7 Biggest Challenges to Growing a Franchise System
By Sara Wilson,
as printed on: AllBusiness.com
Entrepreneurs share many things in common. They’re risk takers, they aren’t lacking in ideas, and they dream big. They strive to conquer unknown territory via national – even global – expansion and often turn to franchising to do so. However, with new franchise concepts popping up constantly, not all are destined to succeed, and even franchisors – despite their bold fearlessness – aren’t always able to overcome the hurdles that come with building a franchise.
We asked Kim Ellis, Senior Consultant with MSA Worldwide and Christian Faulconer, CEO of the Franchise Foundry, for their list of the top challenges that can stop even the boldest of entrepreneurs in their tracks. Are you ready to overcome them?
1. Having Sufficient Capital. Many businesses fail due to under capitalization, and the same is true for new franchises. “This is usually a challenge in the first year since the cost of creating the franchise system and the cost of supporting new franchisees usually exceed royalty revenues and franchise fees in the beginning,” says Faulconer.
Ellis credits the problem to new franchisors underestimating the amount of capital needed to get the franchise to the point where it’s self-sustaining. She warns new franchisors to have enough capital to cover building an infrastructure to support incoming franchisees in sectors including operations, marketing, administrative, and accounting, and to develop a franchise sales program that includes staff and lead generation. “Typically, it will take at least 20 profitable [franchise] units to begin generating enough royalty to support the franchise structure,” says Ellis. “It could take a couple of years to reach that point. In the meantime, the franchisor must be able to self-fund the business.”
2. Building a Solid Infrastructure. Systems, procedures, and support form the backbone of a franchise, yet these issues are not always at the top of the priority list for new franchisors. “Growing before you have your systems and processes figured out means that you can't provide the support that your franchisees need,” says Faulconer. “A good way to measure your success is the profitability of your corporate operations. I am always surprised at the number of people who think they are ready to franchise a business that is losing money at its corporate stores. If you can't make money at it, it will be hard to train a franchisee to be successful.”
In order to build a solid infrastructure, Ellis advises new franchisors to conduct an analysis of the systems, processes, procedures, and support they currently have and what they will require to support franchisees. In addition, “franchisors will likely need to add operational support and training staff, technology, marketing, and administrative support to their internal team,” she says. “They need to consider their strategy for adding franchisees. [For example], if they add franchisees [located] close to their corporate office, the cost to support those franchisees is less than if they add franchisees across the country. Doing a proper gap analysis at the outset will help the franchisor identify the needs associated with becoming a franchisor.”
3. Bringing the Right Franchisees on Board. The long-term success of your franchise will depend largely on the quality of your franchisees. The challenge is finding the right people with the right qualifications. “Many emerging franchisors award franchises to friends and family in their early stages in an effort to grow the business,” says Faulconer. “While this may work in some cases, in most cases your friends and family are not the most qualified franchisees.”
Finding the right franchisees often becomes a money issue. “Today, finding qualified candidates who are interested and willing to invest in becoming a franchisee is more difficult than ever before,” says Ellis. “There are more franchise systems and other types of financial opportunities that complete for investment dollars. According to Franchise Update Magazine, the average cost to recruit one franchisee in 2010 was $13,019. That means franchisors that want to add 20 new franchisees must expect to invest $260,380.”
4. Building Solid Relationships. Finding the right franchisees is just the first step. Next, you have to invest time to nurture a positive relationship with them. “The franchisor needs to recognize that the relationship they build with their franchisees is the key to their long-term success,” says Ellis. “If the franchisor just keeps in mind that they need to treat franchisees as they would want to be treated and always do the right thing by them, they will reap happy, successful franchisees. Franchisors that are only in it to make money will end up with unhappy franchisees. Without the franchisees’ validation, it is tough to add new franchisees. If things get really bad, franchisors could face costly legal issues [from dissatisfied franchisees].”
5. Bringing the Right Staff on Board. “Awarding franchises to the right people is critical, but so is hiring the right people,” says Faulconer. “As an emerging franchisor, it is likely that franchisees will interact with every person in your company at some level. Your employees need to reflect the brand and represent the company's core values. ‘Hire slow, fire fast’ are words to live by.”
6. Understanding Your Role as Franchisor. In order to be a successful franchisor, you need to understand your role. “Running a business is a different role than running a franchise,” says Ellis. “A business owner is focused on the performance of the business, staffing, and expense control. The franchisor is focused on adding, training, and supporting franchisees. Making the shift from business owner to franchisor is often a critical step for the success of the franchise business.”
7. Finding the Right Time. So much in life is about timing -- and it’s no different with a franchise. Faulconer cautions against waiting too long to launch your franchise. “While it is important to nail down the processes and systems, it is also important to recognize that you will have to continue to adapt the system to meet the changing market,” he says. “Your system should always be looking for ways to improve; thus, it is never ‘done.’ If you wait until things are perfect to grow, you may end up missing the market opportunity.”
So what can you do to set yourself up for success? “Lining up proper financing and the right team are critical,” says Faulconer. “If you are properly funded, you are more likely to make good decisions. You are more likely to award franchises to well-qualified individuals and you are more likely to hire the best person for the job. You also have the funds that you need to work through your systems and processes without feeling the need to award franchises prematurely. It's also a good idea to line up a strong board of advisors. Having people on your side who have ‘been there, done that’ is a great competitive advantage.”
And if the going gets tough, remember that you don’t have to go it alone. “Using a qualified franchise consultant is a great step,” says Ellis. “They can help establish a solid strategy that becomes the foundation for the business. They will conduct a gap analysis and develop initiatives and recommendations to help you transition successfully from business owner to franchisor.”