Warning signs for franchisees from the Kleenmaid disaster

The traffic accident that is Kleenmaid continues to unfold, with administrators Deloittes releasing a final report to creditors which states that the Kleenmaid group debt has swelled from an initial amount of $73 million to more than $100 million, and that the company may have traded while insolvent since June 2007. 

 In light of this information, it is laughable for the directors of Kleenmaid to blame the company’s woes on the global financial crisis, as articulated in their now infamous YouTube video.

Unless the financial crisis started a year earlier, and in Maroochydore not Wall St, the claims by Kleenmaid directors represent one of the boldest examples of truth-bending in modern Australian corporate history.

Indeed, the financial crisis appears to be the root cause of many current evils, primarily because it is a scapegoat incapable of responding to ambit claims.

The financial crisis is to blame for Kleenmaid’s demise. It is to blame for the massive budget deficit. The financial crisis is to blame for, well, everything really.

It’s time to take a fresh look at the global financial crisis (or GFC as it is widely called). Not for what it is, but for what it has become: The Great Feeble Cop-out.

As a Great Feeble Cop-out, the GFC can be blamed for and used to disguise gross management incompetence (or worse still, outright deception) in a range of business sectors and industries, including franchising.

Where management incompetence has resulted in the demise of a franchise system, some of the danger signs include the following. It will pay every reader well to watch out for these.

High levels of staff turnover

Franchisees sign agreements for terms of five years on average (according to a Franchising Australia survey, Griffith University, 2006). They are therefore very sensitive to the arrival and departure of staff in the franchisor’s head office, particularly those with whom they are likely to have close working relationships (like the field support team, marketing and operations personnel, etc).

A high-level of staff turnover is likely be noticed by the franchisees before it will be noticed by another stakeholder, such as a supplier.

The staff who leave will be the ones for whom money is less important than having a satisfying and fulfilling job. Staff working under incompetent management will not be satisfied, and will leave at a much greater rate than those working for competent bosses.

Acceptance of all franchisee candidates

If the only criteria for a potential franchisee to join a network is to have the money to buy in, a franchise system is doomed to failure. Incompetent management often take on all comers as franchisees in a bid to grab as much up-front cash as possible, but without regard to the long-term prospects of the system.

Even mature systems can fall into this trap if the sale of franchises becomes an easier way of shoring up the balance sheet than actually fixing the business model.

Unsupported site decisions

In tandem with the acceptance of any candidate with a pulse and a bank account, incompetent management will also pick sites or territories for franchise operations based on little or no criteria other than “gut feel”, or a failure to say no when a landlord offers a location. Without a robust and data-driven process, site selection decisions are a gamble at best.

Random policy changes

Another indicator of management incompetence is a lack of consistency in organisational policy and direction.

Where changes are made randomly and for no apparent reason, or for reasons that are not articulated to the stakeholders affected (including franchisees), management is demonstrating an incompetence in understanding the needs of stakeholders, or failing to balance those needs adequately across all stakeholder groups.

Franchise fee increases

Increasing franchise fees is a contentious issue at the best of times, and most franchise agreements will provide for fees to be increased.

Where fees are charged as a fixed dollar amount on a regular basis, it may be necessary to increase these periodically to keep up with inflation, and agreements containing these types of fees will often include a formula linking any increase to the rate of inflation.

However increasing fees that are based on a percentage of turnover can often indicate problems in the underlying business model and viability of the franchisor, and can bring into question the competence with which the system was established or operated.

High levels of store closures or resumptions

Reputable franchisors will occasionally need to close or resume a store or territory, but when this occasionally becomes an alarmingly frequent occurrence, problems must exist with the system’s site or franchisee selection, the business model itself, or the franchisor’s management of the network.

High levels of store closures are symptomatic of wider problems in a franchise group.

Increased disputation

Disputes in franchise networks are often coupled with store closures, policy changes, fee increases and so on. Franchising is a commercial marriage and therefore 100% of franchisees will not be content 100% of the time, however when dispute levels accelerate and the nature of the disputes become increasingly serious, the management response to increased disputation is a test of its own competence.

Failure to modify product & service mix

In challenging economic times, those organisations that can modify their product or service mix to meet the market will be more likely to survive and thrive than their competitors. Only truly competent management can demonstrate the forethought, tenacity and planning to anticipate and benefit from such opportunities.

These are just a few of the danger signs to consider when determining if an organisation has genuinely been affected by the global financial crisis, or if the management instead is using the GFC for a Great Feeble Cop-out.