By definition, an emotionally charged buyer is someone who makes a buying decision based on feeling rather than rationale and reality.  This creates fertile ground for a misalignment of expectations; the consequences of which are typically dire in franchising.  But why is franchising different?

Well, in scenarios where you may be selling goods and/or services and the buyer and seller are independent of each other once the transaction is complete the consequences are not as severe.

As an example, if I visit a car dealership and see a shiny, new, red, foreign sports car I might envision myself sitting behind the wheel, driving around, and being the center of attention.  It smells new, it looks new, and it handles great.  I could easily romanticize about all the joy this car will bring me, and it’s this type of emotion that will be easily picked up on and played by the car salesman.  Despite the high cost of ownership including the premium gas, insurance, expensive maintenance, not to mention the price tag – I can probably talk myself into buying it.  However, in a few weeks the newness will wear off and I’ll find that nobody was as impressed with it as I thought they would be.  I didn’t achieve all of the joy that I had envisioned that day while standing on the lot and now the reality of the gas, insurance, maintenance, and first loan payment has sunk in.  I still like my car but I can see that my expectations were not realistic due to my emotions.  I rushed the decision a bit, but perhaps I’ll sell it or just leave it in the garage.

The good news for the car dealer is that they aren’t relying on me to drive the car every day or to maintain it.  What I decide to do with the car after the sale is made has no impact on the dealer’s business.  A car dealer wants you to be an emotional buyer.  They want you to create an emotional bond with the car, fall in love with it, romanticize about how great it will be to have it.  Because a rational approach would require studying the total cost of ownership and being realistic about what you’re really getting and therefore you might not buy it.

In a franchising business model the seller (franchisor) is dependent on the buyer (franchisee) after the transaction.  This dependency creates a completely different relationship dynamic than a typical B2B or B2C transaction.  A franchisee who wants to sell their business soon after opening, or one who quickly becomes overwhelmed with the realities of operating a business and underwhelmed with the fruits of owning it is not an optimal situation.  If too many of these misaligned relationships occur during the growth phase of a franchisor’s life cycle the cost of unwinding them, in both financial and human resources, could easily drain the franchisor thus pulling the focus away from new opportunities and setting the sights on extinguishing fires.
The bottom line is that if your franchise sales process is primarily designed to create an emotional engagement with the candidate (especially those who have never owned/operated a business), without doing a thorough job of ensuring that expectations are aligned, then you are most likely setting the stage for long-term failure.  You will win the battle of selling franchises but lose the war of building a sustainable, healthy, franchise system.

Investing the time to create a sales process built around understanding your prospective franchisee’s expectations and criteria, instead of trying to create an emotionally charged buyer, is a step in the right direction toward longer-term success.

As always, I look forward to your feedback and comments.

1. Lack of consistent business processes in all areas including franchise sales, pre-opening, operations, and franchise administration.
2. Lack of IT infrastructure that enables the organization to manage their business processes.
3. Lack of analytics/reporting tools that enable management to benefit from business intelligence, or monitor and improve the business.

This is an excerpt from a typical conversation…

Us: “Can you briefly walk us through your franchise sales process.”

Franchise Exec: “Sure, we receive our leads through various portals or from our corporate website. The leads are emailed to a sales person (or our sales team) then entered into a spreadsheet.”

Us: “Ok, then what?”

Franchise Exec: “Then the salesperson follows up with the lead to see if they’re qualified and if so we send them an application to be completed.”

Us: “I see. What happens next?”

Franchise Exec: “If the application is returned, we review it to see if the prospect meets our initial requirements. If so, we send them a copy of the FDD, then we’ll invite them to our corporate office for a Discovery Day.”

Us: “What happens after the corporate office visit?”

Franchise Exec: “Well, we just follow up and answer any further questions; discuss the FDD; possibly refer a financing contact. You know, work on getting the agreement signed.”

Us: “Sounds easy enough. So, what’s the problem?”

This is where the conversation usually gets interesting and I say that for this reason – most folks begin to identify their symptoms, not their problems.

“We need to generate more leads.” Symptom.

“We are not meeting our goal for number of franchises awarded.” Symptom.

“We are not able to award franchises in the markets that we want.” Symptom.

“I don’t know what my sales team is doing on a daily basis.” Getting warmer, but still a Symptom.

Now, we could list symptoms for days. But the truth is that until the underlying problem is identified it cannot be solved. I would encourage you to begin working to identify the problems that are the root causes of your symptoms. Try starting with the problem breakdown that I listed above to see if this fits your organization.

As always, I would welcome your feedback.

But is it possible that the managers citing this lack of confidence are putting a new face on the old “not invented here” mentality? Many companies using “closed” models for innovation have long used it as a defense to maintaining their internal staffs and large R&D budgets. P&G and others are showing the true power of open innovation models in the market today. When speaking with most franchise industry people, and there are some exceptions out there, most of their views represent the closed model. If it doesn’t fit their view of the world, mostly based on quarter century old paradigms, then it won’t fly.

So what are the other potential barriers to innovation? Strategos, Gary Hamel’s consulting firm, released a survey with senior executives in 2004 on the key barriers to effective innovation. Some interesting statistics in that study regarding the top factors cited as barriers…

• Short term focus/ focus on operations (63%)
• Lack of time, resources or staff (52%)
• Lack of systematic innovation process (33%)
• Leadership expects payoff sooner than is expected (31%)
• Management incentives not structured to reward innovation (31%)

Also interesting that only 15% cited “we don’t know how to think out of the box” as a barrier to innovation. Now because managers think its so doesn’t make it so. This survey reflects beliefs not necessarily realities – a case in point being the excuse of having inadequate resources to innovate. That is as much a reflection of folks not really doing what they should be doing as anything. The bottom line is this: there’s a direct relationship between innovation and failure. The key killer of innovation is the lack of tolerance for failing – a necessity for innovation which directly reflects an organization’s culture. Watch no risk no innovation below for insights on this important barrier to innovation and if you are ready to really impact the way your franchise system works, take some risk and set up a test drive of our franchise flywheel application. Innovation isn’t as scary as people believe.

Its easy to “demand” results: particularly when there is so little understanding as to how those “results” might be achieved. Sadly many believe such demands are a sign of leadership: funny as that is. This faulty thinking that is at the center of huge failings ( think GM and the recent Wall Street debacle as examples). In franchise development, particularly during slow economic times, the opportunity for brands to separate themselves from the pack is greatest but only through an effort of focusing on core business model issues and opportunities. Trying to figure out how to sell more franchises isn’t the answer, although for many that remains the solution.

The principal role of intelligent leaders in franchising or any other industry is to illuminate their organization about the need to choose between the status quo and a future of greater potential. As the article, “Pleasing Wall Street is a Poor Excuse for Bad Decisions” put it: good decisions rarely have much to do with the near term. No matter if you are a public or private enterprise, for profit or not for profit, the near term result should never be driven at the cost of the big picture. Dr. Ed Catmull, founder of Pixar, who wrote the article notes, among other things:

Managers who focus on maximizing short-term profits end up driving out things that generate long-term value — like R&D. They use all sorts of excuses when they make those decisions, including the need to please Wall Street and create shareholder value. But they’re just excuses for poor thinking.

We need business leaders who have a respect for technical issues even if they don’t have technical backgrounds. In a lot of U.S. industries, including cars and even computers, many managers don’t think of technology as a core competency, and this attitude leads them to farm out technical issues. But we live in a technical society; technology is just fundamental to our way of life. Technical understanding should be a core competency of any company.

Watch Ed’s description about how his firm, Pixar, was and is able to innovate. He is a smart man and I concur with his views. Near term results by the way are NOT at the center of their success but other more important things are. What do you think about that ?

Like most people we speak to, this organization is using spreadsheets, outlook, old versions of ACT and other fragmented tools to run their business. In reality many of these folks cannot tell “come here” from “sic ‘em” without involving many hours of effort and people’s time. There is no 360 view of the business. There is no coordination of communication, orchstrated work flows and as a result there are many more people being employed to do mundane things. Even more obviously, what those folks ARE DOING is not nearly as productive as it could be. This is usually acknowledged by the people we talk to and then, as in our call last week, comes THE DISCUSSION. What’s the price ?

Now price is an important variable and its an important question. I mean you have to deliver value for the dollar. We understand that and really see this as our primary advantage. For this ZOR the price would be a mere one hundred and fifty dollars a month. That’s right $150 a month. What was surprising is that THIS WAS OBJECTIONABLE. Can you believe it ? I can’t. $150 a month is a mere $1,800 a year to have something that actually helps you MANAGE your business instead of it managing you. $150 a month is what many companies spend on a single mobile telephone bill per executive manager. It’s a single dinner with a franchise prospect. It is less than 10% of the average franchise unit fee. How is that objectionable?

Do you think franchising generally has ignored the benefits that technology and systems offer? What can explain this type of thinking? We continue to mine for the insightful ZORS who can see the value in the franchise flywheel. Can you help us find some more evolved ZORS to speak with?

Mrs. Fields Famous Brands recently warned that it will file Chapter 11 within the next two months if it cannot persuade note holders to cut $145 million in debt by the end of June. The Salt Lake City-based franchisor of both Mrs. Fields cookies and frozen yogurt retailer, TCBY, has an annual interest debt-load of over $200 million.

Another franchise brand consolidator, NexCen Brands, announced in 2008 that it managed to stave off immediate bankruptcy proceedings after an interest payment on a sizable loan came due. NexCen, a franchisor of Great American Cookie, Pretzel maker, The Athlete’s Foot, and others declared in May that it had discovered the sizable loan’s unfavorable terms and realized it had insufficient funds to pay it. Its CEO warned it faced a severe cash squeeze and had “substantial doubt” that the firm would remain in business. Recent interviews From November 2006 through January 2008 NexCen went on a shopping spree, buying nine brands in 14 months. In the end, NexCen choked after the acquisition of the Great American Cookie franchise chain, when the interest on its debt was so large that it placed the company on the edge of insolvency. The firm’s new chief executive officer, Ken Hall, and his team miraculously managed to turn the franchising conglomerate from a $38 million net loss in Q3 of 2008 to a $1 million net loss in Q3 of 2009 but the Company still faces significant challenges.

These aren’t the only brand “consolidation” plays feeling pressure as a number of firms remain in the hands of private equity: with no means to exit in the foreseeable future.

Ted Pearce, general counsel of Meineke Car Care Centers, wrote the following in a May 2008 Franchising World article titled Post-Purchase Synergies: They Come in All Types:

“As franchise markets began to mature and there were more and more similar franchise systems co-existing within a market, franchisors found ways to further leverage their ability to gain market share by co-branding with complementary brands to capture a market segment that the systems felt they were missing.  The present-day franchising world finds itself further consolidating under a common umbrella in an attempt to build efficiencies within a franchise concept and to realize synergies between these multiple systems.”

Efficiency is a great idea. Problem is most mergers don’t generate it. Here are some facts:

“70 percent of mergers fail to achieve their anticipated value…” – WEEKLY CORPORATE GROWTH REPORT

“Most mergers fail to add shareholder value-indeed, post-merger, two-thirds of the newly formed companies perform well below the industry average.” – HARVARD MANAGEMENT UPDATE

“A Towers Perrin study of 150 mergers of financial-services firms found that 30% of deals substantially eroded shareholder value, and another 20% eroded shareholder value somewhat…” – BEST’S REVIEW/PROPERTY-CASUALTY INSURANCE EDITION

“despite the well-publicized, much-analyzed fact that many of these mergers — up to 70%, according to some estimates — failed to create value, it seems clear that the end is not yet in sight.” – FINANCIAL EXECUTIVE

I was in franchise finance for a number of years and actually was involved in one of the earliest and largest merger acquisitions in food service history: Church’s and Popeye’s. I learned some valuable lessons first hand. While mergers might look good on paper, companies often fail to recognize the specific actions necessary to make two separate organizations behave like one. And the reasons for this are straightforward.

First, the people who focus on the acquisition are skilled in strategy, the industry and in finance. They have a very clear picture of the desired objectives of the acquisition, and understand how the new organization should return business efficiencies. But given the time demands of the pre-purchase activities, and their tendencies to focus on financial and business issues, the “people”  and “systems” issues don’t receive the attention they should.

Second, the idea behind an acquisition or merger is to create shareholder value; to grow the business. Bottom line is many of these transactions are cover for a franchise system that has inherent problems which management believes growth can solve. But it doesn’t. Clarity around processes, systems and people are not achieved through economies of scale. In fact the problems created by operating multiple brands often outweigh the benefits.

Third, people most affected by the merger, employees of the purchased organization, do not know the business objectives, see change as a threat, have no real influence over the events, and wonder immediately how they will be affected personally. Not surprisingly, the focus and priorities of the two groups are likely to diverge starkly.

The main reason why more than 70 percent of business combinations fail is inattention to the messy, detailed, nuts-and-bolts issues. If management truly had their hands around those details they might not need to acquire their way to success in the first place. Facts are that even “smart” “experienced” franchise brand managers are not as capable as they might think at dealing with the nuts-and-bolts. Having consulted with a variety of franchise executives, many whom have been touted in industry rags as being gurus, I can say that few possess deep understanding of their own franchise system let alone the ability to ascertain the workings of another they are thinking of acquiring. Therefore, to the extent consolidations continue as a strategy reflective of a maturing franchise marketplace, folks should remain highly skeptical of mergers as a means to realize efficiencies that create value.

The Leader, however, is the person who climbs the tallest tree, surveys the entire area, and yells, “Wrong Jungle!”

As Covey would say, management is efficiency in climbing the ladder; while leadership determines whether the ladder is leaning against the right wall.  Peter Drucker says it this way, “Management is doing things right.  Leadership is doing the right things.”

You’re probably thinking what does this have to do with awarding franchises, right?  Well, the main point is that to design a truly effective process of awarding franchises you first have to be in the right jungle.  The franchisor-franchisee relationship is a complex one that’s governed by lengthy contracts that spell out very specific obligations that each party has to the other.  If certain expectations get misaligned or are altogether not addressed during the franchise sales process (which happens quite often) this will inevitably manifest itself and result in a problematic relationship at some point.   If too many of these “problematic relationships” begin to present themselves this creates heavy baggage for a franchise organization and eats up much needed resources – both financial and human.   Anyone who has first-hand experience with this knows that the costs associated with these problems can quickly consume any profit that was garnered through the franchise fee and subsequent royalty payments.

Bryan O’Rourke has written a very informative white paper that addresses this concept in more detail.  You can get the paper here.

Let’s continue to look at the Leadership component of developing a process for awarding franchises.

Leadership:  The Right Jungle

This is the philosophical, right-brained part of the process that causes the greatest discomfort for franchise organizations to wrap their minds around, especially those in the organization who derive a commission from a franchise sale.  I have been there before so believe me when I say that I’m not being judgmental, but realistically it requires a paradigm shift away from conventional thinking.

As a franchisor, your company has developed a product or a service, or perhaps a combination of both.  The decision was made that the best strategy to expand your product/service in the market is through franchising, as opposed to bearing the burden of outlaying the capital expenditure and providing management oversight of the individual units yourself.  You now need to find people or organizations who are capable of, and willing to, execute your business model day in and day out.

A quick analogy…. imagine that you have been commissioned to create a baseball team that will represent your state in a competition with the best baseball teams from across the country.  It is your job to go out and recruit the best team that you can, keeping in mind that your ultimate goal is to put together a championship-winning team.  You have a list of positions to fill from the pitcher to the right-fielder.  Do you think that you would start with identifying and recruiting the top major-league, minor-league, and college pitchers in your state; or would you sign up someone who had never thrown a baseball before?  Seems like an easy answer, right?  Regardless of how good your facilities are, or your pitching coach is, you intuitively understand that you need someone with a proven track record of being a solid pitcher.

The same holds true in franchising.  If I want to grow my gourmet pizza restaurant concept and compete with every other restaurant in every market that I’m in;  should I focus on identifying and recruiting the best restaurant operators that I can?  Or should I award a franchise to someone who has never owned a business nor operated a restaurant before?

To ask yourself and your team these questions, with an open mind, and to be willing to accept the answers certainly requires leadership.  It’s uncomfortable because you may find that you’ve been toiling away at the underbrush and making progress, only to realize that when you sent someone up the tree to survey the land, they cried, “Wrong Jungle!”

In Part 2 of this post we’ll examine how the advent of the internet created an influx of “leads” and sent us into the wrong jungle.  We’ll also discuss the two-tiered model for awarding franchises and how to manage it.

Potential reasons why basic internal processes are not adopted include the following:

1. Lack of understanding of what the process should be.
2. Lack of discipline to consistently execute.
3. An inadequate workforce.
4. No priority given to developing processes.
5. Lack of tools to properly manage processes.
6. Lack of defined KPI’s and ability to measure them.

The first four reasons listed above could each be examined in excruciating detail, but let’s focus on the last two.  Building an effective and profitable system of managing a franchise organization means that the people in the organization need access to a lot of data.  And they need it fast.  You’ve heard the saying, “don’t take a knife to a gunfight”, right?  Well, continuing to operate from Outlook and spreadsheets makes you a knife-wielding fighter (and it’s a rusty pocket-knife, at that).  With the emergence of cloud-computing technologies and sophisticated yet user-friendly CRM solutions, you can now afford that gun.

The 360° View

There’s no doubt that by the time one of your franchisees opens the doors of their business they have been through a great deal of interaction with the people in your organization.  They interacted with your sales department, they spent time with your pre-opening staff, training department, and operations team.  They were also on the admin/legal department’s radar.

A  360° view would give you the ability to look back over the course of this life-cycle and view all interactions with the franchisee from the day they first entered your sales team’s pipeline and extending forward up until the day they exit your system. Having key information available in a single view such as: how and when they entered your pipeline; all communication with the sales team; records of all signed contracts; real estate leases, site developement projects, training records, support issues and communications, unit performance history; and so forth is an invaluable tool in developing a high-performing franchise organization.

Understanding when and where the organization has touch points with prospective franchisees and existing franchisees allows the franchisor’s leadership team to develop measurable goals, objectives, and strategies for each point of contact that you have.  Once these goals are in place an organization can begin to measure, benchmark, and improve.  Continuous improvement is a core philosophical belief of The Flywheel Group, as the silver bullet doesn’t exist.  And without a system, a set of measurable KPI’s, a way to measure them, and a competent team of people to execute, well, then improvement is really just anecdotal.

Learn more about a solution that may be right for your organization:

Most businesses seeking to franchise a concept do so with the belief that it is a proven way to expand their company successfully. However, its not nearly as easy as many statistics might lead you to believe. A handful of brands comprise the clear majority of successful franchises and thousands of smaller franchise systems experience a very different life cycle when compared to their few larger counterparts.

For example, a study focusing on franchisor success rates, over a twelve year period, was published in 1998 by Francine LaFontaine and Kathryn Shaw. The findings concluded that only 28.6% of franchisors were still in business after a 12 year period. During their study period 1,941 of the 2,524 companies that began franchising quit franchising: a nearly 77% attrition rate. These findings are largely counter to the main stream statistics promoted by the franchise industry.

A recent White Paper entitled, “Franchising: Disparity in Numbers” written by my colleague Clint Lee of the Flywheel Group (you can obtain a copy here) shows detailed research on the reality of franchising today. The key point is that success in franchising is obtained like it is in most industries: a combination of competent people, a sound and proven business model, and continuous process improvements. Interestingly, these often aren’t the most emphasized disciplines you would hear among many “experts”. Visit the Flywheel Group and learn more about our Franchise Flywheel philosophy. There is an answer to quality franchise system management and it isn’t what most “experts” would tell you.