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Forging a robust ROI in franchising

Written by Dave Galvin on Thursday, 14 June 2018. Posted in Analysis, Franchise

Peaks and troughs occur in all businesses but to get the best return on investment from your franchise, it’s important to understand the stages of a franchisee’s progression so that you can identify key opportunities and threats

Forging a robust ROI in franchising

At a recent franchisor meeting, I was reminded of a great book I once read about the franchise lifecycle. Like all businesses, franchises have a journey – stages of their development as they grow and progress. The franchisor I met was talking about a new and enthusiastic franchisee on board – full of hope and excitement that’s overflowing at the start of a fresh major venture. The franchisor had provided lots of support, reassurance and encouragement throughout the recruitment process and set-up procedures, further increasing the franchisee’s positive outlook.

Both parties were feeling confident and positive, enthusiastic about the journey ahead. 

The book my conversation reminded me of was The Franchise E-Factor, an excellent creation by Greg Nathan. Nathan discusses six distinct phases of a franchise’s journey – and some are definitely more productive and profitable than others.

The eager, motivated stage is what Nathan calls the glee phase – a point early in the franchise relationship. The franchisee and franchisor are optimistic, with faith in the new promises both have made. At this early stage, the franchise business model provides much-needed support and guidance for new franchisees, as well as providing established and successful operating systems, branding and marketing. A general rule of thumb of return on investment (ROI) in business is that a company will make a loss in year one, year two it’ll break even, year three and onwards profit will start to appear. I can’t tell you how many times I’ve seen franchisees, usually around the one-year mark, frustrated and fed up.

What does being in a franchise give me anyway?

This is usually when new franchisees are getting more of a handle on their business finances. A good chat and reflection about the benefits a franchise offers is helpful here. Think where you might be if you hadn’t had the advertising, the marketing, the operations, the support etc. We discuss the usual profitability of businesses in their first year and encourage them to look forwards – this was in the plan, your business will grow and develop. What do we need to do to make sure that increased profitability happens? What can the franchisor do to help you boost your ROI? Based on the results of this, franchisees then either track back into glee, grateful for what’s provided for them, or they can move forwards to the me stage.

One standout example of me stage in my experience was with a particularly successful franchisee. He had worked hard and done very well with his franchise for many years. So he was rightfully very proud of his achievements. He came to me confident and convinced he would be just as successful without the support of the franchise. Why should he stay in the franchise, paying royalties and obeying the rules of the operations manual, when it was his hard work and efforts alone that generated his business’s success? He didn’t need the franchise. He would take his staff, materials, vans and go it alone.

As a franchisor, this was time to sit with the franchisee and work out exactly what his fee gets him and whether he really would be better off going solo. We priced it all out – how much the website, branding, advertising, marketing, HR, payroll etc done would cost him if he set out alone. The price of the internal support particularly the business guidance and how much the key and national account work was worth to his business. I pointed out that he’d need to buy 18 new vans and would lose access to key contracts and guaranteed work. He could technically do it perhaps, he had the skills and staff but he had no work lined up, no clients and no reputation of his own. Then there was some serious competition and not just from us. Essentially his business would be an empty bucket. Yes, maybe he could make it work. But with the successful and profitable franchise he was running, would he actually be any better off doing so?

Competitive advantage

Breaking down the value added by the franchise in this way, he was able to see the franchise contributed far more to his success than he’d accounted for. He soon realised the 7% management fee he was paying was pennies compared to the cost equivalent of paying for it all himself. He realised the competitive benefits of the franchise network and the huge value of an established reputation.

Without a doubt, the best stage of a franchisee’s lifecycle with the best ROI by a long way is the we stage. At this stage, they are a franchise network’s greatest asset. They are established and profitable businesses, mature and commercially-minded, committed to the success of their business but also the success of the whole network. They understand the need to work together with their franchisor to make the most of their business and have useful suggestions and ideas to share, thinking not just about their own interests but also the bigger picture.

This is where a franchisee should aim and a franchisor should endeavour to help franchisees progress to. For the franchisor, delivering on obligations and appreciating specific needs and desires of franchisees is key to the strength and success of the entire group. For the franchisee, the most successful franchises are those that work with their franchise network and franchisor, not against them.

What stage of the franchise journey are you in – and which one are you aiming for? Mindset is half the battle. 

About the Author

Dave Galvin

Dave Galvin

The head of franchising and senior business advisor at d&t chartered accountants is sitting on a wealth of knowledge about the sector.

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