As an industry, the majority of franchisors in Canada stall out somewhere between 10 – 50 locations. There is one key ingredient to a successful franchise system, one thing that matters above all other items, it is a very simple ingredient – happy profitable franchisees. There are two participants in a franchise relationship, a franchisee and a franchisor. In this article, I’ll explore the lifecycle of that relationship and its impact on the development of the brand.
The life cycle of a new and emerging brand typically has a 5 – 7 year honeymoon period. During this time, a brand can grow at a substantial rate if the franchisor is well equipped to take on new franchisees and have a system set up allowing the new franchisees to open in a timely fashion. During this time period, a franchisee is typically happy and filled with the excitement of new beginnings. A franchisor is likely doing its utmost to help support the franchisee and give them the resources that are required as well as any additional resources that are being requested. The hard part is that not all the communication being shared between the franchisee and franchisor may be entirely transparent.
The first challenge can be that the franchisee thinks they are doing better than they actually are. One of the issues with being in a honeymoon period is that the excitement and enthusiasm that comes with it can cloud the reality of the situation. A franchisee will likely either hold back or not vocalize concerns about revenue, expenses, and other matters as they may be unaware of its impact long term. The franchisor carries on feeling confident in that the franchisee is happy without putting in the necessary checks and balances to ensure that what they are hearing is accurate. This is usually due to the franchisor being too small and lacking the resources to be able to look further into performance and compliance of the franchise agreement. The best indicator a franchisor has of poor performance is low sales and overspending on expenses. The challenge is that this information isn’t available for 4 – 6 weeks after a month is completed. Therefore, months of issues can go by being compounded without them being addressed. Once a franchisee becomes a poor performer and unhappy, that is where the real issue lays. Even with inspections held by regional managers and regular profit and loss statement submissions from the franchisees, franchisees can still hide sales to avoid paying more royalty and advertising fund which is typically based on a percentage of gross sales. This dishonesty, eventually impacts the relationship between the franchisor and franchisee.
The challenge now lies in if too many franchisees fall into the above lifespan and a franchisor finds themselves having somewhere between 10 – 50 locations with the 20% of them successful, 50% performing at average and 30% of them requiring turnover or closure. That 30% can form an albatross around the neck of the franchisor when it comes to growth. Instead of focusing on building the company they are distracted with turnover and closure issues. This 30% becomes an issue that leads to a vicious cycle. The franchisor’s growth simply becomes consumed by replacing closures and resales that are recurring within the system. It is also worth mentioning that this stagnation of growth also impacts validation when it comes to prospective franchisees, in a very negative way at that. High franchisee turnover, lack of franchise system growth, and a 30% margin of poor performers significantly impacts what a prospective buyer decides after performing their due diligence of the franchise. Further, some franchisors get stuck in the 10-50 location mark for over 30 years and can never surpass it. This lack of growth for a prolonged period of time, is also questionable to the bank when it comes to the future of the brand and potentially, their decision to finance candidates for the franchise.
Instead of being able to grow beyond their plateau, franchisors stay and work within the framework of 10 – 50 locations, typically within one province. The fear of failure and expansion starts to grip the franchisor and limit the ability to stretch beyond their own borders.
In the 1970’s, Ray Kroc, the owner of McDonald’s went to a franchisee convention with just over 100 franchised locations and said “We are going to build this chain into 1,000 stores in the next 10 years!”, the enthusiasm heard in the room was great as this seemed to be a fantastic goal. One of the franchisees had the courage to ask Ray “That sounds great Ray, how do you plan on doing that?” and Ray said “I’m going to make sure you each make enough money to buy 10 more locations!”
That type of visionary leadership and belief in a system is what the dream of franchise ownership is based on. The hard part is finding a franchisor that has the ability to see that future and build for it. In your journey to find a franchise, look for the historical performance of the franchise, while it’s no indication of future results, it is the best indication you have.
Author: Shawn Saraga and Alexandra Grudkin