By Kevin Bugeja, Managing Director, Franchise 4 U
Franchise business models are an attractive business opportunity for many entrepreneurs and people looking for an independent business venture. Franchises can be startups in a fast-growth phase, or an extension of an established business that falls into the slow-growth category. To be successful in your franchise venture, it’s important to consider the costs and benefits of both business models and see what will be a good fit for you in the long-term.
However, when you’re setting up your initial franchise, it’s essential to develop both a short-term and long-term growth plan to stay on track. Many franchisees’ make the mistake of not identifying exactly what they would like to achieve. Making a clear map or plan of objectives over the course of one year, three years, and five years can help keep the business and complete business plan on track. A five-year plan that is focused on accelerated growth may not always be the right choice for the business model or the system. On the other hand, a one-year aggressive start could be just what a business needs to get up and running.
This is an important part of successful franchising, because it allows the franchisee to set up a series of goals to reach the destination. Being clear and specific about goals can make them achievable. Progress can be tracked, and mistakes are managed more efficiently along the way with a clear-cut objective in mind. Depending on the type of growth curve expected, a successful franchisee can activate a growth plan and become a multi-site franchisee or even plan for succession or exiting of the business to maximize returns and achieve the best possible sale price.
The first step is to identify the key components, called business drivers, on which the franchise’s success depends. This is the first step in building a strong business. Use a business plan to determine what drives your business. If you’re still not sure, contact your franchisor or get professional help from a business coach. Keep in mind, however, that if you have a tough time pinpointing your drivers – even with a business plan – you might be in the wrong business.
Business drivers are related to how you make money, in a food business, for example, several key drivers would be cost of sales, wages and occupancy costs. If you have a good handle on all three of those drivers, then you know how to make money in that business. However, business owners should concentrate on three to five drivers – no more, no less. As too many will seem overwhelming and the trick is to keep them manageable so that they get done. This will help lay down the foundations for the growth and development of your franchised business.
Business drivers vary by industry. There are, however, several key drivers that apply to virtually every franchise. There are two big ones: knowledge management and people management.
In the Know
Managing your company’s knowledge base requires you to keep your employee’s skills up to date and their knowledge of industry-related products, news and trends current. That’s no easy task, given the tremendous amount of information available today. We all suffer from information overload, if you can translate that information into knowledge it’s helpful and remember that fellow franchisees are on the same team as you and are not competitors and can be a great source of information, especially for newer franchisees.
Your franchisor’s training programs can be a tremendous help, as can technology. The Internet, for example, is an excellent source of current information, not only will you find news about your industry, but you could improve your own skills through the continuing education courses available on many newsgroups.
It’s important to keep your knowledge quest simple. Write down the topics that are vital to your business. Then spend about 10 minutes a day updating your skills in those areas. You’ve got to have an agile mind, if you don’t acquire new knowledge and stay adaptable and change, you’re going to die.
Managing people is a lot less scientific than managing knowledge. It involves making some judgments about who you can trust and who you can look in the eye. That starts with the hiring process. Bring in people, who care about themselves, those are the people who generally take pride in their work and who will treat your customers well.
Once those people come on board, give them performance standards and a sense of ownership in the business. That will give them something to strive for. How you do that depends on the business and the marketplace. Remember that what works in a large city may not work in a rural area. So, test your market to determine what will entice your employees to work hard. Financial incentives often work, as do employee-of-the-month awards and other forms of recognition.
Some organizations, such as fast-food franchises, have training programs that help employees start out as cashiers or cooks, and work their way up to manager or area supervisor. The “you take care of me and I’ll take care of you” attitude is a great culture to encourage in your organization, remember “you have to give more than you get back.”
Service with a Smile
Employee relations can have a profound effect on customer service, another key business driver that affects virtually every industry. Many entrepreneurs focus on customer service, but expend little energy on their employees.
Most people put customer service first and dump on their employees to get it. It really doesn’t work that way, they need to have a sense of ownership and participation and pride. “Out of that will come customer service.”
Keep in mind that customer service takes on various forms, depending on the business. The owners of 7/11 franchises, for example, concentrate on providing fast service because that is what their customers want. They don’t want recommendations about which snack tastes best. Customers at fast-food restaurants like McDonald’s or KFC want food that is served fast, hot and fresh.
If you’re not sure what your customers want, conduct a survey. You can stick a form in every bag or simply ask customers to complete one before they leave the store. If you are a service business, keep a mailing list of your clients. Develop a questionnaire and mail it to them with a return envelope. When negotiating a new contract, ask the client to be specific about his expectations. Then put it in writing. Not only will this prevent misunderstandings, but it will help you develop the best means of fulfilling the contract.
In addition to attracting good employees and loyal customers, look at your business systems. Good ones can help you succeed; bad ones can destroy you. Make sure that all your systems – communications, production, financial, etc. – are integrated.
And don’t forget to include technology in that equation, though how much emphasis you should place on it depends on your business. An accounting franchise, for example, must spend a lot of time and money staying abreast of the latest accounting software. The owner of a restaurant, on the other hand, may simply need a Point of sale to record sales & to track accounts payables and print payroll checks, many modern POS systems have these functions integrated and are adaptable to suit various future needs or developments.
It’s important to develop your own technology strategy especially if the franchise you are in is small and doesn’t provide this as part of the initial set up of the business. However, your franchisor might have some proprietary software or tips on what you need.
When your technology plan meshes with the rest of your business systems, your organization will run efficiently and productively. They all must communicate well, they all must function as an integral part of the whole, and they all must work toward the same end, which is making a profit.
The Bottom Line
Let’s face it; no one goes into business to lose money. Everything you do, therefore, must be done with the same goal in mind: to drive up profits. That’s true whether you run a Fast food franchise or a service.
Start-up costs can be a positive driver if you don’t need a fixed location or a lot of equipment. Since you don’t have to build a large location, you have a much less expensive cost of entry, so, that’s a personal driver. If you don’t have to sink all that into a visible plant & equipment, you could have more to launch your business.
The owner of home-based cleaning service, for example, can use the money he saves on a physical location to market his services. If you operate a business that requires the added expense of a fixed location, keep in mind that the visibility of a storefront will attract customers, another means of driving your business.
The Right Fit
Few businesses turn a profit the first year or two. So be prepared for a few bad years, and remember that your resiliency will depend largely on the fit between you and your business.
When you think about what drives a business’ success, its understanding what that business requires and making sure you can do it, we’re not dealing with smart vs. stupid; we’re dealing with an equation of fit. You need to have the personality and the skills set that work with the particular business you’re doing.”
Slow Growth vs. Fast Growth
Both slow-growth and fast-growth franchises have many benefits and drawbacks that appeal to some, and do not work for others. There are elements of risk, experience, and potential for growth involved when weighing the pros and cons of a slow-growth or fast-growth franchise business.
Slow-growth franchise businesses are those that require limited investment in training, startup experience, and creating business plans. Slow-growth models generally have a strong and working business plan prepared, and are looking to add locations or grow from something that already works. Slow-growth franchises succeed through their ongoing marketing efforts that have brought results in the past, and the experience of their trainers and management team. Still, the slow-growth models do have their drawbacks. They do not grow quickly, and are often in competition with similar businesses in the area. Slow-growth franchises have limited opportunities for creativity and new ideas, because they are not startups that require many fresh concepts. Because the business model has already been developed, slow-growth franchises generally have higher royalty fees as well.
Fast-growth franchise businesses are fresh startups on the market. The managers, employees, and even owners will work hard to fuel the business and get it up and running. Fast-growth franchises are starting from scratch, so the business model is a work in progress. This creates a window of opportunity for creativity and producing a new idea or concept immediately; this can lead to a higher market potential, low franchise fees, and the options to grow very quickly. Still, there are drawbacks to the fast-growth franchise business. Many of the staff and managers will be inexperienced, and this can lead to increased training and employee development costs. Since the business model isn’t a proven one, there can be many setbacks and higher risks involved in investing in the business itself. In addition, the lack of brand recognition will require a strong marketing effort. Market saturation is possible, but could take time depending on the existing competition.
To speed up growth, a franchisor has a few options. Franchisors can establish franchise operations in multiple locations simultaneously, and begin receiving royalties earlier or to continue to open company run outlets to assist with cashflow and the costs of running the franchise. Conversion franchises are also used by some franchisors, where the already established businesses become franchises and attract new revenue. Accelerated growth using area development franchising or Master franchisees is also used by some franchisors either by state or region. This involves a greater risk, but also a higher chance of large-scale revenue from royalties and other fees. Franchisors must weigh the costs and benefits of each move, how much capital they are willing to invest, and create sensible timeframes to achieve their objectives.
Expanding a franchise business has its risks and benefits, and doing it successfully can be challenging. Franchise sales are a function of marketing, so an aggressive marketing and market saturation initiative may lead to long-term gains for the franchisor overall. However, without a plan of action and goal-oriented strategy, the system can spin out of control and leave the franchisor with limited resources to get back up and running. Strategizing a successful franchise growth plan involves some clear goals and outlining priorities, costs, and benefits of each move.
There are many factors to consider when choosing between a slow-growth or fast-growth franchise business, but the potential for success is equal for both. Depending on your management style and business knowledge, either model can be adapted for long-term benefits. Be sure to weigh–up the pros and cons of each business model, and select the franchise model that best suits your needs.
Kevin Bugeja, Managing Director
Franchise 4 U
Mobile: 0412 511 630