Doc Franchise Writings and Ramblings

The odds are against success. The numbers don't lie. The challenges facing the operations of a larger small business development compared to a smaller business component is significant enough that it is best to start smaller, ensure your grip on the business model and then grow from there.

These are all expressions I have used. For the most part I still believe these...IF we were talking 5 years ago I would stand by them, in front of them, behind them and arm myself on all of the information that supports them.

Today is a different day however.

Reading newspapers, listening to the radio, or watching TV today is like drinking from a fire hydrant. There are massive changes in the conditions of our economy. The changes mean franchise companies, particularly new and emerging franchisor's need to rethink their sales and development strategies.

Here are some recent headlines:

* Economy Weakens as Deeper Job Cuts Materialize
* Manufacturing Shrinks Most in 26 Years
* U.S. Slips into a Recession
* Jobless Claims Skyrocket
* World Markets Slump on Economic Fears

In a discussion with several franchise executives recently, the question surfaced, "How can we expand in this market?" I quipped that I was excited about franchise growth in the next few years. I explained that the rules have changed and that smart franchise companies will capitalize on the current economic climate and trends. When my optimism was challenged, I shared why I feel this way.

Why be optimistic?

In times of great upheaval come opportunities. If you read past the doom and gloom I am sure you've read that statement as well. Millionaires were born out of the decade that followed the Great Depression. While it is true that the Crash of 1929 brought unprecedented misery and economic hardship to many, during the same period opportunities were created for the creative, quirky and fearless. The worst course of action as that time exhibited is to do nothing, go about your business and not create a strategy that doesn't recognize the current reality.

While caution should be exercised in positions of leadership, don't ignore the obvious. American workers are going to have to change their lives dramatically. Many people - out of necessity - will have to consider starting a new business, purchasing an existing business, or following the more prudent path of franchising as a route to a new career. Their jobs have, literally, disappeared and reality has finally slapped them so hard that they realize things will never be as they were; security will never be in a company, a position, in a career path again!

On the financing side of the equation while the days of freely tapping home equity and 401(k) plans are gone, many individuals still have the financial resources and/or the ability (courtesy of the U.S. Treasury) to qualify for the recapitalization of existing SBA loan programs to fund their startup. There is money to be had.

Back to the Franchise Companies

The biggest challenge for emerging franchisors in these uncertain, yet dynamic, economic times is how to fund their franchise expansion. Franchise companies face several challenges in today's economic environment:

1. Lead costs are above historical averages.
2. The cost of franchise support is higher as well.
3. A poor choice of franchisees will kill your future growth.

All of these things make Master Licensing and Area Development more attractive growth strategies for newer franchisors who lack the ability to fund an aggressive, rifle-shot franchisee recruitment program and build the infrastructure required for ensuring proper progress and success for new and individual franchisees.

The more responsibility a franchise company must take on to secure the future for the masses of their franchisees, the greater downward pressure exerted on front-end expenses before revenues are produced.

The inability to invest in ubiquitous operational support in the first two years of new franchisee operations is the leading cause of franchisee failures, which in turn cripples the future franchisee validation necessary for recruiting new franchisees. This dynamic creates a death spiral. Emerging franchises who attempt to grow and develop their business from a centralized point create more risk for themselves and their franchise system.

Master Licensing (ML) and Area Development (AD) alleviate significant amounts of the cost burden associated with newer franchise systems. By definition ML's and AD's take on the key responsibilities and costs for providing training and support. With an AD strategy in place:

1. The bulk of the franchisee recruiting costs are funded by an AD or these can be centralized and made a component of an off-loaded relationship with a franchise development company. Either or both ways, it reduces franchiser overhead and provides more focused effort with less pressure on the corporate funding sources. If this is done properly, it will revolutionize recruiting.

2. The resources associated with providing a high-quality support system are delivered and managed by a qualified ML/AD. Not only is this more cost-efficient for the franchisor (because the costs of building a support infrastructure and managing recruiting locally are borne by the ML/AD), but the quality of support to franchisees can be geographically proximate, more focused on business nuance and decidedly more personalized.

The key to success in enabling this growth strategy is in understanding the basic operating principles of Master Licensing and Area Development, including how to recruit and manage them, as well as how to properly structure the agreements. The three mistakes most franchisors make in structuring a program are:

1. Assuming that an Master Licensees is the same type of candidate as a franchisee, only with more capital. Some of the most successful ML's I have known over the years are those who did not necessarily have the best balance sheet, but rather an adequate one; however, they had the core talent, enthusiasm, and skills necessary to drive an organization.

2. Creating a development schedule that is too aggressive. This will drive your AD's to choose franchisees based on meeting a timetable, rather than on purely on their qualifications, which leads to a lower quality of franchisees. They will always want better franchisees because the focus on branding for them is now personal. Craft an agreement that allows them to focus on the best things.

3. Assuming that an AD/ML can do both recruiting and operations. I have never, never seen this structure work over the long term. Offload development to a professional organization that takes responsibility for a significant amount of the lead costs and understands the needs of the ML's/Ad's.

There are many other things to consider in designing a franchise growth strategy for these challenging economic times, but having 10-100 (depending on your organization) qualified Area Developers reduces your company needs for funding recruiting and allows you to focus capital expenditures on improving your franchisor operating system.

This can ultimately fuel profitable growth for emerging franchise systems, something they could not have come close to replicating internally. If you are looking for an organization who can provide you with the tools to make this adjustment in your system you know where to find me!


John is a 26-year professional in the franchise industry. He has been a franchisee, a franchise executive and an advocate/consultant to the public and to dozens of franchise companies. He is the founder and managing partner of Wilson Associates and can be reached at docfranchise@gmail.com. or direct office 480.838.1641