A solid franchise management strategy can make the difference between a successful operation and failure.
With that in mind, consider these 8 keys to success.
Why Do Some Franchises Fail?
Running a franchise can be challenging. In 2013, the U.S. Government Accountability Office (GAO) conducted a study of franchise loans extended under the Small Business Administration (SBA) 7(a) loan program. A review of loans from fiscal years 2003 to 2012 showed that about 28% of 7(a) franchise borrowers defaulted. The GAO identified 4 major lenders as originating 74% of defaulted loans.
The GAO’s research and follow-up studies have helped highlight some of the reasons franchises fail, including:
Inaccurate Revenue Projections
In seeking to identify the causes of this high default rate, the GAO determined borrowers had experienced difficulty obtaining key information needed to make accurate financial projections. Federal law didn’t require franchise organizations to provide first-year revenue estimates for startups, and franchisees didn’t have this information available to them in disclosure documents from their organizations.
As a result, borrowers obtained loans based on overly optimistic revenue projections, averaging twice the amount of revenue they were actually able to generate their first year.
Lack of Management Experience and Financial Planning Knowledge
Following up on the GAO’s report, the Service Employees International Union (SEIU), a labor union that has filed lawsuits on behalf of restaurant workers, published a report exploring further causes of franchisee SBA loan failure. The SEIU conducted a 20-year study of SBA data and found that the failure rate for franchise loans was 16.9% and had been increasing since 1991.
Failure rates were higher among franchisees lacking the knowledge or resources to form partnerships or incorporate, pointing toward lack of experience with financial planning and business management as an underlying issue. A survey by SEIU partner Change to Win found that 63% of franchisees had never owned a business before investing in a franchise, while 69% had never managed a business in their franchise organization’s industry. Many franchisees didn’t consult professional input, with 21% failing to consult with an adviser such as an accountant or attorney before entering into franchise commitments.
Clearly, franchise management plays a crucial role in negotiating these choppy waters.
What Makes a Good Franchise Operation?
Despite the struggles many franchise owners face, many others have more successful experiences. Franchise business growth outpaces that of the general economy, said Steve Caldeira, president of the International Franchise Association, an organization representing the franchise industry, citing multiple surveys in response to SEIU criticisms. According to Caldeira, franchise renewal rates average 94.2% a year.
Running a successful franchise requires avoiding the mistakes which cause franchise failure and substituting best practices instead. Lack of business knowledge, planning and financial resources tend to underlie franchise failures. Here are eight steps for addressing these issues.
1. Learn Basic Franchise Management Skills
Just as a lack of business knowledge can hinder your franchise management efforts, getting a business education can provide you with the know-how you need to succeed. One way to learn how to manage a franchise is to get a conventional business degree covering topics essential to franchising, such as:
Alternately, you can take online business courses from conventional universities or digital educational institutions. Digital educational providers such as edX allow you to access courses from major universities online.
Keep in mind that you don’t necessarily have to become an expert in all the above topics to run a franchise. You can hire someone or partner with someone to help you. However, it will help you work with others if you have a basic understanding.
2. Review Your Franchise Contract With an Accountant and a Lawyer
You can supplement your own business knowledge by tapping into the expertise of others. One essential expert you should consult is an accountant. A professional accountant can help you evaluate the viability of your franchise business plan from a financing perspective.
A business lawyer is another important resource. A lawyer can help you review your franchise contract and make sure you’re receiving favorable terms. They can point out potential pitfalls where you may be exposing yourself to excessive risk. They may be able to help you negotiate better terms with your franchise organization. Look for a lawyer experienced with franchising contracts.
3. Create a Sound Franchise Management Plan
A business plan sets the stage for success by outlining your goals and charting a path to achieve them.
It covers key elements of your business strategy, including:
- Your company description and brand positioning
- Market research
- Business organization
- Products and services
- Marketing and sales strategy
- Financial projections
- Funding needs
Your franchise organization may provide you with an outline of a business plan, but you are responsible for the success of your own franchise, and you should customize your plan to fit the specifics of how you will implement your plan in your franchise location.
4. Research Your Market
Market research forms a foundation for a strong franchise management plan. Doing market research helps you estimate the size of your customer base, which is important for sales projections. It helps you analyze what your market wants and what your competitors are doing, providing critical information for shaping your marketing and sales strategy.
Market research resources include government agencies such as the Bureau of Labor Statistics, private databases such as Google Trends, market research reports from sources such as MarketsandMarkets and polls conducted using tools such as SurveyMonkey.
Market research for franchises in certain industries includes location scouting. Consider who your target market is, where they are located, how they will access your prospective location and what other businesses and competitors are located nearby. Your franchise organization can provide assistance with choosing a strategic location and negotiating a favorable lease.
5. Franchise Management Involves a Marketing and Sales Strategy
Your franchise revenue is generated by your marketing and sales efforts, making careful preparation in this area critical to your financial planning and success.
Use your market research to help you develop key components of your marketing and sales strategy, such as:
- Who your target market is
- Which problems, solutions and benefits command the interest of your market
- How you will position your brand’s unique selling proposition against competitors
- Which marketing channels you will use to generate leads
- What sales offers you will use to convert leads into customers
- How you will price your product and services
- How you will promote customer loyalty and retention to generate repeat business and referrals
Your franchise organization typically will provide guidance with marketing and sales strategy, but ultimately, you are responsible for implementing their plan, so you should extrapolate from their template to meet your needs. If you aren’t experienced with marketing or sales, a marketing agency or sales consulting service can help you develop a winning strategy.
6. Estimate Your Financial Projections
Your marketing and sales strategy can guide you in estimating your revenue. Your franchise organization may provide you with revenue estimates. However, as the GAO’s review found, estimates based solely on franchise organization’s marketing pitches tend to be overly optimistic. The GAO advises that franchise operators should do due diligence when making revenue estimates by using other sources to check their franchise organization’s claims.
To complete your financial projections, you will also need to estimate your expenses, balance and cash flow. Accountants use standard formats to create financial statements with this information. Work with your accountant to develop financial projections for your first 3 to 5 years of operation.
7. Develop a Sound Financing Plan
Your financial projections will help you determine how much financing you’ll need to run your franchise operation. Once you know what you need, the next step is to develop a plan to secure financing.
Sources of financing include your own financial resources, investors, loans and other forms of small business financing such as business lines of credit. Qualifying for these types of financing may require you to work on improving your personal or business credit score.
8. Track Your Key Metrics
To verify that your franchise management plan is working as intended, track key performance indicators (KPIs) to measure your performance.
These should include:
- Marketing KPIs such as lead generation volume and cost per lead acquisition
- Sales KPIs such as sales conversion rate and average value per transaction
- Financial KPIs such as operating cash flow and net profit margin
Set goals for each of your KPIs. If your tracking indicates you’re not meeting your goals, test adjustments and make improvements. For best results, use digital technology to automate your tracking and generate regular reports for periodic review.
Franchise Management: Plan Your Path to Success
Lack of managerial and financial know-how can make running a franchise challenging, but knowing and following best practices can increase your success. Studying business skills and getting expert input can prepare you to write a winning business plan and hone your franchise management skills.
A sound plan should be based on solid market research, laying a foundation for an effective marketing and sales strategy and financial projections. Tracking your key metrics helps ensure that your sales and financing strategy achieves profitable results.
If your financial projections show you require financing, consider applying for a loan or another type of small business financing. Take a few minutes to fill out our free, no-obligation prequalifying form and see your loan options in minutes.