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Introduction | So You Wanna Be A Franchisor, Huh? | Why A Feasibility Study? | Establishing The Franchise Entity | How Do You Staff | What Needs To Be Done?
My friend, Nick Bibby wrote an article under this same title on the subject of why so many new franchisors simply never make it as franchising companies. Nick and I spent practically all of 1997 analyzing the franchisor failure question, and developed a system to get a new franchise company over the mountains and through the jungle of franchisor start-up. In the course of that study, we were simply amazed at the number of fundamental mistakes that so many new franchise companies make, which eventually run them out of operating cash, energy and patience. Nick's original article can be found as a link at the web site www.BibbyGroup.com. After reading his article, I invited him to permit our collaboration on an expanded version of it that goes into greater specific depth, probably striking several very painful nerves in franchisors or potential franchisors who either didn't make it at all or are stalled out without the means to grow their systems to their potential. I dedicate this expanded discussion of new and recent franchisor development problems to all who may be thinking about franchising their businesses and to all those small franchisors who are simply stuck at a small franchise system that isn't growing anymore and who are not finding the right answers to get the growth restarted.
What makes a person think about taking his or her present business and franchising it, becoming a franchisor? It isn't just the fact that they have heard of Ray Kroc and what he did with Mc Donalds or the miraculous story of Wendy's having come into what everyone thought was an already overcrowded hamburger franchise universe, having to practically give away their first few franchises, and then eventually becoming another superstar franchise organization. Of course, every franchise salesperson claims that his or her franchise offering is going to be the McDonald's of the widget industry, as McDonald's has become the quintessential term for ultimate franchising success. No. It takes more than that. We think the typical potential franchisor has a profile that goes beyond mere anecdotal celebrity references to the rich and famous.
An irreducible minimum requirement, before anyone is eligible to even think franchising, is a business operator who had at least several years successful experience operating the 'model'. The 'Model' is not the franchise company. The model is the business that the franchisees will operate if the concept is sound. Throughout this article you must constantly distinguish between the model, the business to be franchised, and the franchising company. They are completely different kinds of businesses. The failure to constantly keep this distinction in mind is one of the leading causes of early franchisor failures.
In all likelihood, a reasonably franchisable concept will be operated by its owner in multiple locations, all running successfully. This evidences that the concept is replicable and that it can be run by managers who can be trained. If the owner has to be everywhere all the time to keep the multiple units afloat, that is a strong sign of replication difficulty. Either the system is too complicated to teach to a lot of people, or it is idiosyncratic, the extension of the owner's unique personality, unlikely to be successfully replicated with others at the helms of the various units.
In such a scenario, it is to be expected that customers have helped plant the seed of franchisability in the owner's mind. People come in, have the customer experience for that business, and exclaim their pleasure, their having been impressed with the idea and the manner of its execution, and their belief that it would be very nice to have such a business in their home town. 'Have you ever thought of franchising this?' will have been asked many times.
Eventually, the owner's thought processes turn into the franchise thinking neighborhood, and he starts talking to people who are in franchising, no matter at what level they may happen to live. The model owner starts hearing money talk - initial fees of $30,000, royalties of 6% - 8% of gross sales, an advertising fund swollen with franchisee contributions of another 2% of gross sales, area development agreements through which entire states are sold off with large initial fees and a contractual requirement to build out and open a substantial number of stores within a very short time. The model owner goes to the library and reads up on success stories of multi-millionaires who made it big from franchising. There are no stories of franchisor failures - wrong spin control. In the world of franchise literature, everything is wonderful all the time, prospects are always bright, franchisor organizations constantly bestow awards upon their membership at conventions held in exotic places. Soon, the model owner is slavering over a virtual feast of franchising good fortune and is ready to write checks to get the structure established, to get to the first sale. The entire focus becomes sales fixed, there is a great hurry to get to that first closing, and carts get put in front of horses.
The franchise sale is the last step in establishing a potentially successful franchise system, not the first. To be sure, even after the sale there are details like franchisee training, site selection and store opening assistance, but even these post sale responsibilities have to be prepared and tested well before the first sale closes.
Where does one start, then, in deciding to franchise. One starts with trying to find the answers to the feasibility issue. Albeit I have a very good business that I have operated successfully in several locations for several years, how can I find out whether this concept, configured as I have configured my own businesses, has very good potential as a vehicle for franchising? If more people began here, at the real beginning, fewer franchisors would be in failure and fewer franchisees would have wasted their investments in an incompetently evaluated franchise opportunity. Unfortunately, so many new franchisors start with lawyers drawing up contracts and disclosure documents, a fantasy trip with zero value and enormous potential for harm. What the lawyers have never learned is that the legal work has to match the business concept, not vice versa. The legal work is done last. Then it can, if done by attorneys who understand the franchising business as well as simply being able to draft contracts, become a charter that has rational positive value to the franchise relationship rather than merely being some set of rules cut and pasted out of somebody else's franchise documents, that most surely won't fit the situation to which it is being applied in many very difficult areas, and that become litigation breeding machines. The business comes first, not the legal work.
A feasibility study is what you cannot get from large franchise consulting companies whose people get paid to establish new franchises, not tell potential franchisors that maybe they should rethink their decision to become a franchisor or question the assumptions of the potential franchisor client, no matter how flawed, or even examine into what due diligence the client did and whether it was competent or way off the mark. Finding a development consultant who will not sell you a franchise establishment program unless and until a competent feasibility study produces mainly positive results is almost impossible. Frequently potential franchisors who had already spent upwards of $150,000 with one of the largest franchise consulting firms, got a 'box of rocks' package to use in franchising their concept, most of which was a hodgepodge of cut and paste from franchise documents of other companies, and were left with no idea what to do next or how to do it, and had lost their money as well as their desire to restart their franchising project.
The opportunity for such a result arises largely because when a potential franchisor client goes to the consulting firm for help, he or she has already placed themselves in the role of franchisor in their minds and have set themselves up to be fair game. To be sure, questioning the franchisability assumptions of many clients is considered offensive and an insult to their intelligence, and can cost you their patronage. They will simply go off in a huff, muttering about how dare you question what they have done up to now or insist upon corroboration of it. Alienating such people is the price that has to be paid for integrity. Of course you have to try to be polite and respectful about insisting on a competent feasibility study, and, believing they have already done that, they are reluctant to pay for the work. But, you are either going to make the potential franchisor client spend the little buck to possibly save him the loss of the big buck, or you too will be just another 'consultant', willy nilly 'franchising' concepts that won't work for people who can't execute when the time comes. This moralizing is intended to open the eyes of those thinking about franchising their businesses. Going to franchise industry pep rallies simply does not make you a franchisor. The world is not always wonderful and full of promise for every person and company. The risks can be large, and your money, time, business and energies can all be dissipated if you simply decide to be a franchisor and go to get help from people who take you at your word and go from there.
The fact that others in similar kinds of businesses may have over 200 franchisees does not mean that you will get there or that they weren't one time at the 500 franchisee level and have been decreasing for any number of negative reasons that need to be accounted for. The number of new franchisor failures suggests that either no feasibility work, or inferior feasibility work is probably being done.
The industry has been putting out the pap for decades that franchised businesses are more successful than independents and that franchising, since it represents about one third of all sales of goods and services in the United Stated, has demonstrated itself to be the superior way to operate. Failure rate comparisons between franchised businesses and independents do not support this propaganda.
Mr. Toby Tatum manages the Business Acquisition and Sales Division of Prudential Clement Realty, Inc., in Northern Nevada. He has an MBA degree, is a certified business counselor and business appraiser, as well as a multiple unit franchise owner for many years. In his interview, published in the November, 1997 issue of Pratt's 'Business Valuation Update', some very interesting and usually buried information was revealed.
Much of the failure rate information bandied about is confusing at best because of the definition of 'failure' used. Illustratively, a franchise location in which five owners have lost their entire investment capital is not counted as a 'failure' because it still exists. Statistics published by the International Franchise Association about the success profile of franchised versus non-franchised businesses are being called into serious question by very respected researchers. Dr. Timothy Bates, economics professor at Wayne State University in Detroit did a study of 7,300 small businesses in the mid 80s, the hay day of franchising, including 400 franchised businesses. Roughly 35% of the franchised businesses went out of business, compared with 28 & of the non-franchised businesses. He found a 46% failure rate among franchised businesses compared to a 23.6% failure rate among non-franchised businesses. The Bischoff & Puckett 'Guide to Buying and Selling a Business' (January, 1996) found that only 65% of franchise locations were still in business, operated by the same owner at the end of four years. The American Association of Franchisees and Dealers found that 69% of the franchisors listed in Entrepreneur magazine's Franchise 500 in 1987 no longer existed in 1992. Mr. Tatum pertinently asked what must have been the mortality rate among the franchisees of those companies. (Shannon Pratt's Business Valuation Update may be reached at shannonp@transport.com.) Perhaps now it becomes clear that the $150,000 'franchise kit' approach, with no credible feasibility analysis has, in our opinion, contributed mightily to the frequent failure and stalling out of new and emerging franchisors.
Conceptual feasibility blends into execution feasibility with the question,' Can I teach others to do this and be successful at it?' This crucial question cannot be answered 'Yes' just because the owner of the model has proven that he can do it well on a multi unit basis. The more complicated and specialized the franchised business model is, the harder it is to build a tutorial about its operations and to find people with the skills and talent to master it. The fact that there is a single, central product or service is not always the answer to its clonability. Add to that the prospect that the concept has to be capable of expansion into more products and services to remain viable, and you can see that a great deal of very serious work is involved. Most people thinking of franchising their businesses have probably never written an operating manual for that business. Most of the 'know how' is in their heads. The operating manual has to be competent guidance on everything from fixtures and equipment, layout, workflow, financial management, banking and cash management, advertisement and promotion, insurance, personnel practices, health and safety, licensure, reports to be filed, purchasing, and many other areas of operating knowledge, so that the franchisee can look up what he needs to know on most of the issues that come up from day to day. The more the franchisees have to call the franchisor for guidance, the more support personnel have to be available at higher expenses for the franchisor or slow and unresponsive support for the franchisees, with resulting frustration and antagonism. And we're just talking about the operating manual for the model business to be franchised, not the essence of management techniques that will be necessary for the franchising company or the ways to handle affording that kind of management expertise when you are just starting out.
If, after this work has been done, the prospects are positive, two major goals have been achieved. First, the franchisor to be has come to a much better understanding of market and concept analysis and the required disciplines than ever occurred to him or her before. Second, having done that work, there is a much higher comfort level in committing the resources to the rest of the job of getting established. Of course it is highly intuitive. But it also must be highly analytical to be something more than just a crap shoot.
This is where the typical new franchisor has been starting, being up to now, unaware of the significance of feasibility analysis. This is the point at which so many die aborning, laying out big bucks for the box-o-rocks franchise kit from the big so-called franchising companies who are selling cut-and-paste, pseudo researched materials that the new franchisor ends up keeping in the garage or attic as a memorial to over priced, inadequate assistance in getting established. I often wondered whether this is how it has been happening due to the fact that some of these 'old line' franchise consulting companies are simply populated with 'old line' people who are still thinking of franchising in anecdotal, rather than analytic terms. Once the new franchisor got the 'stuff', there was an inability to translate the material into a real rather than a virtual business enterprise. The marketing and sales materials were not tailored for the particular franchisor; there was no mentoring in how to develop an effective marketing program, with competent and LEGAL marketing and sales materials; no mentoring on establishing and implementing an effective lead flow system and sales procedure, much less assistance in finding the right person or people to sell this franchise. The new franchisor was simply left with this box-o-rocks.
Those that did run ads simply copied worn out materials, used to death slogans that had no specific bearing on the particular opportunity being presented. They hired, on commission (which isn't wrong), some old time franchise salesman who was never vetted for prior history even though the person had to be disclosed and his or her history described in the disclosure materials, who went out giving earnings claims on a franchise opportunity that had never before been franchised. The operating manual was amateurish, and the franchisor ended up having to run the franchisees' businesses for them to make them work, taking those resources away from developing the training program and the operating manual to a high level of effectiveness. You aren't a franchisor if all your energies are consumed working in the stores of your first five franchisees, debugging them day by day because what you sold them was thrown together with only the resources between the ears of one person with other things on his mind.
By the time the new franchise company got to ten or so franchisees, it stalled. There were no resources to run the franchise company, because all the horses were busy running the model. And the most frequent reaction we encountered in dealing with these stalled out franchisors was, 'I just want somebody to sell franchises, that's all.' There was just too much exhaustion to re-evaluate and de-bug the marketing system, the sales program, the training program with its absolute need to be operating manual driven. Just sell the franchise as is and leave me alone.
Of course such an approach is probably not going to yield beneficial results for anyone.
Nick and I designed a system that includes not only preparing paperwork, but is based upon mentoring techniques that he has mastered in his counseling training and practice. This bridges the gap between the box-o-rocks sold to a client who never becomes known to the consultant, and a highly supportive franchise development assistance program that is hands on, working together at every step, ending up with actually establishing the franchisor's marketing system, implementing it for and with him, setting up the sales program and training the franchise salesman to sell THIS franchise. The training and operating manual is compiled together, not by different people working in isolation. Trainers are trained on how to train and role playing hones the training skills, which are honed even finer as continued training of actual franchisees occurs.
At this establishment phase, some legal work, not the contracts and disclosure documents, takes place. You have to create and protect the name and the image, which means that what others might have done before has to be accounted for. Having a federally registered trademark is not required by any statute, but you literally cannot build a successful franchise system without one. We were astounded at how many new and emerging franchisors had selected a business identity that was descriptive at best, had only filed its incorporation papers or maybe a state service mark registration, believing that they had accomplished a safe level of protection. We recently were cursed out by a potential franchisor who had absolutely generic identifiers, no service mark registrations at all (impossible to get anyway with generic identifiers), and who insisted that his domain name was all he needed. No amount of explaining the law or the priorities could disabuse him of his conviction that he needed no help, which prompted the question why in the hell did he call us in the first place.
After the circuits through which the operational business energy of the franchise company is going to run have been established, connected and trouble shot, and only then, does one turn to the writing or franchise contracts and disclosure documents. Only then, when you have decided what is probably going to have a very good chance of effective, efficient operational quality, do you write a franchise agreement. The agreement must fit that business, not somebody else's business. The main trouble with the franchise contracts of other people is that they were originally cut and paste jobs from earlier documents of still others, all of which have gone through additional cut and paste modification as they were found to be more troublesome than helpful. Since you can't know what went wrong in these other companies, and since you can't even trace the history of all this cutting and pasting, what you get from cut-and-paste is an abortion, not an agreement.
Of course there are certain kinds of contractual provisions that are going to resemble the similar provisions of other franchisors. To the extent that all franchisors encounter certain common problems, the contract provisions dealing with them tend to be similar. But the important thing is that there are major differences between this business and the franchise businesses of other companies, which the franchise agreement has to be engineered to enforce, to protect, and to enable in a hopefully non-confrontational fashion. Most lawyers are afraid to even think of making the disclosure document, the UFOC, a selling tool, because they fear the franchisor client will be overly aggressive. If the lawyer had a better relationship, a mentoring relationship, with the franchisor client, there would be sufficient discourse and trust between them for that to be under control. Usually the lawyer who drafts the UFOC doesn't even know what the sales and marketing materials are saying to prospective franchisees, or knows and lacks the courage to call problem statements to the client's attention. I recall one client whose sales brochure contained clearly erroneous material, who when asked to remove it, agreed and turned right around and put the offending language in the transmittal letter used to send the UFOC to franchisee prospects. Who in hell did he think he was fooling? The legal work now has to become imbued with the same mentoring quality that the business concept establishment work received. This, we found, almost never happened. Most of the franchisors we encountered were using unsuitable form agreements plagiarized from other franchise documents of other companies, disclosure documentation that wasn't even in the required current format, marketing and sales techniques that not only were not working, but that were very frequently not even lawful. Having already sold a dozen or so franchises, or having already laid out money for the box-o-rocks franchise kit, they had great difficulty accepting the suggestion that what they were doing was simply not going to generate lasting franchise relationships. The attitude that had them stalled out or stymied at the starting gate, that all I want is somebody to sell some franchises for me, was deeply entrenched. They were by then getting very short of cash to get their programs resurrected, and we ended up doing triage analysis, in which certain franchisor profiles simply were not going to be salvageable, so why bother. It is so frustrating to have seen these people in such dire straits, beyond help for reasons of having been beaten down by the system they thought they had purchased, of being too far gone financially and unable or unwilling to provide any further injection of capital to correct the mistakes.
The insistence that unproductive and counterproductive systems be continued and that all one needs is a better franchise salesman are definite clinical signs of impending collapse of a new or stalled out franchisor. The anecdotes of specific awful experiences could fill a small book, and are really not worth going into here. Suffice it to say that franchisor failure at the beginning or soon after commencement of franchising operations is not accidental or the product of luck. There are very identifiable and correctable reasons for such failures available to such franchisors if they have the energy to devote to re-establishment at a professional level of performance.
Franchise management, staffing for success, assumes that the offering is a quality concept, worthy of purchase and of growth, an assumption made more reliable by the quality of the feasibility study. Obviously, where quality and preparation aren't present, no amount of management skill or franchising expertise will produce long term franchise success.
Franchise management is a double edged sword, inadequately analyzed in the planning stages. Yet its absence is the cause of most new franchisor and emerging franchisor failures, the planning is faulty and there is inadequate management to bridge over the start up period when there have not been enough franchise sales for a good franchising company to be self funding.
Management problems begin with the franchisor misperceiving the depth of his or her skills. First time franchisors are usually successful entrepreneurs who have chosen franchising over other means of expansion. Their natural tendency is to think that because they successfully ran the business that is going to be franchised, the model, they can also run a franchise company. They perceive the completion of the legal documents, the contracts and the UFOC, as a kind of diploma in franchise management. However, the reality is that the title franchisor is no indicator of ability or of adequacy of resources.
After a great deal of pain and a lot of wasted energy and money, the first-time franchisor comes to realize that franchising is not simply an extension of the model business, but a complex, different kind of business in its own right requiring its own specialized skills. Past success in the business that is going to be franchised has little to do with the demands of franchising. And so, as of now at least, the new franchisor is usually trying to straddle the two businesses, which means neglecting the model and inadequately providing for the franchising company. Soon, capital needed for advertising, training, printing, travel and support evaporates as costly errors multiply. Time also evaporates. Both phases of the business suffer. The new franchisor is now trying to run the model, run the franchise company and do the planning that should have been done way back before the legal work was done. Now the changes needed make the franchise agreement a bad fit in substantial operational details, many that simply cannot be cured by simply amending the operating manual. And, of course, with the amending of the franchise agreement comes amendment of the UFOC and the filing of post effective registrations of amendments in all the 'registration' and 'notification' states.
Emerging franchisors usually are lean on staff, actually an understatement, since most of them have only their own lonesome selves and maybe a secretary. Without management depth to support start up efforts, there is no one with experience to assume competent responsibility for work that simply must be delegated. Employees of the model have no experience to fill in the franchise company.
When the emerging franchisor finally wakes up to the inadequacy of staffing, he is cut by the other edge of the management sword - he can't find or afford the people he needs. Operations and marketing people are basic to the franchising industry, just as to any other industry, and, while there are crowds of bums out there for the asking, good, effective people are harder to find and cost money.
Here is where the stall out panic sets in and the franchisor who can't or won't accept reality starts hiring more commission sales people and using business brokers, thinking that if they can just get more franchises sold, the concept will become self funding. WRONG!!! Sales of additional units have very low probability of success because the franchisor still has nobody to handle the operations and support functions of the franchise company. We ran into franchisors who had about a dozen or so franchises sold and were totally occupied cooking in their kitchens, because they had not adequately trained, had no field support people who could troubleshoot the franchisees' stores. The franchisors were exhausted, defensive, short on money, facing collapse, personally and financially, and still insisting that all they needed was to sell more franchises. Even if they could be convinced of what was needed, they had run out of funds to afford it. They were terminal, and the people who had invested in their franchises were doomed as well. Some just stop franchising, which also means they make no investment in the support their existing franchisees require, look for somebody to come in and work for 'a piece of the business' and no or little pay, or try to find a buyer, wanting a price for their agony that isn't justified by the quality of what they are trying to sell. Nick and I got picked up at airports by franchisors who said they were calling to get assistance, only to try to talk us into buying the company when we got there. The companies were usually out of cash, with one foot in the grave and the other on a banana peel, and the price was always too absurd even to bargain over.
Well, whadaya gonna do? There are four options. You can investment spend core business money by hiring full time competent personnel and paying them what they deserve. You can borrow to finance that. Of course, the reference to 'investment spending' accounts for the fact that, for a while you are going to be over-staffed, and have to grow into capacity utilization. You can sometimes have a lower salary and an equity kicker, but if it works out you will later regret having parted with a portion of ownership for hired help.
There is another way. The first three options provide a full time staff which you don't yet need. Management assistance 'as needed' is available and can deliver experience and depth without breaking the bank. Is this a novel concept? No. Is anybody doing it? Very few, and most not well. But marketing, training supervision, sales, operations and strategic planning can be obtained without breaking the budget. Will emerging franchisors ever learn this before it's too late? Will people wanting to franchise their businesses just decide to do it, roll the dice and buy a franchise kit box-o-rocks system and continue in such large numbers to self-destruct and take their first group of franchisees with them?
Copyright 1997 - 2010 || Richard A. Solomon
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