The Biggest Mistakes Made by Franchise Companies

Have some franchise companies learned any lessons from the harshness of the great recession?

Since the time I initially wrote the original Top Ten Franchisor Mistakes in 2006; to say that things have changed in franchising is a gross understatement.

Considering the great recessions affect on franchising, I felt it was time to blow the dust off and see if these mistakes still hold true as they did in the pre-recession high-flying times.

The Top Ten list is growing and therefore I have had to re-title it from its original in 2006.  Unfortunately, it appears the great recession has magnified some of the mistakes that franchisors make, and even invented a few new ones as well. I still see some franchise companies cut corners where or when they shouldn’t be; or alternatively, bulldoze over their franchisees, staff, and in some cases, everyone they are involved with.

And believe it or not, for the first time in my career, I actually witnessed a franchise company commit suicide this year for no reason whatsoever. If you are wondering which company this is; you will have to guess at it, as I am withholding all names to protect those that are already collateral damage. Individual people do all types of crazy things when under tremendous stress or duress, and the great recession proved this happens with companies as well.

On the highly positive side however, I have witnessed many franchise companies go from good to great during the great recession by concentrating on franchisee profitability, support, and significantly adjusting the way they do business. As we continue to emerge from the economic darkness, there will be more franchise companies that will join those as they emerge much stronger and better than they were before the recession.

Fundamentally, there are a myriad of mistakes and missteps, both large and small, that franchisors can and will make along the way. Some of them seem to fix themselves over time; some are fixed by sheer luck; some are corrected by training; and some by throwing a whole lot of money at them. Some unfortunately, never get fixed at all.

However, there are basic foundation items required of every good system, and franchisors that do not heed these criteria will certainly share the bad results with their franchisees, stakeholders, and their own checkbooks.

Throughout my almost 30 years in franchising, I have seen all of these mistakes made, and of course made a few of them myself.
The important thing is to learn not to repeat them, and to pass that knowledge on to others so that they can avoid making them as well.

So here are the big ones, and they are in no particular order:

Not having, or committing enough cash to start and grow the franchise system until it sustains itself with royalty flow.
Of all the mistakes on the list, this is a huge one and probably the one that irritates me the most. There is no easy way to say what needs to be said nicely, so here goes and listen up… First, if you don’t have the funding to properly develop your franchise and get the system to royalty break even, do yourself and everyone else a favor and don’t even begin to franchise at all. You cannot, and should not, expect to grow and sustain your system on franchise sales alone!

Secondly, if you’re a big company with deep pockets, there is no such thing as “we’re just testing viability of the concept”. If you franchise and contract with franchisees, you had better be committed to growing the company with them. Otherwise you’re misleading good franchisees who have invested significantly into your little test.

Speaking of test, and as I mentioned earlier, I unfortunately witnessed a franchise company commit suicide this year. Now I have seen companies go broke, close their doors, declare bankruptcy, or just plain quit. But this is the first time in my life that I have ever witnessed one commit hari-kari for no logical explanation.

This particular company was already very successful with an operating franchise system. To expand their holdings, they decided to launch a new franchise brand in a different category. They initially capitalized it and had expert franchise management develop and operate it. After selling a few dozen franchise owners and area representatives, they for no apparent reason, removed the expert franchise management one month, and then a few months later, quietly shut down the franchise by taking down the web site overnight. As you might imagine, this created absolute anarchy within the system and adverse reaction from the franchisees. Imagine that?

No one really knows why this company did such a bizarre thing, other than some speculate it was because they had reached their “budget”.  Budget?!?!... I wonder if they thought about the franchisees budget after having invested with good faith into their franchise.

Here is some sage advice concerning capitalization. My experience is that a new franchisor can never have enough cash. A good rule of thumb for cash availability is six months of operating expenses. However, as a new franchisor, it could realistically take a year to get your franchise offering put together before you are even ready to sell franchise one. Because of this, plan on long-term cash flow needs and you will be much better off. Even though you are eager to get growing with new franchise sales, counting on them is a very deadly mistake and one that could take your entire concept down.

Having the wrong partners and/or investors involved.
Nothing can derail a franchise plan faster than investors or partners that do not understand franchising or the business that you are in. Your partners and investors must understand that it takes time to grow a franchise system and that the “riches” of franchising are NOT the franchise fees. If they insist, have them read the “not enough capital commitment” mistake referenced above. If you are busy battling your investors, you cannot keep your eye on the ball of growing and supporting your franchise system.

An old friend of mine once told me when I was raising money for a new franchise brand “Don’t be blinded by the money, be sure the deal is good and makes sense first”.

Personally having been there and done that, seeing a bunch of zero’s behind a big number is very compelling. However, be sure that that there isn’t a higher price to pay for it than the term sheet specifies.

Growing your system too fast.
Recently I attended a franchise conference where I met a couple of guys that were brand new franchisors. As we were talking, they were telling me how fast they were growing by selling large area representative contracts requiring dozens of stores to be opened by each one. However, they were running into huge challenges with their area representatives meeting single store development and opening requirements and didn’t know how to get them on track. In other words, they were selling lots of store opening commitments, but not getting them open with operators.

I said OK, and then asked them how well their single unit franchisees were performing. They replied that once their single unit franchisees opened they did quite well because of the strong support and training they provide.

Again, I said OK and asked them who directly supports their area representatives. This resulted in a blank stare and a long pause of silence from them. With a sheepish reply, and somewhat of an epiphany at the same time, they indicated that was probably the root of what was wrong with their system, as they didn’t have any sales or operations support for their area representatives at all. As they grew, they built training and support for their stores, not realizing that area representatives also need support, albeit a different type of support.

At the stage of life this new franchisor is at, it is going to be an expensive lesson for them to implement support and training for their area representatives. Some of their area representatives that are currently in the system may not be the right people for the job, which means they will need to figure out a way to get them growing or find an exit out of the system for them. In addition they indicated that most, if not all, of the area representatives were behind on their development schedule which means they will need to get current with their agreements or face termination.

No matter how you slice it, fixing this problem will take their eye off the goal and set them back for an extended period of time. The lesson learned here is that you can quickly outstrip resources and support mechanisms in your franchise system if you grow too fast. As well, a few dollars spent early in the company lifecycle on a reputable experienced franchise consultant may have prevented this from happening at all.

Bottom line - high sales growth does not equal success. Planned “getting your locations open” growth does.

Not having franchise experience or hiring people who have it.
This is a very common mistake I see happen. Most companies that utilize franchising as a growth strategy quickly find out that they are in a brand new business. They may figure this out in a number of ways, including attending franchise events such as the International Franchise Association’s annual convention and being overwhelmed with the information, receiving expensive legal lumps on the head, or pushback from the franchisees that don’t jump when they bark orders at them.

Being a franchisor is not the same as it was running the successful business that you are franchising. Your first indication to this might be – franchisees don’t respond like corporate employees. The phrase “herding cats” couldn’t be used in a more appropriate example than working with franchise owners.

Pushing a metal linked chain also comes to mind… If you try to push a metal linked chain, it quickly collapses, however if you lead the chain, you generate consensus through the links and you can pull it along with you anywhere. Franchise chains react in exactly the same way.

Franchising is first and foremost a relationship business. Seasoned franchise people know this and they also know how to coach franchise owners to make things happen. Do it right by hiring people that have been at executive levels in franchising and if possible have CFE (Certified Franchise Executive) certification.

Strong franchise experience will grow you faster than any amount of advertising will, and also keep you out of hot water with your franchisees and state regulators.

Not having good training and operations manuals.
Strong training and usable operations manuals are key ingredients to franchising success. You can never train enough! Trust me on this - I have never ever heard a franchisee say “Stop Please! I’m over-trained and cannot take one more ounce of it!”

If there is one thing that is fairly inexpensive and provides incredible value for royalties paid, it is training. In addition, keep in mind that franchisees have different needs based on the lifecycle of their business.

New franchisees need different training than operators who have been open for 3-4 years, or owners that have been operating for a long time and are looking to sell or exit their business.

When it comes to franchise operations manuals, they should be a tool that franchise owners can turn to for almost any question or problem. Additionally they need to be an integral part of your training and daily operations. With today’s technology, you can host your manuals online in a user friendly tab driven menu and do away with the antiquated PDF’s. To do manuals the right way and get your franchisees to use them, I recommend working with a reputable consultant that specializes in manual design and creation.

If you’re a new concept, spend the majority of your development time and money in these two areas. It will pay incredible dividends to your franchisees and your system. If you are an emerging or mature system, it’s time to ask your franchisees how often they use their manuals.

I’ll put my money on that the majority of them probably don’t even know where they’re at.

Not having an operating concept that allows your franchisees to make money.
I wish that I had a nickel for every time that someone approached me with a great idea for a franchise. For the record - ideas sometimes build good businesses. And sometimes… just sometimes… good businesses build great franchise systems.

You cannot just leap from an “idea” to a “franchise system” without a profitable proven business format to build upon. If you do, it spells major disaster for everyone involved! And I mean disaster… You don’t see too many eBay auction stores around anymore do you? For those readers new to franchising, there used to be hundreds of eBay auctions stores operating just a few years back. Prime example of a neat idea - but fundamentally a bad business model.

Unfortunately, the current franchising landscape has a few questionable concepts which were launched with the “I have an idea” model.

I cannot stress enough, that it is imperative for a company looking to expand through franchising that they have proven operating stores or locations. From that starter base, best practices can be gleaned and developed for replication.

If at all possible, the best test store results will come from developing locations in various demographics and geography. The results from these locations can then be measured and compared to all of the operating locations for any number of operating metrics.

Great franchisors continue, and will deepen this habit of measurement and comparison with all of their corporate and franchised locations.

Not recruiting adequately capitalized franchisees.
Those of us that have been in franchising for any length of time have heard the “fog a mirror” statement. For the record, it means if a person can fog a mirror and has enough cash in the checkbook for the initial franchise fee, they will find themselves a franchisee before you can clean the mirror off. My friends, this is not a blueprint for sustainable franchising.

Because of the lack of available financing the recession has afflicted upon business the last few years, and the overwhelming urgency of getting a deal sold, I am concerned that some franchisors may have brought the mirror out from the attic. Time will tell if this prophecy is true. Regardless of the temptation, it is a dangerous move to skirt your financial requirements for new franchisees.

If you’re not sure why this is a bad idea, just consider the pressure that a shortage of cash will put on the new franchisee. That is, if they are somehow lucky enough to get financed and open. If they do open, it will not be long before you have a store going dark and customers calling headquarters because of it.

If you are a smart franchisor and stick to your new franchisee financial requirements, I commend you! A trend that I have seen because of the tight lending environment, are franchisors that are increasing their financial requirements for new franchises. The premise behind this is that if they have more cash up-front, it should make it a little easier for them to attain financing. I couldn’t agree more, however make sure your franchise sales people know the impact this will have on their development plans for the year, as there will be less candidates that meet the new criteria.

Good franchisors annually review their Franchise Disclosure Document (FDD) Item 7 “Estimated Initial Investment” requirements and make windage adjustments if needed. If you are a new franchisor, absolutely expect your FDD Item 7 to change during the first few years of operation and need adjustment as you will discover what you initially thought your franchisees would spend to open has changed.

Not having or providing field support to your franchisees.
Every franchisor at some point needs to have a strong field support system. Yes, I do recognize that there are some systems that are very unique, have very small unit economics, are a home operated concept, or have some other reason that having an actual field support team might be challenging.

As the past CEO of Ident-A-Kid^® which is a home based, small unit economics franchise operation; I can tell you that the unit economics simply do not afford a “typical” field support specialist. However, that did not preclude us from providing world class support to the franchisees via daily phone support, intranet, webinars, training, conferences, and so forth. Actual “at the franchisees location” support, if needed, is typically sales and marketing oriented within their markets.

Over the years, one of the most common complaints that I have heard from franchisees is “The home office staff has never operated a location and doesn’t understand my business”.

All corporate staff must spend time working in the store and franchise operations. Some franchisors make it mandatory that all new corporate employees spend time working behind the counter before they start their corporate duties.

For smaller franchise companies, getting out from behind the desk can be a challenge, but one that I have grown to appreciate. There is no substitute for field experience and the franchisees will appreciate the effort more than you know. Besides, this is where the rubber hits the road and can it be a lot of fun doing as well.

If there is one thing that the hit series “Undercover Boss” on CBS has taught us; is that it is amazing what you discover when working in the trenches with the owners.

The bottom line is - if franchisors do not spend time in the field or provide field support, they will ultimately pay the price through diminishing royalties, customer complaints, and bad franchisee relations.

Not communicating with your franchisees.
A long time ago, I attended a break-out session at the International Franchise Association’s annual convention. The session was geared towards franchise system turnarounds and one of the speakers was Sid Feltenstein. At that time, Sid had acquired, turned around, and then sold A&W^® to Yum! Brands^®. The A&W^® turnaround was, and still is a very successful story in franchising.

One of the attendees asked Sid what the “secret was” to the successful turnaround of the company. Sid’s reply was simple and one that I have never forgotten – He said “I asked the franchisees what needed to be fixed and provided it for them”.

Since that time, I have utilized the “Sid Feltenstein communication strategy” in managing the brands that I have been involved with. And let me tell you, it’s amazing what we accomplished together with the franchisees.

An incredible by-product of this strategy is when franchisees are directly involved with decisions of the brand; they become evangelists and perpetuate communication even quicker through the system.

As a new franchisor, you must develop and foster a great communication platform to your franchisees as soon as possible. This should include headquarters personnel training, creation of a franchisee advisory council, internet communication tools, newsletters, and every other conceivable tool available.

A bad habit that I see franchise companies acquire is they are really good at “pushing” information out to the franchisees, but are not very good at “pulling’ feedback from them.

A very effective way of pulling information from your franchisees is to poll them once a year on your performance. As brutal as having your franchisees grade you may sound, this is an essential way of finding out the problem areas that need to be fine tuned or overhauled completely.

Some franchisors frequently poll their franchisees on singular items in their intranet system. While this gives good incremental anonymous feedback, it won’t provide you with comprehensive feedback like the annual report card poll. It does however; provide you with good feedback and shows that you care about your franchisees and their success.

Just remember, you can never over-communicate with your franchisees. To be a great franchisor, you must master this art.

Not having a great information system.
Not so long in the distant past, you could actually run a franchise brand without a sophisticated information system. Let me be the first to say that it is not possible any longer.

Today, you cannot compete or succeed as a franchisor in any category without knowing your store unit economics, system key performance indicators (KPI’s), franchise development/sales metrics, and corporate accounting metrics – period!

With current technology, it is even possible to do this live time with sophisticated dashboards giving you immediate vital signs. Unit economics are the life blood of the franchise system and franchisors must be able to react and help franchisees that are missing the mark quickly. Dashboards give you this ability.

Because of the importance of technology in franchising today, it has also become a very strong value proposition during the franchise sales process. If you have it, bring your franchise development team up to speed and flaunt it. If not, make the investment, as the ROI to the system is almost immediate.

Think about this for a minute… if you don’t get your technology act in gear, I can assure you that your competitors are.

In Summary

There are many mistakes and blunders that a new, emerging, or even a mature franchisor can make and I didn’t, or couldn’t list them all. But be assured; these are some of the biggest there are, and I hope this information is beneficial enough to keep you, or others you know from making any of them or help to identify them and make corrective action.

Building and growing a franchise system correctly takes significant commitment, discipline, and education. If you don’t do it right, it will be an expensive proposition for everyone involved.

Personally, I have found franchising to be a lifelong learning experience and very rewarding career. I have also found that there is no other business sector that shares information as readily as people in franchising do, so take advantage of that and build a circle of advisors that you can reach out to when you have questions.

Very early in my franchise days, a close friend of mine told me to “build my rolodex of contacts.” That was some of the best advice I have ever received and heeded from anyone. Over the years, I have reached out to my contacts many times when I had questions. As well, I have developed incredibly rewarding lifelong friendships with many of them.

If you find this information valuable, let me know. I am always excited to hear from my readers.

All company, product, and brand names mentioned are trademarks, registered trademarks and/or service marks of their respective owners.