In the current economic downturn, all franchisors are certainly going to experience an increase in franchisees who are struggling to make a profit. Franchisees that are battling are certainly a risk to your brand.
Struggling franchisees pose an external risk to your brand because:
The public sees a brand as a whole and does not identify that a franchised business is an independently owned and operated business;
One outlet is a reflection of your entire network, so a standardised experience is expected, therefore if there is a negative interaction there will be a negative connotation to your brand as a whole; and
In the age of viral social media content, a negative customer engagement has the potential to cause rapid brand damage.
Similarly, struggling franchisees pose an internal risk to your organisation because:
They will not blame themselves and will turn the blame to you as the franchisor when their business is not performing well;
A struggling franchisee can quickly spread negativity throughout your network;
You as the franchisor can be in a detrimental position, if a struggling franchisee defaults on payments to key third parties that you have relationships with e.g.: landlords, finance institutions, suppliers etc.; and
Failure to pay you the agreed franchise fees can cripple the support structure you need to offer to struggling franchisees especially
What can a franchisor do to assist a franchisee who is then struggling?
Firstly it is absolutely imperative that franchisors have a look at themselves to honestly assess whether they have the business model and support structure in place to give each franchisee the best chance of making a success of their business. This would include reviewing whether a franchisor has:
A proven, replicable business model for the franchisees to replicate.
A fair and balance fee structure which makes the business viable for both franchisor and franchisee.
A realistic cash flow projection to ensure franchisee is adequately capitalised from the outset.
Strong systems and procedures in place.
A viable and sustainable country development plan in place.
Site and territory selection criteria.
An up to date, accessible and relevant franchise package in place (operations and procedures manual, disclosure document and franchise agreement).
Comprehensive initial and ongoing franchisee training programmes in place.
Defined franchisee profile with a strong recruitment and selection process.
Strong franchisee support culture and infrastructure.
Despite the above tools for success being in place, a franchisor will still likely always have franchisees who are not making the grade, that is the very nature of business.
The way in which a franchisor can look to assist a stressed franchisee is to implement an “intensive care programme” to assist. This would include:
Identifying at an early stage that the franchisee is at risk through regular field visit support and intensive business assessment including benchmarking
Identifying where the problem lies within the franchisee’s business, this is the most important step of the process and can be achieved by:
Determining how involved the franchisee is in the day to day operations of the business;
Intensive financial analysis (benchmarking, sales analysis, cash flow analysis etc.);
Intensive operational analysis;
Staff satisfaction surveys;
Customer satisfaction surveys; and
Assessment as to whether the franchisee’s area or market has changed, leading to a decline in demand for the product or service offering.
Making recommendations for corrective measures to be implemented to resolve the problem in the business.
Where necessary, assisting the franchisee to implement corrective measures with specialists.
Review performance of corrective measures.
Some don’ts when looking to assist a struggling franchisee:
Never allow a franchisee a royalty holiday or break. If you have developed a sustainable franchise business model, it is likely that the problem in the franchisee’s business is not the royalties they are paying a franchisor, but rather some other issue within their business. Therefore, providing a royalty break is not treating the problem at hand and is a “quick-fix”. For further information on this, see article
Similarly, a struggling franchisee should never cut back on their marketing efforts as a way of reducing expenses, again it is likely that the marketing expense is not the sole problem within a business and furthermore, we believe marketing should be viewed as an investment, not an expense.
In conclusion, it is clear that non-performing and loss-making franchisees are a reality for franchisors. Strong franchisors are built on the basis of keeping strong, healthy relationships with franchisees, therefore it is in the best interest of the franchisor to do their utmost best to assist a franchisee that may be struggling.