it. If you look at Subway, many of their franchisees own several stores and I can tell you they are not the one making your sandwich. They are business men.
franchising - I've got a couple of clients that have franchised recently with different experiences based on their promotional capabilities. One is a lifestyle-event company that has done well with 6 franchises up and running and 3-4 ready to go so for for 2007. They did a good job of promoting it through their personal networks and through their web site. They also worked hard to connect quickly with the potential investors. We usually had a full package in their hands within 24 hours. The second one is barter exchange organization that after 2 years of trying has signed up 2 franchisees. They were slow in moving - didn't promote it through their connections and were more concerned about trying to not let poor franchisees in I think they eliminated everyone else. In starting up its about using good connections until you can build up a critical mass that attracts people you have no connection with. Cheers
Re: What is the Best Franchise? - As a franchise owner the things that I look for in a prospective franchise is: 1- A proven track record. Too many franchises try and branch out long before they have perfected their product, don't become a guinea pig for them to figure out what works and what doesnt. 2- Support. A good franchise should have great communication with it's franchisee's and be available to meet it's franchisees needs. Youre only contact with them shouldn't be when you have a problem. Good franchises involves it's franchisees in building it's business. 3- A Great System. McDonald's doesn't exactly make a good hamburger but they have an excellent system of conducting business. The real value in a franchise is the system, not necessarily the product. There are many other factors in deciding on a franchise but many of those are personal to you and your situation. The best thing to do is to conduct as much research as possible and speak with every current franchisee you can and get a feel for the franchise. garyshouldis.com
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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