MULTIPLE FRANCHISES: A train wreck waiting to happen?
This article appears in the September/October 2013 issue of Business Franchise Australia & New Zealand
People who succeed in business usually have one thing in common – unbridled ambition.
No doubt it is an admirable quality but one that often has to be tempered with a strong dose of realism if the business owner does not wish to fall on his own sword through quick expansion or development that cannot be sustained.
The same can be said for a successful franchisee keen to take on more than one franchise within the same type of business. Melbourne-based chartered accountancy firm Liston Landers – a leading expert in the provision of detailed financial advice to
prospective franchisees – claims that many business people wishing to expand from one to two or more franchises can be a train wreck waiting to happen.
“The management skills needed to run one franchise are tricky enough without trying to handle another business,” explained director Kieran Liston. “It is essential to find the right manager to replicate in the second franchise the systems that are working well in the first.”
Too often franchisees (who are still beholden to the franchisor for the basic methods used to run the business) wishing to take on one or more additional franchises within the group show a complete lack of leadership and are unable to delegate properly.
“They also are unable to put in place the systems and structures to cope with the complexities of growth in these situations and demonstrate an inability to shift as needed with market dynamics,” Mr Liston said.
Mr Liston’s comments are backed up by United States economist Verne Halbish’s book “Mastering the Rockefeller Habits” in which he states that “of roughly 23 million firms in the US only four per cent get above $1 million in revenue, and only 0.4 per cent make it to $10 million”.
The same is true for franchise businesses in Australia. Most never get past an average annual turnover of $500,000 to $1 million and, of those franchisees who try taking on multiple franchises, 50 per cent revert back to one in a reasonably short time frame. One of the basic problems is that the franchisee holder cannot be present in more than one business at any one time.
“He or she might have the flair needed to build one franchise and be able to intuitively react to customers to head off bushfires and ensure the business grows dramatically,” Mr Liston said.
“However, trying to impart that same flair and skill in a manager left to run one of the other franchises is at best difficult and, at worst, often impossible.”
Unless the person (or persons) chosen to run the other business (es) is equally committed to its growth, then only disaster can result from any expansion attempt.
So franchisee holders thinking about expanding their horizons need effective staff training across all their businesses to ensure successful outcomes. Convincing managers to employ the same initiatives the franchisee holder would use were he or she in attendance takes time, practise and patience.
“However, with the right mechanisms in place there is no reason why this cannot lead to successful growth in all the franchises involved,” Mr Liston said.
Despite popular belief, the world of franchising is no picnic and what may appear attractive from the outside looking in can often turn sour once a franchisee takes over the reins of even one franchise business. There are many candidates in the market for a franchise – not least managers from industries rapidly reducing their workforces through redundancies (the increasingly bleak future of the Australian automotive industry springs to mind) looking for another avenue of employment.
Many of these people are reluctant to again be caught in the firing line and figure a franchise (and the chance to be their own boss) is one method of avoiding such a fate. People considering the move to a franchise need to understand that purchasing a franchise is buying a system on how to run a business. They also need to realise that this system is so well documented that people involved in the business know exactly what to do with its every aspect.
“Anyone thinking about going into a franchise must be prepared to feel comfortable with this level of control,” Mr Liston said. “They need to understand that, for any business to be successful, net profit needs to be around 20 per cent of turnover – a goal that is often difficult to attain once the franchisee holder takes on more than one franchise.”
It is at such times that franchisee holders thinking of expanding into multiple franchises could do worse than take a leaf out of the controlling franchisor’s book and appoint a manager who can be given responsibility for overall marketing and determining ways of increasing revenue while reducing production costs.
“This person should have sufficient expertise to ensure the right systems and structures are in place to cope with the complexities of growth involved with running multiple franchises,” Mr Liston said.
“That way, the franchisee holder has a good chance of avoiding the pitfalls others in his or her situation has faced in the past when trying to expand their business.”
Expanding a business venture into multiple franchises can occur on two fronts – buying an established business (run by another franchisee) or setting up greenfield or new sites.
Each has its own cost structure, and any owner of an already successful franchise should carefully consider these factors before making a final decision about branching out. While a franchisee might be able to handle the ongoing costs associated with running one franchise, the sudden doubling or tripling of expenses involved could tip his or her business over the edge in a fairly short period – particularly if profit levels of the second or third franchise don’t match expectations.
For example, a fast food outlet might cost $60,000 for a (usually) 10-year franchise agreement plus monthly royalties to cover marketing and other administration costs. Because of the need to fit out new premises with plant and equipment, a greenfield site (including franchise fee) might involve an outlay of $250,000 to $300,000.
“Franchisee holders thinking about expanding their business to take on two or three franchises must ensure they have a sufficiently versatile business model that will enable them to absorb these costs until such time as the new businesses begin to make adequate profits,” Mr Liston said. And, of course, the more franchises they take on, the greater the number of overall staff with which they have to deal.
Because of the nature of services provided by franchise businesses, many are staffed by young casual workers who probably are only looking for pocket money and do not see the work as a career path.
Motivating young staff under these circumstances is difficult enough in one franchise without worrying about incentives for two or three.
Appointing caring, understanding managers to ensure staff motivation and spirits are kept high at all times is particularly important in these circumstances. It hopefully means ongoing customer satisfaction – a vital ingredient for a profitable business - and might be the essential difference between success and failure in a multiple franchise enterprise.
Kieran Liston has 40+ years specialist knowledge in the area of valuing franchises and provides consulting services to existing and potential franchisees.
Chartered Accounting Firm, Liston Landers strives to be recognised by both their clients and the business community as a market leader in the provision of ethical, innovative and solution oriented financial and accounting services.