Written by Kurt Dyck
Many small business owners decide to buy into a franchise system rather than start a business from scratch, and for good reason. There are many advantages to going down the franchise path, including following a proven business model, established marketing plan and brand recognition, site location assistance and mentorship from the corporate office. For many entrepreneurs, becoming a franchisee allays some of the risks of starting a business, and is well worth any start-up costs or franchise fees paid.
Hitching your wagon to a franchisor, however, can also have some drawbacks, such as being tied to specific systems and the lack of the ability for creativity. Don’t forget about the franchise fees, those cut both ways and are paid based on revenue regardless of whether the business is profitable. At Lucrum, we’ve worked with franchisees of all kinds; below are some do’s and dont’s to consider if you are evaluating or are already committed to working within a franchise framework.
Do make the most of pre-established franchise systems.
As mentioned earlier one of the benefits of being a franchisee is that a franchise typically has well-established systems, from a business model to your point-of-sale (POS) systems to selected vendors and pricing for purchasing materials and equipment. While in some cases an owner may feel “locked-in” and unable to exercise creativity; franchise models are typically well-vetted and work well for the given line of business.
A top advantage of franchising is the data collection and reporting system, along with the ability to compare to many other locations within the system. Make sure to tap into this wealth of data. This is particularly important in planning for the development and opening of new stores/locations.
Lucrum has one client who owns over a dozen hair salons and the sharing of data has been a tremendous help during the challenging months in 2020 due to COVID. He was able to compare his customer traffic to the nationwide counts and found that his trends are identical to the nation as a whole. While this is not good news, it’s certainly comforting that it is not his locations or management practices.
Do take advantage of any available coaching.
If the franchise offers business coaching or mentorship, take advantage and learn from someone who likely has made the model work well. If there is no formal program, reach out to current and previous franchisees. Regardless of the level of success, folks that have been through the same things can offer plenty of advice. Also try tapping into the knowledge of the people in the Corporate office, who work with other similar franchisees.
At Lucrum we have often found that establishing Corporate relationships helps us advocate for our franchisee clients and gain insight into the inner-workings of the model. With an established relationship the franchisor is more likely to provide advice or raise questions if certain areas of the business aren’t optimal. We know of another operator who has such a good relationship with Corporate that they bring him their underperforming or problem locations to see if he is interested in acquiring them. Talk about a good referral source!
Don’t get stuck in a mold.
Even when following a prescribed path and working within a pre-determined system, be sure to develop your own identity and goals. The business owner should know geography and demographics better than anyone else, and probably the one who hires employees, creates the culture, and stands to win or lose at the end of the day. The most successful and satisfied franchisees that we’ve worked with are the ones who use the franchise framework to build their own unique entity.
Lucrum met one franchisee within a concept we knew well who bragged about not having to set foot in his stores because “his brother handled that side of the business.” He also mentioned that his office staff had zero turnover. After working with them to see if there was a mutual fit, we declined the engagement. In our opinion the brother didn’t have a clue how to manage operations and the reason no staff left was because they were underqualified and way over paid. We declined the engagement.
Do create your own model.
The most important thing we’ve seen among our successful franchisees is consistency, along with feedback. The first store (or three) can be pretty scary, and requires gut-feel decisions to solve problems. Overtime, owners learn the model so these decisions become instinctual but this takes time. So it’s important to follow the process consistently, measure results, and track what works and what doesn’t.
At Lucrum, we do this by creating sophisticated financial models that detail all the relevant inputs and performance metrics so we can understand the impact of decisions made or environmental factors (such as a pandemic) and educate our franchisee clients and give them confidence.
Don’t worry if it doesn’t work.
One of the advantages to owning a franchise is that there is a market for them and they are relatively easy to value and sell. Often entrepreneurs will start in a given franchise, learn what they like or don’t, and then branch out into a different direction. There are a plethora of franchises available to invest in, running the gamut of business types. The best way to see if becoming a franchisee is good for you is to get started.
We have one franchisee who owned 4 locations of one concept and 14 of another. The 4 units required as much if not more time to manage, account for, staff, etc as the other 14. While the cash flow was very strong, our client decided to sell and found a buyer quickly. His stress decreased, life got much simpler and he’s able to focus all his time on the 14 units that he actually enjoys managing.
There are many benefits to franchising but like any business venture, requires research. Unscrupulous brokers or area developers may make it sound like the typical owner sits on the beach cashing checks but that’s rarely the case. Successful entrepreneurs work hard to learn the system and usually grow to multiple units to leverage that effort and knowledge. Like any entrepreneurial enterprise, franchising takes hard work and a little bit of luck. But it also provides a nice framework to hopefully maximize the chances for success.
If you’re considering a franchise, or if you have already jumped in and need some help figuring it out, we are here to help. We structure our CFO consulting services in a way that makes sense for business owners, giving you the information you need in a method you can afford. Contact Lucrum today to get started.