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We know what proliferation is. It is essentially quantitative. Everyone in
franchising has been through the experience with companies that seek numerosity
goals, as well as the frequent deterioration of entry level standards that often
occurs when we are trying to get to 100, 500 or 1,000 franchisees. The joke –
which is frequently not a joke at all – is that you have to exceed the goal by
at least 20 % just to handle the attrition from the franchisees you accepted
that you shouldn’t have/wouldn’t have accepted in normal circumstances, who
don’t make it past year one. There are similar jokes about military physicals.
This is not about that kind of situation.
Force multiplication in franchising is about the qualitative potential
represented by a corps of a few hundred or several hundred of your own
franchisees in the sense that they ought to represent your primary “go to”
target market for your next franchise concept. The combined impact of an
effective and positive working relationship with your own franchisees and a
timely executed competent diversification plan will mean more to your company’s
growth potential and capital value that any alternative strategy.
To be sure, this is a departure from historical practice and many companies have
become very large and very profitable doing it the traditional way. But times
are changing, and the traditional way ignores the impact of imitational brand
proliferation in the middle to later stages of concept life cycle. What that
means is that the simple flooding of the market with additional units of your
own brand is now seen to coalesce with the impact of others in the same business
coming in with pretty much the same concept but just another name. Add to that
the introduction of your products into alternative channels of distribution, and
what you get is impaired margins and returns and the conflict of deteriorating
profitability in the franchisee group in favor of incremental sales and profits
at the franchisor level. In that scenario, when a new concept does come out, the
franchisees who might have invested with you are less inclined to do so because
of how opportunistic you were in the existing relationship. In other words, you
have alienated potentially hundreds of easy sale franchisees for your new
concept.
The argument here is that earlier diversification makes market flooding within
the original concept essentially unnecessary and, at the same time, keeps these
easy sale franchise investors in your camp.
They know your company and how it operates. They know your track record in being
able to produce a model that can produce profit and cash flow. They know your
ethics. No matter the cheerleading, you aren’t expected to have franchisees who
love you. You are expected to have franchisees who make a good investment return
by reason of their being affiliated with you. If you accomplish that, then the
ever present grousing is just something that comes with any territory, no matter
how positive the territory may be, and you pay it little or no attention.
I have all too often sat in rooms full of wealthy franchisees who did nothing
but complain that the franchisor was getting rich off them. I usually alienate
them by reminding them that that’s why anyone goes into franchising in the first
place. A properly managed franchise company is held together by the discipline
of compliance with the core protocols, not by cheerleading, affection or any
other emotional bond. They don’t have to love you. They just have to pay you.
They don’t pay you because the contract says they have to do that, although you
would soon be broke without that legal obligation. They pay you because the
model enables the payment and still provides a competent return to them. Without
that irreducible requisite no contract on the world means a damn thing. Core
protocols are economically bilateral in the sense that, no matter what the
contracts say, the economic performance is positive at both ends.
That is the acid test of any company’s qualification to become a force
multiplier. Why then is not every successful franchise company already a force
multiplier? Why do diversification projects so often fail either in the real
failure sense or in the sense that targets are not reached and diversification
concepts are simply spun off in one fashion or another?
If you look at the really good franchisors today, you aren’t looking at people
who sell one franchise at a time. A concept with potential goes to proven multi
unit operators. In fact, it is a hallmark or a high risk franchise opportunity
that they are being sold one unit at a time to thinly capitalized novices. But
what if a high risk one at a time franchise opportunity can be converted into a
higher investment quality offering simply by ownership change to a franchisor
with a proven ability to support sustained profitability in its system? The
conversion is made possible by recognition of characteristics that make the
proposal attractive to someone who already knows how to run a real franchise
company because he already does run a real franchise company. Novice franchisors
are often the principal reason for franchise system failure. They are trying to
learn on the job. They may have run the business to be franchised, but have not
run a franchising business. The two are worlds apart. Experience with one means
little when it comes time to be a franchisor.
The high failure rate of new franchisors is due mainly to the fact that the new
franchisors are novice franchisors selling their franchises to novice
franchisees. The value of the experienced franchisor is a qualitative force
multiplier in the sense that survivability comes with the experience.
When you couple that new concept to an experienced franchisor, you have
something to sell to experienced groups of franchisees. And if your own
franchisees know you too well ever to invest with you again, you have to look
for other groups of franchisees in other franchise systems. That doesn’t mean
that they won’t call your franchisees to find out what it’s like living with
you. So, if you’re that bad there may not be a force multiplier opportunity for
you. But if you haven’t ripped off your own people, you can and should start
selling your next concept to them first. Nothing speaks so well in sales and
marketing terms as a concept that is being bought up by the franchisor’s own
franchisees in another system. My God what an endorsement! That kind of respect
has to have been earned. The reason I think it is so seldom earned is that
diversification comes along too late. It should start sooner rather than later.
No franchisor with one hundred franchisees should wait any longer to begin
diversification through acquisition. Diversification through internal
development – the notion that the new concept must be invented here - is a much
harder, more time consuming and much riskier proposition. There are so many new
concepts out there that you might have to write a check for, but that would put
you way down the road in being ready for prime time much faster than trying to
do it yourself from scratch. In the end, writing that check is much cheaper than
doing it yourself. It is cheaper because you are missing out on revenue streams
by not getting off quickly. DUH! Besides, with one hundred franchisees you are
still hungry enough to make a new concept grow at that high growth early stage.
What should your own profile be in order to make your next concept attractive to
your own franchisees as their own next generation of investment. Face it. If
they’re really good, there will be another generation of investment for them.
The only question is whether that next generation investment will be made with
you.
Other than outright chicanery, a major error that franchisors make that
negatively impacts upon their own franchisees wanting to invest in a new concept
with them is that they succumb to the laziness of overcrowding the territories
of existing franchisees. As soon as franchise sales begin to ebb, the first
thought is the lazy thought – sell more of the same franchise into already
populated areas. You may have the contract right to do that, but you could be
selling the new concept franchise to your own franchisees without being seen to
be stealing their sales. You would be getting more units into populated
territories, but they would be different concept units. And if franchisees
elected not to buy them, your then selling them to others would not be an
encroachment matter if the new concept is not a direct competitor. So long as
the new concepts are not competitors of your existing systems, you can populate
the dickens out of territories and not create ill will. Moreover, there are
still economies of scale in multi concept populations being supported and
supplied by one franchising organization.
When diversification begins to be undertaken at the one hundred franchisee
level, there are still enormous areas of the country (if we’re talking about the
USA) into which you are still selling your core/original concept franchises
without any encroachment issues. Your franchise selling organization is in high
cotton with fertile fields lying open before them. With healthy franchisees in
your core concept, little or no litigation/arbitration/dispute resolution
absorbing dollars that could be used for constructive enterprise activity, this
early stage concept replication is perfectly timed. Furthermore, the first
acquisition isn’t going to happen overnight. While acquisition puts you in play
faster than internal development of new concepts, it is still not an overnight
proposition. You will sell fifty more franchises at least before you are ready
to begin to roll out your Plan B concept. The chemistry of it all has the
greatest chance to enhance your financial trends beyond normal expectations. You
recognize that you can keep your organization in an early stage optimum growth
mode by diversification, more assiduously than being a one trick pony. To be
sure, many one trick ponies have really good tricks, but the odds are better
with diversification. There are only so many superstar one trick ponies, and the
normal experience is that superstardom is the exception rather than the rule.
Once you have made the decision to go this route, the next step is to profile
what potential acquisition candidates should “look like”. Profiling will be done
more than once, and initial profiling should be broad brush, generic criteria.
Once the shopping list has been populated, further profiling at more specific
levels of criteria will be done.
The initial profiling should not be management style focused. Initial profiling
should consist mainly of criteria of size, history, area of activity, geographic
scope of penetration to date, total initial investment requirements for their
franchisees and gross sales per unit. The translation of sales into
profitability need not be in the first stage profiling, as newer systems usually
don’t have franchisee profitability data anyway, even if their franchise
agreements say that they are entitled to that information. All the information
needed to complete this inquiry is easy to obtain, and by generalizing initial
profiling criteria, the time consumed by that part of the project is
significantly shortened. This approach also eliminates detail profiling of many
prospects that simply won’t make the cut. We don’t spend time and money on what
we probably won’t be interested in.
That accomplished, we would then have a population of potential affinity
concepts with which our own company and our own franchisees could be compatible.
Since I believe it is important that what we select be something our own
franchisees would seriously consider, assuming their relationship with us is
where it needs to be, affinity screening that does not take into account the
potential advantage of our own franchisees as core group investors is not
competent initial profiling. While we may find something that is so astoundingly
attractive that we don’t have to give a lot of weight to our own franchisees as
owners, that is not really a strong likelihood.
The next stage is to look more closely/intimately at the population that results
from this “swine sift” [swine sift is a term relating to the selection process
to get only the prize hogs and sows to the final award ceremony in a cattle and
hog show]. This includes trouble shooting the systems now being used by the
candidates, including what ought to be changed to make it work more smoothly.
This involves harmonizing the operations protocols with the realities of optimum
efficiency – getting stuff out of the way that is potentially obstructive –
maybe also looking at the franchise agreements and seeing what if anything about
them ought to be revised. Also included in this second stage swine sift is a
closer evaluation of the present management of the candidate. We will have to
live with some of them, as those with particularized knowledge of what pertains
to that concept rather than just being generic franchise experience probably
should be asked to stay. I’m sure that I don’t have to go into the advantages of
being able to scrub most administrative costs now being borne by the candidate
franchise company selected because we can simply integrate that into what we
already have at modest variable cost. There will be some “cultural” issues with
the top people, and how to harmonize those will be part of the considerations.
We will then come out with a smaller population of potential grand champion sow
and hog, and it is at this point that we start to deal with questions of pricing
the acquisition and negotiation of terms. That is obviously a multivariate
exercise that isn’t part of this discussion, but it isn’t that hard to figure
out. My personal preferences are that, to the greatest extent possible we use
cash – present and future contingent – rather than equity. While equity is so
attractive because it is “funny money”, when everything works out very well, you
tend later to wish that you didn’t have those people around with a say so about
things. There are many ways to arrange those executive relationships in M&A
situations, and it doesn’t have to be an “either or” choice every time” Just the
use of phantom equity rather than real equity opens a variety of negotiation
options.
By now we will also have done our “field due diligence” on the candidates’ own
franchisee relations. At some point we will be close enough to doing a deal that
the consents needed to do intensive field due diligence may be needed. People
fear their franchisees becoming unglued at uncertainties associated with
potential changes in ownership and how that is to be managed. Again that is a
negotiated arrangement and should not present major issues if handled with the
appropriate levels of issue sensitivity.
The likelihood is that, when done this way, we will end up with more than one
concept that we would really like to own. To me that is being blessed with good
fortune.
The unwilling often say that they fear doing this might cause them to lose their
focus on their core business. I believe that just isn’t so. The core business of
a franchising company isn’t the product or service that their franchisees sell.
The core business of a franchising company is franchising. You don’t have to
dilute your extant franchise system’s intensity to accomplish diversification.
That is a flat earth notion that ought to be rejected out of hand.
It seems to me that the
way to solve problems of excessive system growth that results in encroachment
problems has been to write contracts that permit the encroachment and shift the
potential risks of encroachment to the franchisees. I think that is a terrible
solution. While one might want to keep that contract language on the notion that
anything that reduces franchisor risk is essentially good, this notion of
diversification instead of market flooding appeals greatly to me as a better way
– a business way – to solve the issues. It is better in that the growth profile
offers better prospects for positive returns in a diversification mode. And if
your franchisee relations are where they ought to be financially and
operationally, you have a ready made battalion of investors who “know the
drills” and can live with them. .
Think about that.
Copyright 1997 - 2010 || Richard A. Solomon
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