When a pulse and a cheque are not enough

Suzanne Jarzabkowska, CEO, DC Strategy


Guidelines for franchisors and franchisees in building thriving, sustainable networks.

The greatest challenge facing all businesses today is engaging and retaining dedicated ambassadors for their brand.

Whilst this is true for all businesses and food and retail particularly experience great difficulty keeping employees for more than two years, it is fundamental in franchise recruitment. And not surprisingly it is a large part of the reason many retail businesses of scale and all food businesses of significant size are franchised. Franchisees bring not only the requisite capital to build each unit of the franchisor’s business, they become the motivated owner operators who typically spend on average seven years in the network.

The successful franchise is founded on a value proposition that recognises the basic interconnectedness of the franchisor and the franchisee in building enterprise value for both. It is a combination of the franchisor’s product or service, their experience, systems and processes, marketing know-how and brand, which together constitute their intellectual property.

It is a business opportunity that the franchisor can safely duplicate and present to other entrepreneurs (their franchisees) to invest in. Franchisees know that if they comply faithfully, the franchise model provides greater certainty than an unproven concept, reduces the risk of failure and offers a higher potential for growth and realising their enterprise value when they sell. This mutually beneficial relationship is secured by the legal agreement that has been customised for that specific business.

So, whether you’re an emerging brand opening green-field sites or an established system looking to drive and consolidate your network, attracting and recruiting the right franchisees to join your network is the critical lynchpin between the  development and the execution phases of your growth. And if you’re a potential franchisee trying to decide not only if franchising is for you but how to choose the right fit, knowing how to assess the multitude of offers is vital for your success.

So what should franchisors look for when recruiting great franchisees?

1. Obviously they need sufficient capital – not just to pay the up-front franchise entry fee and set up costs but sufficient operational capital and an understanding of the cash-flow projections. Presenting accurate financial data based on your existing operations, providing guidelines around financing and ensuring candidates are appropriately financed and independently advised before proceeding to the next phase is essential.

The Disclosure Document as mandated by the Franchising Code of Conduct and monitored by the ACCC has basic financial disclosure requirements, but go beyond that and provide enough information for a bank and the candidate’s financial advisor to assess the proposition. The candidate is also advised under the Code to seek financial and legal advice and must sign that they have done so, or that they have declined to do so.

2. Again, relevant qualifications, experience and skills are important. You need be certain that with your induction, training and support and by following the Operations, Training and Procedures Manuals, franchisees will able to run their business independently and hire, train and manage their staff. Some businesses have prerequisite qualifications and demonstrated expertise, but many look to the induction, training and support they provide to qualify their candidates and some require both.

A dental, optometry or veterinary franchise may require professional qualifications. A delivery or transport business may require a truck license, a trade certification may be needed for an automotive, electrical, or plumbing business, or registration with the relevant regulatory bodies may be required for masseurs or beauty therapists Some skills may be experience based such as food handling experience for QRS franchising or technical experience for phone or computer repairs.

3. The right psychological profile is more difficult to quantify and is not industry specific. Rather it is an integral part of the recruitment profile of successful candidates in any business. In a franchise network however it includes both macro and micro profiling. It is imperative that your recruitment process establish from the first point of enquiry the platform on which the relationship will proceed, not just during recruitment but as a foundational qualification to your franchisee’s position in your network.

A franchise is not a democracy and macro-profiling ensures candidates understand their success is dependent upon their willingness and ability to comply with your proven concept, systems and procedures. This ensures they are sufficiently entrepreneurial to run their businesses but not to the extent that they deviate from the operational and legal guidelines or challenge you, the franchisor.

Micro-profiling determines the ideal candidates according to the franchisor’s task and culture requirements. The recruitment of franchisees is focused on protecting and upholding your brand’s core values. This will be dependent on both the business’s product and service offering and the service culture.

4. A good cultural fit is again, difficult to quantify. Successful franchisors have well defined and articulated brand values and a vision for their network. This creates brand ambassadors who are directly invested in managing their staff, monitoring costs, driving sales, lifting profitability and promoting customer loyalty. Positioning your brand story and then finding the right franchisees who will buy into that vision with at least some of your passion and commitment is essential to both their and your success. Remember always, cultural allegiance is the primary driver in high performing networks.

A number of standard checks are mandatory in the process and should include the basic employment and business references, police and credit checks.

What should potential franchisees look for when assessing a franchise opportunity?

Going into business is a serious undertaking requiring hard work and long hours to ensure success. Don’t be misled by franchise opportunity ads which promote lifestyle first as a large number of good franchises are both labour and capital intensive. You need to have the constitution and mental resilience to be your own boss.

1. A sound financial proposition is vital. You need to know how much you will need to invest, what the expected returns are and over what period. Typically franchises of around $300,000 - $500,000 will take 2.5 to 3.5 years to return the original capital investment. You should analyse the numbers and understand the projected cash flow, taking financial and/ or accounting advice before approaching your bank. This includes how much operational capital will be required until the business is profitable, what happens if you don’t make budgeted sales or if your plans don’t work out. Be conservative and have an exit strategy.

2. Assess the franchisor’s offer. Listen to what the franchisor is promising in terms of what training and support is offered and how is it delivered. The selection process and how franchisees are screened and selected is important in judging the quality of other franchisees. Make whatever independent enquiries you can about what you are told by the franchisor and lastly, does the franchisor encourage and assist or facilitate access to other franchisees in their network?

3. Talk to other franchisees. The Disclosure Document must list contact details for all the current and past franchisees. Talk to as many you can from both lists knowing that franchisee experiences vary greatly, so you get a balanced and helpful understanding. Questions to ask them include: has the franchise opportunity produced the results they expected; has the franchisor been responsive to their needs; does the system produce a reasonable return on investment; and would they recommend the franchise opportunity to others?

4. Understand the legal agreement. You will receive a stack of paper about 12cm thick - a Franchise Agreement, a Disclosure Document, the Franchising Code of Conduct, and possibly a premises lease, a license to occupy or a step-in deed. Each of these documents could be from 6 - 80 pages, so set aside the time, get comfortable and take them one at a time starting with the franchise agreement. Read EVERY word highlighting anything you do not understand or agree with. Prepare a list of  questions from each agreement for your lawyer and any other questions from the agreement or about the business in general. You should also discuss with your lawyer and your accountant what financial structure will best suit your franchise business – a company, a sole trader, a family trust etc.

5. Do your due diligence. This will vary from business to business but here are a few: Understand the trading cycle for the day, the entire week and if seasonal, the trading cycle for a year. Assess the culture of the business and whether it is the fit right for you. Understand the commitment - can you see yourself working in the business on a daily basis; dragging yourself out of bed early on a Sunday morning and what about school holidays and spending time with the kids? You may be investing upwards of a quarter of a million dollars and about seven years of your life in this network.

6. Successful franchisees take advice. Under the Franchising Code of Conduct you are advised to take financial and legal advice before signing up to a franchise (or sign that you have declined to do so.) Take your highlighted copy and see a lawyer who specialises in franchising and make sure the assessment is in writing and for fixed fee. Consult a good accountant – a specialist franchise/business advisor not someone who prepares your tax return each year and again, make sure you get written advice about everything of concern and preferably for a fixed fee.

A franchise opportunity is certainly a means to long term financial security and wealth but in between now and then, there’s a substantial amount of work and your whole family needs to be committed to that. You need professional help to review and understand the franchise opportunities you are considering and investing in good advice is a tiny portion of your overall investment.

A competitive and compelling franchise proposition

A decade ago potential franchisees had largely one criterion in evaluating a franchise offer – the return on investment and they didn’t really care if it was a gym, a poodle parlour or a bakery. The GFC and growing business sophistication have delivered much more risk averse candidates whose concerns are now markedly more complex. And with over 1200 franchise systems out there, franchisors need to present a competitive value proposition in order to attract the best candidates.

From research we conducted in 2013 with over 650 respondents, potential franchisees assess a franchisor’s offer against the following criteria:

a) A proven business with good systems and processes

b) An established and recognised brand

c) The induction, start-up and ongoing training and support

d) The strength of the marketing activity

e) A lower risk profile.

Around 80 per cent of small businesses fail in the first five years, however, around only 20 per cent of franchised small businesses fail in that time. Franchisees look to your business to provide the financial data, the systems and processes, the brand and marketing collateral, the legal documentation and the training and support to reduce the risk associated with opening a business.

That said, a 20 per cent failure rate still presents a fairly high degree of risk for both franchisor and franchisee. Add to this that over half of that 1200 franchise networks never achieve critical mass – that is a degree of financial success that rewards the franchisor with greater returns from developing their (in most cases very small)  networks, than they would have had simply growing a few company owned outlets.

Australians want to work for themselves and be their own bosses, yet curiously they are among the most risk averse nations in the world…..a perfect recipe for franchising!

Suzanne Jarzabkowska, CEO of DC Strategy heads up the multi-disciplinary team of franchise commercial consultants and lawyers. She specialises in organisational behaviour, change management and business growth and transformation in the franchise sector. A dynamic speaker who presents widely in the media, commercial and educational communities she writes extensively about franchising in regular columns and specialist opinions in print and online business publications.

For 30 years DC Strategy has been the region’s leading end-to-end franchise consulting, legal, recruitment and branding firm. Franchise programs developed by their highly experienced specialist teams have built over $1.5 billion in enterprise value for their clients in the last decade alone growing the networks and brands of the many of the most successful national franchises, many of which they’ve taken to the world.

For more information contact:

P: 02 8220 8700
E: growth@dcstrategy.com
W: www.dcstrategy.com