Many of the young franchise systems we encounter approach us asking for advice about how they can ensure success for their brand and their franchisees. Throughout our experience in the franchise world, we’ve seen the top mistakes emerging franchisors make again and again. Luckily, we’ve also been around long enough to expertly advise you how to avoid them.
In the following article, we’ve compiled the most common mistakes of young brands and how you can steer your business in a different
The Mistake: Hiring the Wrong Talent
A common mistake that young franchisors make as they grow is to hire or promote people who are the wrong fit for the world of franchising. When emerging franchisors make this mistake they tend to either:
- Promote inexperienced talent with insufficient skills to succeed in their new role– often because the person has been there since the beginning or was in the individuals existing network of known professionals– or,
- They hire incredibly seasoned talent from long established, often enterprise businesses. The former won’t have the skills and sophistication you’ll need to competently guide you as you scale your business.
The latter will likely struggle with the sudden environmental shift from a stable, mature company with a dense hierarchical infrastructure to an emerging brand where daily priorities change and it’s often all-hands-on-deck.
How to Avoid it: Strategic Networking
As you grow, build your network of other franchising professionals so you have a group of peers that can be a sounding board as you make decisions regarding new hires, promotions, and other organizational changes.
Franchising, although having similar attributes to other businesses, is distinct in nature. An understanding of multi-unit economics, the regulatory landscape of franchising, and the nuances of the franchisee and franchisor relationship are paramount in franchising, especially at the leadership level. Rest assured that an entire article could be dedicated to this topic, including many horror stories of franchisors failing based on uninformed and bad opinions from CPAs, accounting firms, or attorneys who don’t understand that a UFOC no longer exists or how a franchisor’s recognized earnings in the FDD audit can drastically impact franchises sales. Overall, a professional degree does not equate to experience in franchising, so hiring the right way both internally and externally truly matters.
The Mistake: Expanding with the Wrong Partners in the Wrong Markets
Most brands start with a core market they know well and have had continued success in. Often, they’ll be steadily expanding and seeing good performance in a key metro area. But, the growth of the business and the need for cash are both high. Emerging franchisors have a high need for early revenue that tends to come from franchising fees as they aren’t established enough yet to rely on royalty fees. The pace of growth coupled with that need for cash can cause young concepts to rush into markets with partners they haven’t fully vetted.
So, while it’s time to expand and adding another unit in a new market is likely right for the brand, too often that brand will go with a market and partner they know too little about. A brand with an established presence in the D.C. area market, for example, might suddenly add their next location in Houston, TX. And while Houston could make a lot of sense on paper, the reality is they’re moving into a market without brand awareness or heavy franchise support. More often than not, that franchisee will struggle, fail to perform and ultimately, close. Not only is this a loss to your bottom line, but this failure has a negative impact to your entire brand that you now have to overcome.
How to Avoid It: Find a Well-Capitalized Partner in a Contiguous Market
Look for a well-capitalized partner in a contiguous market. A partner able to provide a high capital investment will be better able to weather any bumps in the road that come with young concept expansion. A contiguous market ensures a close line of franchise support and an easier time of establishing a brand presence. Be patient. The larger market expansions will come.
The Mistake: Not Mandating Uniformity of Systems, Processes and Reporting
A hallmark of any great franchise can boil down to one word: consistency. Beyond a consistent brand experience, a consistent operations experience built on uniformity of systems, efficiencies, procedures, and processes will help ensure your success.
Too often, young brands either underestimate the importance of uniformity as they scale, or they rely on people instead of manuals to be the core source of process communication. To help understand the potential impact disparate systems can have on a brand, consider the common mistake of not requiring a single point of sale (POS) system.
Allowing different POS systems requires additional resources and manpower for your existing staff to access, track, and report on results. Young brands are always stretched thin on labor – why make this a pressure point? Different variations of POS systems also make collecting royalties via ACH difficult and cumbersome. As the franchisor, you likely cannot have one master login across all these systems to pull sales data and collect ACH payments. Would you allow a franchisee to change your logo or the recipe of your brand? Obviously not. Why allow them to make decisions regarding the POS system that can have an equally devastating impact on their and your financial livelihood as your signature hot sauce recipe?
A similar headache-saver is requiring a uniform chart of accounts (COA). Many companies who do not mandate this discipline have, at worst, experienced royalty fraud and, at a minimum, spent excessive time creating comparable financial statements between franchisees. It also causes difficulties with preparing a robust and accurate Item 19 for their FDD. A uniform chart of accounts ensures comparable financial data from unit to unit. Although coding errors can occur despite this, it is much more likely to be able to accurately report and analyze P&L data, reduce the risk of royalty fraud, and to have confidence in financial metrics reported in the Item 19 of your FDD.
How to Avoid It: Transfer Knowledge from Individuals to Manuals
It’s typical to have people wearing multiple hats across functions of an operation when you’re a young franchisor. T breakdown of uniformity of systems and processes often occurs when an official policy or guide isn’t in place and is instead reliant on an individual or team communicating the expectations to your partners. Bottom line: transfer the knowledge base from people to manuals. In addition to helping you ensure that key operational consistency, manuals provide the added benefits of:
- Relieves the franchisor from the bulk of the training burden. This will become even more important as you scale and your key players and teams find themselves with reduced bandwidth. They won’t be able to onboard new partners in the same way they did with those early units the bigger your franchise gets. Plus, as questions arise or finer points require clarification, the franchisee can now first consult a manual before inundating the franchisor with emails and calls.
- Creates a clear path for process improvement. Onceyou put your requirements into manuals, it becomes easier to evaluate gaps in your processes or identify areas for refinement. It’s simpler to evolve an existing document than it is to make institutional changes to the way “Bob from corporate told me to do it.
- Establishes Expectations & The Foundation for a Strong Franchisee Relationship. Having processes, systems and reporting expectations in writing formalizes them and clearly communicates that they are required expectations and not passing recommendations. Clear expectations will set your company and your franchisees up for success in addition to helping you create a stronger relationship with your franchisees. Bad habits start early. If you don’t institute a level of rigor from the first month forward, many franchisees will not prioritize adherence to process and reporting.
The Mistake: (A Bad) Location, Location, Location
Even choosing a strong contiguous market isn’t a guarantee for a new unit’s success. You can have planned expansion with the right partners in the right markets, but still make the wrong real estate decision.
New franchisors often lack the funds to purchase a big mapping software that more established businesses use to vet new locations. The mistake comes in when they allow this limitation to block them from making real estate decisions with any vetting at all. Because we all know, in business, success is all about location, location, location. The wrong location can drag the site down and negatively impact the entire brand right alongside it. Newer concepts don’t have enough excess brand equity to take these kinds of avoidable hits.
How to Avoid It: Get Scrappy with the Data
Even if you don’t have resources to invest in software or pre-packaged data sets, you can use what you do have at your disposal to create site criteria models. Use your partners, franchisees, traffic counts, co-tenancy information, population density maps– whatever you can get your hands on– to help you make a decision backed by some information.
This will become the basis for your site criteria model. A model by which you’ll eventually evaluate the investment value of all locations you’re considering for expansion. Just like building out manuals, building out this model will bolster your long-term success by creating a baseline from which you can evolve. You can identify trends of what criteria becomes the biggest predictor in your location’s success. You can fine tune the criteria as more locations open and they each get longer operating times under their belts. Suddenly, this bootstrapped data set has more relevance and proof points of success. And soon, you’ll be successful enough that you can afford those bigger software budgets and fancier data sets.
Of course, starting any new business comes with a multitude of pitfalls and challenges. Many of which you can’t predict or plan for until you’re in the midst of them.
However, setting up the foundational structures of team, process, and appropriate growth plans can help set your emerging brand up for success and avoid the most common mistakes we see young franchisors make.
Still need help navigating those entrepreneurial waters? We’re here to help. Contact OnePoint Franchise Accounting for better books and constant, 360 degree insight into your business’s financial performance.