Most franchisor teams spend a great deal of time checking on their franchisees. But it can be a much greater challenge to address the health of their own business. After all, it’s generally easier (and more comfortable) to notice the apparent weaknesses of others than to see our own – and to do something about them. No matter how hard it is, it’s very helpful to have a regular business health check, and in this article we suggest some areas to look at.
In 2013, Peter Knight and I spent time investigating and thinking about the question ‘What sends a franchise broke?’ This work provided a great conversation starter and valuable framework for a business health check.
Franchisors are usually quick to recognise that their franchisees can benefit from such a review. Many also said the ‘7 Things’ can apply to them too! Thinking back to my own time working at a franchise head office, these topics resonate with me as tough but important matters to consider at planning sessions.
So, here are seven key areas for a franchisor to consider as they check the health of their business. A good way to use this list is to read through each point, note the areas where it might apply to you and discuss what action is required. Different members of your team or board may have different perspectives, so consider asking for their thoughts too.
SEVEN BUSINESS HEALTH CHECK POINTS
1. Change – How well do you respond?
In the last few years, so many things have changed in so many areas it sometimes seems almost impossible to keep up. But unless franchisors stop to look, they’ll continue on as if nothing’s changed. The business environment has changed. For many businesses, costs are higher and there’s more competition. What’s changed for you in the last few years and how have you responded?
For any business, it’s critical to monitor its financial position for signs of change – and respond accordingly. This includes a review of monthly breakeven, the update of monthly revenue targets and the development of specific strategies to manage costs and achieve top line targets.
2. A difficult childhood – did you have one?
Some new franchisees seem have been “up against it from the start”. For example: they were under-funded, or were too optimistic about sales, or underestimated their costs or only had a vague idea about their financial commitments.
Emerging franchise systems can face similar challenges. For them too, reality often turns out different to the dream. Growth almost always is hard, and it’s costly. It can be hard to steer a path between supporting existing franchisees and growing the network, often with limited financial and human resources.
So it’s no surprise if some franchisors run out of steam and stick at between 15 and 25 units.
But even the most challenging early years can be surmounted with a keen focus on revenue generation, wise spending decisions, and good business and cashflow management. As with improving your personal fitness, a key step is to recognise the issue, identify a goal, and get help to make the changes necessary to progress towards it.
3. Business rigour – how do you measure up?
Business rigour incudes the management practices that help a business set goals, track results, identify problems, comply with legislation and achieve important targets.
Very often, the management and reporting practices that were fine a few years ago are no longer appropriate as a business grows. Financial reporting and board meetings are a good example. So how do you know when more rigour is a good thing (rather than process for the sake of process)?
If you (or your team) manage on an ad hoc basis, spend a lot of time fighting fires, or are surprised by financial problems, some more stringency in the business may be helpful. It might include regular board meetings, financial reporting, or team and individual meetings with the appropriate structure.
An important part of business rigour is to understand how the franchisee network is performing in revenue, cost structure and sales indicators. Just a handful of key measures tracked over the long term can shed light on trends.
For instance, what proportion of franchisees have achieved an increase in sales in the last 12 months? How many are above or below the average COGS and staff wages percentage and what are the trends in these numbers?
4. People do crazy things – how about you?
Some business people seem to do mad things: they blow their money on extravagances with little thought of upcoming expenses, dramatically increase their costs of living, or spend big on an overseas trip.
Franchisors are not immune. It might not be personal expenditure, but what about pet projects, new software, or a lavish conference? Another area to watch out for is overseas franchise enquiries that take the business off at a tangent and might weaken the focus on home grown franchisees.
None of these things are of themselves bad. Still, it pays to look ahead before deciding how to use the scarce resources of time and money. A three-year strategic plan, budget and cash flow can be a great help with this.
5. Sales – how effective is your team?
Most franchisors are one step removed from the sales process because they rely on franchisees to make them happen. But each year, the cost of doing business increases. Unless sales revenue is growing, a franchisor may struggle to fund the needs of the business.
Franchise sales can be a tricky area. Expansion is a fundamental for business success in many franchises. Yet it can be tempting to sidestep this point and seek reassurance for missed sales targets by repeating the mantra ‘we don’t make money selling franchises’ (therefore it’s okay not to do so!)
Perhaps you’re content, and the business is profitable and sustainable and with just a few franchisees. Or the business might be mature and slow growth is acceptable to your board. But if there are financial challenges, or needed projects are on hold because there’s not enough top line, then revenue from all sources may need to be brought into sharper focus.
6. Could pride cause you to stumble?
Many franchisors have established and run successful businesses in the past. As a result, their confidence has grown and they have developed a strong belief in their abilities.
So, when challenges occur it can be difficult to admit they don’t have all the answers, or even recognise there’s a problem. Franchising sometimes makes this harder, because there seems to be a bit of pressure to paint a picture of success to the market.
Pride makes us reluctant to seek and hear insights and advice from outsiders or team members with a different perspective. Yet we all have blind spots and make mistakes – and every business has problems to deal with.
The question becomes how can we identify and deal with problems in a way that continues to demonstrate good leadership and propel the business forward?
7. Paying the bills – how do you score?
The main reason businesses go broke is they can’t pay their bills. They can’t meet their financial commitments. There can be many causes for this, but in the majority of cases, it’s because of poor financial management.
However, this shouldn’t come as too much of a surprise. The warning signs would have been evident. The truth is, where you are today is a result of what you’ve done, or not done, in the past. It’s a result of your actions and decisions.
As with any business, franchisors must monitor and manage their financial position. They must watch for the early warning signs of impending danger, make plans to generate more revenue and make wise spending decisions to support their long term plans.
What sends a franchisee broke? Read the SmartFranchise document here.