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Thursday, January 20, 2011
Wednesday, January 19, 2011
Measuring the Health of a Franchise Program
A franchise system has many of the qualities of a living creature. If its various operating systems are not kept healthy, it can weaken and become ill. Ultimately, if its health problems are unchecked, it can go out of business forever. If you are considering joining a franchise program, it’s a good idea to give the franchisor a full check-up, something like an annual physical. If the doctor were to give your franchise program the once-over, how would the company measure up?
Training, Supply and Knowhow: The internal skeletal features of every franchise program are of primary concern to the health of the business: training and franchisee supply. Every strong franchise system does an excellent job of transferring knowhow through initial training, opening assistance, continuing training, and systemwide meetings (see Item 11 of the Franchise Disclosure Document (FDD) for a description). Also of vital importance: strong inventory supply arrangements in place for the benefit of franchisees (Item 8). Aggressive supply arrangements save the franchisee by offering prices that are not available to independents, offsetting the costs of the system’s royalties. If these supportive internal structures are not in place, carrying information and value to all corners of the system, it could be a sign of serious problems.
Low or No Growth: Growth and expansion are the life force of a healthy franchise program, and like breathing, the absence of growth will quickly threaten a franchise system’s survival. Check Item 20 of the company’s FDD to measure its expansion or contraction over the past three years.
The Mark of a Winner: The trademark of any franchise system is at the heart of the rights granted to franchisees; the trademark must be rock solid if the franchise system is to stay healthy. Item 13 of the FDD will give you an idea of the health of the trademark -- whether it is federally registered with the United States Patent and Trademark Office (insist on it) and whether there have been any problems, lawsuits, or contractual limitations on its use around the country.
Even-Keel Relationships: The mental health of a system is important as well. Are franchisees in the system pleased to be there, do you find some misgivings, or is there deep discontent among franchise owners? If there are recurring problems, you will want to learn about them as soon as you can. The only way to accurately gauge a system’s psychological health is to talk it through with franchisees. Contact them using information in the FDD (Item 20), put them on the couch, ask a lot of probing questions, and listen well. Also look for reliable third-party certification of franchisee opinions, such as FranSurvey.
Defensive Strength: A healthy system is able to resist attacks on its stability. Has your franchise system been tested by its competition, overcome supply problems, defended an attack on its intellectual property, or responded well to a failing franchisee? What about litigation listed in FDD Item 3 – how are legal confrontations handled by the company? As with any organization, a strong franchise program will handle adversity better than weaker systems. How has the franchise program fared in the recession? (Go easy in your assessment on this point, as many businesses were thrown on their backs financially by the market gyrations of the past couple years through no fault of their own.)
Financial Standing of the Franchisor: A franchisor system without solid financial standing puts a lot of people and franchised businesses at risk. The FDD always includes recent financial information about the franchisor; the basic requirement is to include the past three fiscal years of financial statements, audited by an independent CPA, although younger franchisors may not have as much to disclose, and their financials may not be audited. Take the financial statements to an accountant or other financial advisor, and determine if the franchisor has the financial health to succeed in the long run.
Franchise systems span the full range of health, from the robust new up-and-comer to yesterday’s concept now approaching death’s door. If you need to evaluate the stability and longevity of the franchisor and its current health, crack open the FDD and run your own checkup of the entire franchise system.
Andrew Caffey is one of the nation’s leading franchise legal specialists and he represents franchisors across the United States. Caffey served as General Counsel of the International Franchise Association, a member of the Governing Committee of the ABA Forum on Franchising, and Chair of the ABA Forum on Franchising. He also is a member of the bar in Maryland and the District of Columbia, and a member of the Panel of Neutrals of the American Arbitration Association. Caffey has appeared on numerous franchise programs and is a frequent speaker and author on subjects of franchise and business opportunity regulation.Unusual, Strange, and Downright Weird Franchises
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Signs of Life: Franchise Industry Heads into 2011 with Cautious Optimism
In 2008, the recession began. In 2009, the franchise industry started to feel the impact as credit dried up and money was short. Franchisees started closing up shop and even some franchisors started throwing in the towel.
At first glance, it might seem that 2010 was nothing but more of the same doom and gloom. Money -- and qualified investors -- has still been hard to come by and when exactly that will ease up is hard to predict, leaving franchisors in uncharted territory leading into 2011 and beyond.
Look closer, though, and you can see that this dynamic industry is just that -- dynamic. While economic uncertainty weighs heavy, many of the franchising industry's key players are actively working to make the best of difficult times.
Some are hoping for help from the controversial Small Business Jobs and Credit Act of 2010, but smart franchisors are taking matters into their own hands, improving support for franchisees, building innovative lending programs; upgrading facilities when times are slow, and even engaging in "co-opetition" to share costs and benefits. And even as some sectors struggle, some lucky franchises find themselves perfectly positioned to take advantage of today's trends.
Government Aid
When the recession first swept through the nation and thoroughly dried up access to capital, small business waited for government to step in and offer some kind of assistance. First, the Economic Stimulus Plan shined high as a beacon of hope, of some kind of relief. However, now, nearly two years after the Plan officially passed, the assistance has been minimal.
"The stimulus was not targeted at helping small business," says Ronald Feldman, CEO of Siegel Financial Group, a company that specializes in placing financing for startup, expansion, and acquisition of franchised and independent businesses with loans ranging from $250,000 to $10 million. "Less than 1 percent of the stimulus was designated for SBA programs. All in all, it had little impact on franchising."
Now, hopes are pinned on the Small Business Jobs and Credit Act of 2010, which passed into law in September and is designed to drive economic recovery and create jobs with the help of a $30 billion small business lending fund and $12 billion in tax breaks. Feldman, who personally lobbied for the bill for two years, believes that it "could have a profound positive effect on franchising. Many multi-unit operators have the ability to grow, but have not been able to get conventional lending due to the market," he says. "SBA lending could be a great solution to support their growth efforts."
However, with the midterm elections putting Republicans back in control of the House of Representatives, there is a possibility that GOP representatives will push to alter the bill, which many of them believe will be more costly than beneficial.
Franchisors Fight Back
But at some point along the way, franchisors stopped waiting and started doing. Restricted by limited capital, many franchisors shifted their focus in 2010 from quantity to quality. Instead of striving to grow in terms of number of units, they turned their attention to growing from within. They focused on building better intranets to better communicate with -- and thereby better support -- their franchisees; they proactively developed their own lending programs; they took advantage of the down time to remodel; and some even joined forces with competitors to remain strong in tough times.
AlphaGraphics and Allegra Network, for example, are joining forces to host a joint Technology Expo next year, a notable first in franchise print history. Likewise, PremierGarage Systems, a garage flooring and organization franchise, and Closet Tailors, an in-home organization franchise, combined forces to launch a new concept this year, Tailored Living, which specializes in both interior and garage space enhancement. Dan Tafoya, senior vice president of Business Development for Home Franchise Concepts, the parent company of Tailored Living, reports that the partnership has helped his company weather the choppy economic waters and believes that the franchise industry will be seeing more such alliances in the future, which should help reduce the amount of competition.
Meanwhile, some franchise categories are blessed by the favorable demographics. For example, Senior Helpers, a franchise specializing in in-home care for the elderly, started franchising in 2005 and has opened over 250 U.S. offices since then. The company saw system-wide revenue swell by 225 percent as the number of locally owned franchises in operation grew by more than 25 percent in 2009 alone. "Recession-averse [sectors] like medical and health care have been doing better and will continue to grow moving forward," says Peter Ross, founder and CEO of both Senior Helpers and Doctors Express.
Others have adapted and found the winning formula needed to grow in this new economy. Some franchise opportunities, for example, are actually benefitting from investors' lack of cash. AllBusiness.com's AllStar research revealed that more than one-fourth of our AllStar winners could be run from home, and over one-third could be started for under $100,000.
Dan Rowe, president of Fransmart, a franchise development company, notes that the segments of the restaurant franchise industry that are especially popular are those offering lower-cost formats such as gourmet food trucks, kiosks, and carts: "I think these lower-cost formats are here to stay and allow a brand to penetrate a market more than single-format growth strategies."
Meanwhile, other franchises are taking a different approach. Fantastic Sams actually started buying back development territories in an effort to strengthen the brand and ensure uniformity. In Northern California, the franchise bought back 13 of its franchises and announced that it will not seek new franchisees until it's ready to do so.
A New Reality
Survival mode brings both positives and negatives. As Darrell Johnson, president and CEO of research company FRANdata, discussed at the 2010 Franchise Leadership & Development Conference, consumers are spending less and the market pie isn't growing, creating a pitched battle for sales and market share. Meanwhile, franchises are under careful surveillance by potential investors, the banks, the media, and existing franchisees. Together, these factors are forcing franchises to run lean and efficient.
"With the downturn, it seems that companies -- at least smart ones -- are focusing their attention on improving operations and focusing on profitability for their franchisees," says Lorne Fisher, CEO/Managing Partner of Fish Consulting, a national communications consulting company. "This will create a better business."
At the same time, franchisors are becoming much more selective in who they select as franchisees. No longer do they have the luxury of accepting second-rate applicants; they need candidates strong enough to get approved for a bank loan as well as knowledgeable enough to start and run a franchise in a difficult economy.
Ironically, as the bar rises on the franchise recruitment process, so will the success of new franchises. Tomorrow's franchisees will be of a whole new caliber. "Franchisors are developing and executing more strategic franchisee recruitment programs," says Fisher. "Their marketing is less about quantity of leads, but quality. They are seeking more qualified leads by focusing on their ideal prospect target audience and crafting more impactful messages to attract candidates to invest in their system."
Further roiling the waters is the looming threat of acquisitions. In the largest restaurant acquisition in a decade, 3G Capital took over Burger King in 2010 for a total of $3.3 million after the fast-food franchise suffered a two-year slump in sales.
Jeff Johnson, founder and CEO of the Franchise Research Institute, worries about what these kinds of leveraged acquisitions could mean for existing and future franchisees, since capital investors aren't always focused on building a long-term, sustainable brand. "Most investors don't understand the interconnected relation between franchisor and franchisee. Thus they believe that franchisees are 'indentured servants,' and this leaves very little room for win/win resolution of conflicts -- and there are always conflicts," he says. "In the short run, [acquisitions] will pump money in and allow some franchisors to cash out, thus encouraging more entrepreneurs to franchise, which is good. But in the long run it will not be positive. Heavy-handed franchisors wanting to get their way often turn to litigation as a means of conflict resolution, which is bad."
Looking Forward
So what lies ahead for the franchise industry? While most are cautious in their predictions, FRANdata's Johnson estimates that there will be economic uncertainty for the next three-plus years. Others are confident that the worst is over.
Either way, this is a major test of the industry's ability to adapt to difficult times. Even as the weak players are weeded out, the industry as a whole has the opportunity to grow stronger.
And somehow, someway, the entrepreneurial spirit lives on through franchising. The research behind this year's AllBusiness AllStar Franchise list makes it clear that independent businesses are still launching new franchise opportunities.
Why?
Because that's what entrepreneurs do. It's in their DNA. Indeed, now, more than ever, a multitude of entrepreneurial-minded people -- many who've lost their jobs -- are busy strategizing their next moves. And franchising continues to offer a relatively safe, low-risk option to build a business in an established system rather than tough it out alone. So even though the industry took a nasty hit from the Great Recession, it's already starting to do what it has always done: help pull the economy out of troubled waters.
"Every newly born franchise employs 10 people on average and an additional 10 indirectly," says Tom Scarda, a franchise consultant with consulting firm FranChoice. "If we can put many of the highly experienced corporate refugees into franchises, we'll have many little economic engines revving all over the country, providing jobs and tax revenues."
Sara Wilson is a freelance writer who specializes in issues related to small businesses. Contact her at wilson.sara@gmail.com6 Steps to Improve Performance Evaluations in 2011
Performance evaluations, appraisals, reviews, whatever you call them people have strong opinions about the process. Whether you love them, hate them or fall somewhere in between they are a policy requirement for many organizations. The process can be viewed with trepidation and about as much enthusiasm as a nasty medical procedure or facilitated with forethought and preparation. Here are six steps for both fans and foes to improve evaluations in 2011. 1. Know the Program Review any policy that describes the appraisal process, time line, approvals and how results are used. If something is not consistent with practice ask about it. When there is no written policy follow up to identify the expectations. Ask for due dates, formats and flow. 2. Understand the Rating Scale What does an outstanding rating mean? Is a 3 on a 1 to 5 scale a good rating or merely mediocre? Look for definitions of rating scales and ask questions to make certain you are applying them correctly. Be wary of the philosophy that no one can achieve the top grades. Why have a system that rates from unacceptable to excellent if no employee can be excellent? 3. Do Your Homework Check all available records and results for documentation, both positive and negative, to back up ratings and comments. Looking at last year’s evaluation is a good place to start, particularly if you were not the manager at the time. If previous evaluations seemed inflated, or overly harsh, pull the team together and explain your philosophy and the tools you will use for the process. 4. Think About the Outcome What are you trying to accomplish with the performance evaluation conversation? Do you want to motivate the employee to pump up performance, prepare them for a promotion or help them continue to excel? Think about the broader picture and not simply the document on the desk. This is also the time to be ready for possible reactions to good news and reminders of less than stellar results. 5. Make it a Conversation "Here is your evaluation, sign it," is not an appraisal discussion. (Although I have heard this.) This is your opportunity to sit down with staff and devote time to talking about their performance. Use it wisely and make certain that it is a conversation that helps to build a relationship of trust. 6. Start Planning for 2012 Don’t wait until the 2012 procedure is issued to plan for the next evaluation. Talk to employees throughout the year about performance results, keep notes of your conversations and document the good and the bad. Starting now will make the process easier in the future. If you need some extra help and hints it’s not too late to sign up for today’s web conference, How to Conduct Motivating and Legally Sound Performance Appraisals. Take the time to prepare and you will improve the experience and results.
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