IT DOESN'T HAPPEN OVERNIGHT, IT TAKES A LOT OF WORK
Author: John Wasiliev
Date: 11/02/2006
Words: 726
Source: AFR

Publication: The Financial Review
Section: Smart Money
Page: 37


Over the past couple of years there has been a growing emphasis in franchising on the commercial side of the business.

The shift contrasts with the main focus seven or eight years ago on creating better and more honest relationships between franchisors and franchisees. This flowed from the franchising code of conduct introduced in 1998 to stamp out opportunistic practices by some franchisors.

David Campbell, of Avatar Business Navigators, was heavily involved in the then Franchise Association of Australia, which is now the Franchise Council of Australia.

Campbell says the new emphasis will be illustrated at an FCA conference to be held in Brisbane in May. The theme of the conference will be the viability of the franchise industry.

"It's one thing to say that franchisees must make money from franchising, but if the franchisor is not making money then nor will the franchisee," he says.

Franchise Systems Group consultant Bill Lockett helps franchisors establish their businesses and says that as franchising continues to develop, the variability of franchise groups increases.

"In many franchise businesses there are a lot of average performers in the middle with some top performers at one end and poor performers at the other," he says. This contrasts with benchmarks that suggest a franchisee should be looking at a net profit of 10 to 15 per cent as well as a return on invested capital of between 25 and 35 per cent as a minimum.

Where a franchisee is earning significantly less than these benchmarks, he or she is likely to be unhappy. Franchising is not about buying a job. It's investing in the business to create an income as well as grow your capital, he says. It's the responsibility of franchisors to ensure this happens.

Campbell says that prior to the franchising code of conduct, the franchising industry suffered from the activities of opportunists who were often less than frank about what they offered. Now that these times have changed, the focus is turning to a more commercial relationship.

A major challenge for franchisors is managing the expectations of franchisees. Research has highlighted often quite wide variations in the businesses being run by different franchisees. There can sometimes be as much as a 30 per cent spread in gross margins earned by different outlets and up to a 40 per cent spread in operating costs.

"The big question you have to ask is how this can be in a franchise group that is selling the same products or services into the same market," says Campbell.

In addition, up to 10 per cent of franchisees find themselves in businesses that are simply not going to make it. Campbell says the old strategy among franchisors was to put these franchisees under a blanket and try to forget about them or hope they would go away. But they are the franchisees who are most likely to create future problems.

Campbell says a smart franchisor will never ignore a poorly performing franchisee.

The best strategy is to migrate them up into the system by helping them make decisions that should improve their business, he says.

Having performance benchmarks is one solution.

"You need to be able to point out to them using numbers that if they don't improve their situation they will erode the equity value of their business," Campbell says.

They will also put the security that they offered to acquire the business at risk. While a franchisee might argue that they are trying their hardest, it's hard to dispute numbers that show they are underperforming.

Campbell says it is important that franchisors take their role seriously.

While they play an active function in promoting the business to new franchisees, few franchisors see themselves as a business coach.

"I think the market is now moving to a point where some coaching is expected of franchisors," he says.

"This can be achieved by using the performance of the more successful franchisees to encourage a change in behaviour or approach among those who are lagging."

Campbell says many established franchisors don't fully utilise the information provided to them by franchisees. Furthermore, franchisees can be reluctant to provide all the details of what is happening.

However, if a franchise business is falling behind, a franchisor almost has a duty to do something about it.

Having franchisees that fail or perform poorly is not a good thing for a franchisor. It's bad for the overall business.