Surviving as a Franchise System in 2020 and Beyond

Harness the internal resources of your franchisee network

In 1936, British author Aldous Huxley wrote his ultra-futuristic book, Brave New World. In it, Huxley describes a globalised society where the population is forcibly nurtured into a dangerously complacent state of contentment, conformity and conspicuous consumption. What happens to this society when an outsider enters and threatens their orderly existence then becomes the focus of the story.

Fast forward to 2020. In Australian and in many other ‘advanced’ societies, economic order and social contentment is being abruptly and rudely shaken with the arrival of an outsider – a threat in the form of a new virus that completely and deeply shatters the status quo.  

In both stories, there are winners and losers. The losers are those who fail to adapt to new conditions and states of reality, either through stunned disbelief, or refusal to accept that to continue they must do things differently.

Now, bringing this scenario into the here-and-now, and specifically into the world of franchising and business, let’s consider what’s at stake here and what you can do about it.

Whether you are a franchisor or a franchisee, your business model, and hence your livelihood is dependent on a highly refined set of rules and ways of doing things. But when external forces threaten to overturn the very foundations of those rules and practices, how are you going to survive? The answer is to change and adapt. And changing and adapting in many franchising systems may be easier and less costly than you might imagine.

Franchisors are actually in a rather unique position to change and adapt – more so than many other business system models. As a franchisor, inside your organisation you have a network of franchisees who represent a significant internal pool of talent, experience and knowledge. Your franchisees comprise owner-operators with a vested interest in making their individual business work profitably. These franchisees are not willingly going to just quit and hold out their hand for a short-term government support package, like employees in another business model. They have their entire future invested in their own business. They also have the best, most complete knowledge about who their customer is, what their customer wants, their likes and dislikes and how best to communicate with their customers.

So, when (sorry, I should say, now) the very future of established customer interaction is threatened, through lockdowns, empty shops and shopping malls, restricted movements and heightened fear and frustration, who best to come up with alternative strategies? Your own franchisees, of course.

If, for example, you see the future as moving from shopfront to on-line, or say, replacing socialised hospitality with packaged food deliveries, or shifting your B2B in-person response services to an App-based Help Desk, or any other scenario relevant to your business, then the starting point should be your own people – your motivated, knowledgeable franchisees.

Other companies in other industries may have to invest considerable capital to buy-in or hire specialised solutions to shift from the old to the new ways of doing business. But the franchisor who appreciates the in-house value of its own people will be in a much better position to come up with new ideas, find new solutions, change from one method of selling to another, or try out new products and services.  And will be able to do so much faster and at much lower cost than a competitor who is caught with an inflexible, inefficient and costly business model and is reluctantly facing an adapt-or-die future with few or no solutions.

Now, this is not to suggest that a transition from old ways to new will not be without cost or upheaval. Yes, you cannot just move out of retail shopfronts to on-line as if there are no barriers or costs, like premises leases, for example. But the organisation that is able to harness the power of its own internal resources, the intellectual capital and experience of its motivated franchisee network, will be in a much better position to still be in business as we enter the brave new world of 2021 and beyond.

If you would like to discuss how you can harness the internal resources of your network of franchisees, how to rejuvenate your existing franchise model or get advice from industry specialists on new business models for your franchise, contact us at WFD for a free, no-obligation initial consultation.

As a business expansion strategy, franchising provides many benefits to both the franchising company and the individual franchisees. The benefits to the franchisees are well documented in nearly all franchise marketing including franchisor websites, franchise recruitment advertising and editorial discussion in the various media.

Less well understood are benefits to the franchisor. As the decision to embark on franchised expansion takes some time to formulate, it is worth revisiting these benefits. A strategy of franchised expansion is always a major commitment for any company and franchising is not something you can half-do or adopt a “try it and see” approach.

So, let’s elaborate the most common reasons why franchising can be such a powerful strategy for reaching a long-term expansion objective for a franchisor.

1. Investment by franchisees

The Franchisee puts up the money to set-up and operate their franchised outlet or territory.

Typically, this includes plant & equipment, stock, premises, working capital; plus:

An initial Franchise Fee which covers the cost of recruitment and provides some initial profit to the franchisor.

Therefore, expansion for the Franchisor does not require a huge capital outlay.

The franchisor can open up new outlets and territories very quickly by using the franchisee’s money.

It is best to expand in multiples to maximise efficiencies and to reach a critical mass as early as possible.

In many cases, it costs no more to set up 5 or 10 franchises than it does for just 1 or 2.

By franchising, a franchisor can easily access markets a long way from home base or home city.

This makes franchising ideal for interstate and international expansion.

A franchisee has his or her own money invested in their franchise, therefore they are highly motivated to make it work.

Ownership always achieves a better result than having a manager and staff operate each outlet or territory.

5.  Local knowledge

A franchisee is a local in their local market. As such, they can build a client base far better than a company operating a remote branch outlet.

A franchisee’s local knowledge includes being part of their local community.

Local knowledge become critically important for international expansion where customs, culture and language are often very different from the franchisor’s home country or city.

Each party does what they are best suited to.

The franchisor takes a global or macro view and builds the brand profile, while providing support to the franchisee network.

The franchisee has a local perspective, runs the day-to-day operations and is responsible for performance of one business unit.

7.  Profitability

Franchising is a different business model to full company ownership of distribution channels and requires a different mind set by a franchisor.

Royalties and Franchise Fees replace outlet bottom-line (which is franchisee’s profit).

Product sales are at wholesale to the franchisee therefore the franchisor needs to build a network of multiple outlets/operators ideally all buying from the franchisor.

Franchisor’s profits come from expansion of the network, not selling directly to the end customer.

It is this duality of roles that makes franchising so effective. It’s a business relationship in which each party does what they do best. For a franchisor, it is about building a network, and with this focus and commitment, franchising can deliver significant benefits to a company that are simply not available by alternate, or traditional, means.

Prime Minister Scott Morrison announced a six month moratorium on evictions in relation to commercial and residential tenancies, where it arises from financial hardship related to COVID -19.

There were no other prescriptive measures or directives other than landlords and tenants should communicate and reach an agreement whether it be for a suspension of rent or abatement of a part or all of the rent.

If your business has been ordered to shut down then, of course, you have no option to do so.

If you have a private landlord or an agent acting for a landlord contact them and confirm you are no longer able to trade.

A call is fine but follow it up in writing (an email is fine) to confirm that is the case.

Ask them for an abatement of rent while you are unable to trade.

An abatement means a reduction of the rent either fully or partially and that the Landlord cannot then later come back to you and ask for that rent to be paid.

A suspension of rent or deferring rent (not a tenant’s preferred option) means you are still liable to pay that rent once the suspension if over so it remains a liability you will have to meet, and the issue is how will that be paid.

A landlord could then at a later stage claim it against the security deposit or bank guarantee so be clear and careful as to what relief you are seeking and what is agreed!

Shopping centre managers will likely try to have you agree to a suspension or deferment- don’t agree to this.

If a landlord or shopping centre management asks you to sign any document whether a letter, authority, acknowledgement be careful and get advice before you sign it, as you may be locking yourself into a long term more difficult position.

We know that some centre’s and landlords are still sending invoices to retail tenants for next month’s rent showing no sign of support whatsoever.

The six month moratorium is on evicting tenant’s it does not address the issue that you are still liable for the rent unpaid.

The Government has not directed that landlords must reduce or hold payment of rents.

The best thing is to have open and immediate communication with the landlord or the agent politely and professionally but ensure it is in writing.

A temporary closure would not usually involve your removing your stock and vacating the premises.

If you remove your stock fixtures and fittings that would be an indication you have abandoned your lease and puts you in breach.

The landlord may then accept your action and decide to terminate the lease or keep the lease on foot and continue to claim rent.

This places your security deposit or bank guarantee at risk and also enables the landlord to claim for refit fees, loss or rent and other damages.

If closing the store place, a note on the window for customers "temporary closure due to Government direction and Coronavirus”.

Then take a photo of the front of the store with your stock and the sign - Why? It shows you have not abandoned the premises but only temporarily closed.

Can I rely on the Force Majeure clause in your lease?

The answer, in short, is no.

Also, it is unlikely a tenant can rely on the doctrine of frustration to end the lease and who has the time and money to go to court to seek an order anyway?

It is a matter of communicating and reaching an agreement with your landlord.

Be transparent and provide any supporting information the Landlord or agent may reasonably require.

Wollermann Franchise Developments is a relatively new arm to the Wollermann organization, but we have engaged a highly experienced team of people with over 30 years’ experience in the development of new franchise systems, and the sale of existing franchised businesses.

Whilst franchising is not for everybody, buying an existing franchise can often eliminate much of the hard work for an individual wanting to get into business for themselves, and through franchising, we can provide you with the tools to turn your existing successful business into something a lot bigger and more financially rewarding.

A successful franchise needs to recruit the right people to grow their network. In our opinion, the right person is someone that best embraces the culture and group mentality of the brand that they have decided to represent. A franchisee is part of the brand.

At Wollermann Franchise Developments, we are passionate about what we do, we love getting the best result possible for our clients, but also get excited about helping buyers establish themselves in a business, most of those for the first time.

Personally, I have devoted over 40 years of my life to business, and have always worked as long as it takes to get the job done.  That doesn’t mean I work 24/7, I make the time to enjoy family and friends, I keep fit and devote as much time as I can to community service.

I invite you to give me, or any of our team a call for a no obligation chat.

Franchisors and franchisees selling an existing business need to be aware that a revised Section 52 statement will be required to be produced from the 2 May 2018. The new rules apply to existing businesses being sold for $450,000 or less, except if they have a liquor licence. This is a change from the previous upper limit of $350,000.

If the Section 52 Statement is not given to a potential purchaser or is incomplete the purchaser may avoid the contract of sale and be entitled to a full refund of any moneys paid.

Section 52 statements are required to be signed by the vendor and their accountant. For further information contact Ian Wollermann at WFD on (03) 9999 5488

Some franchisors have lost the plot and forgotten that their franchisees are their customer, not the end consumer.

Keeping a group of franchisees happy is pretty simple and just makes good business sense.  Recognising that franchisees are the franchisor’s customer, a franchisor should focus on these three crucial components:

1. Providing services that assist the franchisee to run their business. This can be an IT system, ongoing training, preparing financial reports, through to product development and supervisor support – things that a franchisee cannot easily do themselves when their daily attention is running their own business.

2. Developing and implementing a marketing strategy for the group including brand development and local area marketing for individual franchisees.  Marketing is always best implemented by the franchisor as the party with the broader group perspective and with the resources to devote to professional marketing.

3. Franchisees need to be able to ‘buy better’ than what they could negotiate themselves for goods and services required to operate their franchisee. For example, this includes the flour for a baker, coffee for a franchisee’s customers through to a mower for a lawn-mowing franchisee.

All this might sound simple and obvious, but they are at the core of why some well-established franchisee groups are going back to basics with the aim of looking after their franchisees.  

These three components assist the franchisee to operate a profitable business. If a franchisor keeps these principles in mind when managing their network of franchisees, they will continue to have HAPPY franchisees on an ongoing basis. For further information contact Colin Crawford on 0425 838 800.

It is not uncommon for franchisors to simply divide up a city or state into blocks or districts as the basis of territories for franchisees, with little or no regard for the demographic composition of each of these territories. This approach can be fraught with problems for both parties down the track.

In any business, franchised or independent, the business owner really needs to know who his customer is, where they live or work and how likely they are to access the business as a customer.

Without this basic understanding, the business is really flying blind in attempting to promote and attract customers.

From a franchising perspective, a franchisor should at the very least, undertake some demographic research of the area surrounding a proposed new franchise territory. This research should be undertaken in the context of what the business is selling, in order to know how many potential customers it can attract, where they will come from and what their likely preferences are.

For example, a pet-care business should be located in a territory comprising a high percentage of households that have pets, or a food service business should be situated in a territory with a population who will find the menu appealing.

For a franchisee, buying a franchise in a territory that is based on solid demographic and socio-economic data, will provide confidence that they will have a good foundation on which to build up their business.

Research-based territory planning also protects the franchisor in the event of a dispute with a franchisee where the franchisee asserts that they were sold a franchise that turns out to be “under-performing”. If the franchisor can show that the territory has been determined based on statistical research into the composition of its local population, is a reasonable distance from other franchisees of the same brand and with consideration given to the proximity of competition, then the franchisor will be less likely to fall foul of its obligations to appoint franchisees in territories that will support a franchised outlet.

Good territory pre-planning is just good franchising practice. It should become one of the elements that goes to support franchisees who, after all, are buying into a franchise based on the experience, credentials and knowledge of the franchisor, who has “been there, done that” for them.

Should I use Master Franchising to expand my business interstate or overseas?

Firstly, let’s consider the role of a Master Franchisee. The master franchisee’s role is to actively recruit and then manage franchisees in their region. Typically, a region is a state or country geographically separate from the home turf of the franchisor.

Master franchisees provide a local presence where a franchisor would find it difficult to effectively recruit and support local-area franchisees.

For their role as “intermediaries” between the franchisor and local-area franchisees, the master franchisee is remunerated with a share of the franchisor’s revenue streams. That is, the initial franchise fees and the ongoing royalties.

So, the first question to ask is: Can my franchise fee structure support paying a master franchisee in exchange for them providing local area services? If the answer is Yes, then the next steps are to define exactly what a master franchisee is required to do (i.e. set some goals and targets), what resources you will need to provide to the master franchisee so that they can operate effectively and how you intend to share franchisee support activities. For example, what role will a master franchisee play in local-area marketing for franchisees and how is this to be delivered to franchisees by the master franchisee?

In effect, a master franchisee becomes the franchisor in their region and takes on all the roles and responsibilities of the franchisor. So, selecting the right master franchisee is critically important. The master franchisee must share the franchisor’s vision and commitment to the business and the brand and demonstrate a capability to grow the franchisor’s business in their regional territory in complete harmony with the objectives of the franchisor.

There’s much to consider before simply assuming that the best way to develop and support a region remote from head office is to delegate to a master franchisee.

Master franchising can and does work where the careful preliminary considerations are well thought out and where the 3-way association of franchisor, master franchisee and franchisee is made a “win-win” for all parties.