Franchisors must ensure budding franchisees have the financial muscles to transition into franchising
In franchising we often talk about the life-changing decisions franchisees make. By joining a franchise, entrepreneurs can become business owners with the support and guidance of a franchisor. At the same time, the franchisor benefits from the franchisee’s passion and enthusiasm. All in all, it’s a win-win. However, the commercial reality behind this business utopia is that the finances of the relationship should always be the first consideration. Remember that many marriages end because of money issues.
Even though franchises have a remarkable success rate, they do fail. And the principal reason is undercapitalisation. It may sound obvious but it’s important that franchisors are certain that prospective franchisees understand how much money they’re going to need. Take a moment to consider how deep you need to delve into this subject during your recruitment process. Think about what you as a franchisor do to support and protect the financial interests of your prospects and yourself.
It all comes down to two things: a franchisor’s understanding and openness about the funding requirements of their business and the financial position of the franchisee.
Franchisors have the knowledge of the financial requirements and performance of the business itself or the franchised businesses in their network. They’re uniquely positioned to provide indicative financial projections to prospects. Instead of the financial element of the franchisee’s business plan being a finger in the air, it should be based on the franchisor’s performance or the average of other franchisees’. Franchisors who shy away from discussing the funding requirements of their business through fear of discouraging prospects are not only unethical, they’re downright foolish. The result of doing so will be a stressful, unhealthy relationship and the very real possibility of a failure in the network, which isn’t worth the risk.
Additionally, franchisors must understand the franchisee’s financial position. Being able to afford the initial fees to cover things like territory, vehicles, training and stock is simply not enough. Moreover, franchisees must also have enough working capital to support the business and themselves until the investment starts to bring a return. Their financial muscles must enable them to deviate from the plan if they must and do more than barely scrape through. It’s a franchisor’s duty to ensure franchisees have some financial breathing space before they sign on the dotted line.
When it comes to supporting franchisees through the funding process, we should remember that for many the costs of starting a business are second only in life to buying a house. Most people only fund a business once or twice so it’s always going to be daunting. That’s why good franchisors build relationships with the franchise departments of the main clearing banks. The bank’s knowledge of the brand and other franchisees that it has funded can help to move things along for your franchisees. If you haven’t already got them, start working on those valuable relationships today.
Ethical franchisors will only make a return on the relationship when the franchisee is successful. If a franchisor allows an underfunded franchisee to proceed then quite simply, they will never see the returns from the franchisee’s success.
Even in these early stages, franchising is about sharing details. A franchisor must be prepared to give a financial illustration and show franchisees the way. Franchisees must be ready to show the franchisor exactly what they can afford and how they plan to fund the business – both with total honesty. The financials are serious so whenever you approach a prospective franchisee, you should remember Cuba Gooding Jr’s character from Jerry Maguire and think “show me the money”.