Six ways to manage franchisee underperformance

Since the 7-Eleven wage fraud scandal first made headlines in late 2015 up to today, franchising has consistently held the media’s attention in a way it is has not done before.

Stories about alleged poor behaviours by both franchisors and franchisees have been grist for the media mill. In particular, stories about franchisees whose businesses have failed receive much greater media attention than stories about franchisees who operate successful businesses.

Reports of unsuccessful franchisees – regardless of the causes – risk creating a poor perception of the franchise sector generally, and individual franchise brands more specifically. Where individual brands suffer reputational damage, not only is the franchisor affected, but so too are its franchisees as their resale values erode despite operating successful businesses.

As a result, franchisors should do everything within reason to ensure that franchisees in their network do not fail. The consequences of underperforming franchisees that go broke reverberate throughout a network and beyond.

Here are six ways to manage franchisee underperformance to mitigate the risk of the franchisee themselves losing money, and the risk of reputational damage to the network.

1. Recruit better quality candidates to start with

This tip might seem like a blinding flash of the obvious, yet franchisors often admit they have allowed sub-optimal candidates to join their networks. Mostly this is because the franchisee selection criteria is poorly defined, or not defined at all.

The irony here is that if an organisation was to hire an executive on a salary of $250,000 per year, they would apply a very high level of scrutiny to that candidate, yet if the transaction is reversed and someone is paying $250,000 to buy a franchise in that same organisation, the franchisor might apply very little scrutiny of the candidate (except in regards to their ability to pay).

Even if rigid selection criteria do exist, these can often be compromised by other factors, especially when an existing franchisee finds a buyer for their business (who may be unsuited to the franchise) and presents the sale to the franchisor as a done deal.

This can often result in a competent franchisee being replaced with an incompetent franchisee, and a franchisor caught in the middle and damned by the vendor franchisee if they don’t consent to the sale, and damned to managing an underperforming franchisee in the future if they do consent to the sale.

2. Require a business plan

Every franchise candidate should do a business plan before committing to a franchise. Good franchisors will not grant a franchise until they receive a business plan that broadly aligns with the franchisor’s prior experience of the operation of other outlets in the same network.

Unfortunately, some franchisors don’t insist on a business plan as a condition of granting the franchise, or will accept a business plan to tick a box in their recruitment process but without checking that the plan is meaningful or viable. Without a plan, the only way that the franchisee or franchisor knows when the business is off-track is often when it is fatally broken.

3. Train franchisees properly

Most franchisors think they train franchisee properly, but some could do better. Sometimes franchisees do their time in training, but fall short of the standards of competence needed to run a successful franchise.

Unsurprisingly, these franchisees tend to underperform in some way or another from the very outset. Achieving a high pass mark in training should be a prerequisite for a franchisee to be allowed to operate a business, otherwise they should be required to undertake remedial training until they can prove their competence.

4. Monitor franchisee performance against their plan

The franchisee’s business plan outlines their realistic expectations about sales, cashflow and profit. Franchisors who monitor their franchisees’ performance against their business plans will quickly identify when sales, cashflow or profit starts to fall below expectations, and be prepared to intervene accordingly.

These core elements, as well as other indicators of the health of the franchise, should be monitored on a daily, weekly and monthly basis. Unfortunately many franchise agreements either don’t require franchisees to provide financial data, such as profit and loss statements, to the franchisor, or they are required so infrequently (eg. annually) as to be meaningless.

5. Modify incrementally and often

Franchisors who have monitoring systems that can instantly identify when a franchisee’s performance deviates below the expectations set out in their business plan should mobilise appropriate resources to reverse the decline.

Small but frequent modifications require less effort by both the franchisor and the franchisee than trying to rescue a business that has gone completely off course.

Better still, frequent but minor modifications proposed by the franchisor are more likely to be seen positively by franchisees because they are proactive and aligned to the franchisees’ interests, rather than potentially painful and disruptive major interventions.

6. Apply tough love where required

Tough love is hard to give, and harder to receive. Sometimes franchisees will not respond to incremental modifications, and may seem determined to crash their business by rejecting offers of help. It may be necessary to force an intervention via a breach notice to communicate to the franchisee the potential seriousness of their position.

In extreme cases, and if a franchisor has the financial capacity to do so, it may even be necessary to buy out the franchisee to exit them quickly before they do lasting damage to the brand, and potentially worse damage to their own financial position.

Usually this is a course of last resort for franchisors, because even those franchisors who can afford to offer a quick financial exit to franchisees may not have the resources available to operate the franchisee’s business, especially if it is a business without staff, or located far away from the franchisor’s national or state offices.

These six ways to manage underperforming franchisees are interlinked. Any one method will be limited in its effectiveness unless the other five methods are also employed in sequence for new franchisees, and concurrently across the network for all franchisees.