Growing a franchise

This article first appeared July 19, 2011.

For many people who buy a franchise, it is usually their first time in business.

They are enthusiastic and willing to learn about the business, but often this enthusiasm is directed only at the technical and operational aspects of the business (ie. the stuff where they work in the business) and rarely at the strategic and tactical level (ie. the stuff where they work on the business).

The technical and operational details of running the business (how to serve customers, make or display the products, perform the services, open and maintain the store, etc) are often the primary focus of the franchisor’s training program for new franchisees.

Without doubt this operational excellence is important to both franchisor and franchisee, yet it may not be enough by itself to ensure a franchisee can profit from and grow a successful business.

As a result of prior work or executive experience, plus their due diligence in assessing the business prior to commencement, franchisors may occasionally assume that franchisees will bring a degree of financial acumen to their new franchise.

However, this may not always be the case. Where the franchisor’s training may concentrate on the specific technical or operational aspects of the business, a franchisee might not be equipped with the full range of business skills to properly grow their franchise.

For this reason, every potential franchisee should learn general principles of business even before investing in a franchise. In particular, this involves understanding the difference between sales, profit and cashflow.

There is a proverb in business that goes like this:

Turnover is vanity;
Profit is sanity,
But cashflow is king.

The meaning is simple. Sales turnover can be high and look very impressive. Indeed it’s one of the first things franchisees might use to benchmark their performance against others in the same group.

However, turnover alone is not enough to grow a grow a business unless there is adequate profit, but even this won’t guarantee a successful business unless the cashflow and working capital requirements of the business are kept in balance.

Without the right cashflow, even the most successful business can collapse, just like an elite athlete starved of oxygen. If a franchisee does not have a grasp of basic business financials, their long-term prospects are limited at best, no matter how good the brand in which they have invested.

Franchising as an entrepreneurial alliance

Once a business owner has mastered the basics of financial monitoring and measurement, they are ready to grow and fully benefit from the entrepreneurial alliance that franchising creates.

The term entrepreneurial alliance immediately establishes and recognises the dynamic nature of franchising at franchisor level (ie. the entrepreneurship needed to develop the concept at the outset), plus the self-driven characteristics of successful franchisees who see opportunity to partner with a franchisor for greater success than they could achieve by themselves.

The nature of an alliance is that there are goals common to both parties, as well as obligations. An alliance also suggests a time or situationally-dependent relationship, which is also in keeping with the concept of the limited term of a franchise grant, and the option to renew usually available to both parties at the end of the term.

In many ways this is more illustrative of the nature of the franchise relationship than a “commerical marriage”, a favourite term often used by franchise observers and media alike, and which draws obvious parallels with real life marriage. However, the difference in franchising is that neither party expects to stay together until “death us do part”. Both parties know up front through the disclosure document and franchise agreement what their obligations to each other will be before, during and after the relationship, and in the event of a serious dispute, mediation is a legal requirement.

The entrepreneurial alliance in franchising creates a new term for franchisees: intrapreneur.

An intrapreneur is an inside entrepreneur, whose innovation and drive can accelerate their business development within a larger organisation by drawing on its resources, rather than striking out on their own. This term fits perfectly with the concept of entrepreneurial alliance, as franchisee intrapreneurs still require the framework and concept of the franchise system on which to build their own entrepreneurial success.

The inference of both of these terms is that profit underlies the nature of the relationship, and that growth in franchisee profits enhances this relationship.

Growing into additional outlets

Many franchise business models lend themselves to multiple-unit ownership. This provides intrapreneurial growth opportunities for franchisees by acquiring additional outlets (subject to their capacity to effectively manage multiple units). A progression of this nature should be firmly rooted in a solid understanding of the financial concepts explained in this article, and may involve the following stages once the initial outlet has achieved consistently high levels of performance.

Growing a franchise requires a fundamental understanding of financial basics, the establishment of key performance indicators (KPI’s) for elements of the business, constant monitoring and management of these KPI’s, and finally, considered growth into additional outlets to maximise the advantages and minimise the disadvantages of multiple unit ownership to become a truly successful franchisee intrapreneur.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for nearly 20 years at franchisee, franchisor and advisor level.

He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.