The Right Stuff About Buying a Franchise – Lesson 6: Marketing Follies

Without sufficient energy given to marketing your new franchise, your financial returns will be no better than your fellow franchisees.  If your rewards are less than the average, it is unlikely you will be able to get ahead.

 

One of the few levers you may be able to pull is marketing, usually represented by the four Ps of price, product, promotion, and place.  For most franchisees, price will normally be set by your franchisor.  Similarly, your degree of control over product selection will also probably be highly constrained.  I have already spoken about the significance of place, or location, in Lesson 1.  It remains a hugely important variable in the success or failure of your business.

 

This leaves promotion.  While I am compelled to contribute a fixed percentage of revenue to a central advertising fund, local marketing efforts are pretty much up to me.  This may also be true for you.

 

I’ve tried several promotional strategies.  Around this time last year, I ran an Australia Day promotion coinciding with our national holiday.  I had signs made for the store and distributed almost 20,000 brochures in the local area.  It was a dud.  I gave away a 20 percent discount only for a short-term loss of profit.  Long-term benefits to the franchise through greater local recognition remain unclear.

 

Next, I attempted to win a competition run by one of my suppliers for the highest increase in sales for their travel books.  While my sales grew by almost 400 percent in the month of the competition, I was merely a runner-up.  One store increased their sales by more than 1,000 percent, although I remain intrigued by the reality that their equivalent sales of the same books in the previous years must have been close to zero.  In other words, I’ve learnt that while I may be highly motivated and strongly focused to win such competitions, there are others in the franchise system whose knowledge about the keys to victory is based on years of ensuring that they stay in front.

 

I have tried hard to encourage more of the book spend among employees in the local business district to remain in the area.  I created a local loyalty card that complimented the loyalty program of my franchisor.  In particular, I thought that this would appeal to local school teachers and similar educators who tend to buy more books than others from different professions.  Again, while incremental sales have undoubtedly been enhanced, this strategy has not provided the more significant improvements I had sought.

 

Arguably, the bargain-hunting book buyer is a different animal to the normal member of the book buying family.  For this reason, I have held several sales in the surrounding area.  While this strategy worked relatively well prior to Christmas, the most important retailing period of the year, it has been less successful since that time.  One attempt cost me thousands of dollars after I chose a rotten location.  Another was lucky to break even. 

 

The big wahu of all promotional strategies was the exclusive deal I made to sell books at the three Donald Trump events scheduled for various states in Australia last November.  I spent weeks to win this deal, subsequently signing an exclusive deal with the local promoter.  I paid him $7,500 for the privilege, and ordered more than 4,000 books to sell at the events.  I was sure I had a huge winner on my hands.  In addition, I was negotiating with Trump University to sell their range of Trump wealth-creation products at these events.

 

When Wall Street tanked, ticket sales stalled.  The promoter went bust, taking my money with him.  Donald Trump had been paid almost $2 million in fees to attend, however the promoter’s inability to come up with the final payment caused Trump to cancel his visit and pocket the money.   I am but one of the 650 creditors of this disaster. 

 

Given that I tend to have the perseverance of a bulldog, I actually attempted to resurrect the tour, offering to sell the tickets at more realistic prices, allow those who had already bought tickets to come for free, and to split any profits arising from the tour with Trump, suggesting that his share go to charity.  While I didn’t know if I would make any money myself, I truly wanted to do something for those folks who’d already paid an average of $350 for their tickets.  It would also have been nice to sell some of the thousands of books I’d ordered.

 

So, there you have it.  Promotional strategies from the realistic to the ridiculous.  It remains the nature of marketing that we must, to paraphrase Built to Last, try a lot of stuff and keep what works.  In the absence of the kinds of marketing research available to executives in large corporations, franchisees must feel their way cautiously along the dark promotional path. 

 

This is especially challenging during tough times, since marketing dollars are one of the few costs over which we have some semblance of control.  The overwhelming temptation is to back off and spend as little as possible.  While I wouldn’t recommend spending money that you cannot afford to lose, both new and existing franchisees must promote their businesses frequently and with gusto.  Set your budget at the outset, keep thinking creatively, and look around for new approaches that may provide a competitive advantage for your franchise.     

The Right Stuff About Buying a Franchise – Lesson 5: Your Accountant is God

Yes, I mean it.  It is not rhetoric or hyperbole but is truly grounded in reality.  Your accountant or financial adviser is God (or very close to it!).

 

I began with the best of intentions.  My former accountant was a well-meaning guy with a number of small businesses in his portfolio.  His specialization, however, was the not-for-profit sector.  Their philosophy and that of this budding franchisee could not have been more different.

 

Believing that I should ground myself in all aspects of the business, he encouraged me to purchase bookkeeping software and complete all of the data entry associated with paying suppliers, receiving books at the store, processing credits, and so on.  Unfortunately, not only did I struggle with accounting at college, my desire to undertake such laborious processes was even more underwhelming now that I was distant from academia.  Thus, I let the bookkeeping drift while hoping that it would sort itself.  While the elf may have repaired all of the boots in the old fairytale, nothing of the sort would occur for me.

 

You see, I am a book keeper, not a bookkeeper!

 

Before telling you about the inevitable disaster that loomed over me, allow me to digress briefly to discuss the value of a franchise-familiar accountant prior to making the decision to buy a franchise.  In short, an experienced financial adviser is worth gold to you.  They can review the most important metrics underlying the success or failure of your proposed business and put their finger quickly on the flaws in your thinking.  If it is an existing business, they can spot whether the owners have been paying themselves a reasonable salary, whether they have or have not been squirreling funds between accounts to create the perception of inflated profits and revenues, and let you know if the value placed on the goodwill of the business is reasonable or overstated.

 

Oh, how I wish I had received that type of advice at the time!

 

Okay, back to my disaster.  While I was keeping up with paying my suppliers, my cash reserves were rapidly diminishing.  Cash is the lifeblood of any business and is the very heart and soul of every small business and franchise.  Despite sales revenues looking okay, I was losing the battle to stay afloat.  In addition, while not completing the critical accounting tasks, I was also neglecting to return overstocks to suppliers, a fatal sin for any bookseller.

 

I was just about ready to throw in the towel when I received a phone call from the franchisor.  A new employee in the accounting department had spotted a major error.  Every month since I had purchased the business I had been sending in a check to cover my royalty payments and advertising levies.  At the same time, my franchisor had been direct debiting my bank account for the exact same amount each and every month.  I had been paying the franchisor double and no one had spotted it.

 

When the head office employee stated that I was about to receive a refund of almost $30,000, I could hardly speak, such was the feeling of relief.  When I phoned my wife, who teaches part-time rather than working in the franchise, she cried.  While not nearly as naturally emotional as I tend to be, she had been sharing the same strain.  We shared tears of relief.

 

Now, I have an accountant who services the financial needs of three other stores in this franchise network in addition to mine.  He knows all of the ins and outs, can organize the leasing of new equipment, and can complete the critically important financial deliverables on which the franchisor relies.  Not only that, Doug drops by the store every few days to pick up my paperwork and discuss any financial matters that either he or I need to resolve.  He makes sure I pay my taxes on time, processes the salaries of my staff, and keeps a supportive eye on me, the financial luddite.

 

So, while it may be an overstatement to equate Doug with the holy father, it is nonetheless that he was an overdue answer to prayer.  For your own peace of mind, find a Doug at the outset!

The Right Stuff About Buying a Franchise – Lesson 4: Are You an Entrepreneur or a Frentrepreneur?

Many people buy a franchise because they want to work for themselves.  The phrase, “I want to be my own boss” is often the first on the lips of budding franchisees.  However, buying a franchise is arguably a step back from pure entrepreneurship.

 

For the pure entrepreneur, consider someone such as Richard Branson, now CEO and majority owner of one of the biggest and most admired companies in the United Kingdom.  From a very young age, Branson always sought to go his own way.  His first business venture was a student newspaper he started from scratch, a business he later sold to a multinational company for a tidy profit. 

 

Richard Branson considers himself to be a business and brand creator, someone who can reshape an industry through both innovation and an incredibly strong commitment to seeing things from the customers’ perspective.  By better responding to meet their needs than anyone else in the sector, his Virgin companies almost always carve out significant chunks of the market.  Clearly, Branson could never work for anyone else and, in fact, has never done so.

 

In the United States, Donald Trump is a superb example of an entrepreneur who always demanded total control of his business and his future.  While he worked with and for his father Fred, a Brooklyn-based real estate developer, during his college years, Trump created The Trump Organization during his early 20s.  His aim was to create the instant perception among potential clients and customers that his corporation was far more significant and expansive than it appeared, even though at first he was its only employee.  Like Branson, Trump has long been a lone ranger who has always needed to maintain primary control over any business venture with which he is associated.

 

If this approach is also your own favored approach for getting into business, buying a franchise may not actually be for you.

 

In summary, the franchising organization retains substantial control over what you can do, how you can do it, and when and where you can do it.  This information is contained in the franchise agreement that every new franchisee must sign.  While the restrictions on your behavior will differ from one franchisor to the next, the motivation for such constraints on your freedom is common to all.  That is, they are seeking to ensure that their offerings are standardized to the highest possible extent and that they maintain maximum control over their empires. 

 

If you have ever read Michael Gerber’s excellent book, The E-Myth, you will understand why this is so.  Developed appropriately, the policies and procedures to which you will be subject serve both franchisor and franchisee in positive ways.  They ensure that customers who visit any of the franchises receive similarly high levels of service.  They ensure that franchisees don’t drop their standards or personalize them in ways that compromise the franchisor’s reputation and brand.  Most importantly, they are designed to ensure that anyone with a reasonable degree of intelligence and a commitment to hard work can achieve them, thus limiting the reliance of the franchisor on the vagaries of individual brilliance and talent.

 

For the franchisee, the rules under which they operate limit the risks associated with starting a new business, since they are less likely to make dramatic mistakes.  Their potential customers may be already familiar with the brand and its characteristics, thus making it easier to develop customers and patronage.  Many decisions, particularly those associated with marketing, purchasing, and the creation of IT systems and databases, may be out of the hands of franchisees, therefore encouraging them to focus their efforts on building sales.  In all likelihood, franchisees will also benefit from the buying power and managerial support provided by their franchisor.

 

If this is more your ballgame, you are what I call a “frentrepreneur” rather than a pure entrepreneur.  Yes, you retain many of the characteristics of the traditional entrepreneur and likely associate yourself with their stories, but you act within a somewhat different operational context.  In essence, you deliberately choose to trim your wings in the knowledge that you will likely fly longer than other birds, recognizing too that you may also not get to fly as high as they do.

 

While accepting the downsides, this can still be a personally rewarding and totally appropriate business decision.  The world is full of franchisees who remain enthusiastic about self-selecting into a franchise system rather than starting from ground zero.  In fact, I walk past one every day, a bakery and pastry franchise, who proudly stated to me that he is the nation’s highest revenue franchise.  Not only is he delighted about this achievement, he is clearly making a great deal of dough with his dough!

 

In buying a franchise, it is therefore essential that you first examine yourself, your motivations and your relative need for control and autonomy before concluding whether you are an entrepreneur or a frentrepreneur.  In whichever industry you are exploring, ask existing independents about the benefits and costs of remaining outside a franchise group.  Also, ask current franchisees about the pluses and minuses that they consider to be part and parcel of being a franchisee.  It is only after you’ve reflected on this information that your true identity, as entrepreneur or frentrepreneur, will become clear.  Armed with this self-knowledge, a critical early decision will have been made.

The Right Stuff About Buying a Franchise – Lesson 3 – Do Your Homework Better Than I Did Mine!

The Right Stuff About Buying a Franchise – Lesson 2: Will You Make Money?

In late 2007, I purchased an existing franchise bookstore whose revenues had dropped by about 30 percent during the previous four years.  The owner and his wife were genuine sellers, having already relocated to another part of the state where they were to care for a seriously-ill relative.

 

I was confident that I could restore its glory.  After all, I had doubled the membership, revenues, and staff numbers of a real estate industry association just before buying the bookstore.  I knew how to revitalize a business.  Surely I could do the same for the bookstore, right?

 

Well, yes, or at least a qualified yes.  Revenues are now approaching their former highs as a result of some very long hours and the implementation of some innovative marketing strategies.  Yet, for all this, I haven’t realized significant profits to show for this effort and these outcomes.

 

Why not?  Because, in the case of books, and probably for a heap of other products, the economics of the business model work against the creation of lucrative outcomes.  I was reminded of this by an insightful quote in the wonderful book, The Guernsey Literary and Potato Peel Pie Society by Mary Ann Shaffer,

 

“I love seeing the bookshops and meeting the booksellers—booksellers really are a special breed. No one in their right mind would take up working in a bookstore for the wages, and no one in their right mind would want to own one—the margin of profit is too small. So, it has to be a love of readers and reading that makes them do it—along with first goes at the new books.”

 

So, it’s a tough business.  But we each have to work at a place we find interesting, feel enthusiasm for, and is within our span of knowledge and expertise, don’t we?  For me, this had to be the world of books, particularly since I can’t fix or repair anything, am a dolt and a luddite when it comes to anything technical, and have had a love affair with books since my childhood.  Added to that, I self-selected into a lower-risk, lower-returns industry by buying a bookstore rather than something newer and more glamorous.

 

Nonetheless, it seems to me that the vast majority of franchise business models are designed with the primary expectation that it is the franchisor who will benefit most.  They pass most of the potential risks on to the franchisees, require the franchisees to undertake almost all of the “grunt” work of the business, and are not especially accountable to their franchisees except in an indirect, relatively weak manner.

 

Yes, they are required to monitor the health of their franchise networks, provide opportunities for franchisees to get together, and create marketing and logistics support for their franchisees, but these are arguably less onerous, less risky, and less committed tasks than those demanded of franchisees.

 

If it’s prosperity you seek, there are a few options you should consider.  Otherwise, you will find yourself in the very large pile of mom-and-pop franchise owners who have bought themselves jobs but do not achieve the returns deserved from their labors.

 

First, you can get in early and buy a franchise in an industry or niche in its early to late growth phase rather than one in its late maturity like the book business.  McDonald’s in the 1970s, Subway in the 1990, and fruit juices, salads, and sushi bars during this decade are all examples of this phenomena.  Cast your creative minds toward the growth curves of the new wave of franchises.  Perhaps there are businesses available that help people better manage the finances they have (or don’t have) that will be in real demand as the economy contracts.  The fitness and health sectors are likely to continue to grow at impressive rates, while services for our aging baby boomer generation will undoubtedly mushroom during the years ahead.  The earlier you are in, the more that you can take advantage of the above-average margins earned by those facing fewer direct competitors in the short to medium term, and the more that you can establish yourself and take advantage of further opportunities to purchase additional franchise stores or territories before the rest of the world learns about the money to be made there.  Of course, there is a higher level of risk here, but higher rewards usually follow if the risks pay off.

Second, you can snap up existing franchises with low-ball offers that may be accepted, with a little luck, by those desperate to sell.  In this way, you won’t find yourself taking years to pay back the goodwill that may or may not have been in the business you have just purchased.  I definitely paid too much goodwill for my store, adding years of additional work to pay it down.  In contrast, I know of one colleague who has recently added a second franchise to his existing store.  His timing was great for both stores, and he paid little more than the value of the inventory he was acquiring.  For him, there is a much greater potential upside than there is for me.  Live and learn, right?  

 

Third, you can scout around to see if there are any franchisors offering more of a win-win deal than those who cream off a flat rate of your revenues.  In my view, a truly abundance-focused franchisor would take less of your hard-earned cash as you scale up, and then a higher percentage as you move beyond your break-even to increase your overall margins.  I’m not sure if such franchisors exist, but if I was just starting out I would certainly check this out.  If you have already decided on your industry, I would also closely examine, from every angle, the slice of your money taken by all of the existing franchisors in the industry before settling on any one.  Don’t forget, 8 or 10 percent of your gross revenues may not seem like a lot, but when it is considered next to your bottom-line, you quickly realize that every dollar given to them is one that you won’t keep.  It is a dollar you can’t use for local promotions, a dollar you can’t use to pay yourself a higher salary, and a dollar unavailable to pay down your business loan.  You will never see that dollar again.  Consider this fact very, very carefully and understand its serious implications for your business and your lifestyle before buying your franchise.

 

Finally, you can always take on some extra work outside your franchise or establish another business to help bring in some extra cash.  This is not without its potential problems, however.  Any time spent elsewhere may take your eyes off your most important asset, your core business, and thus compromise your most critical business outcomes.  In addition, your franchisor may not look at your outside work in a benevolent way.  Check the franchise agreement carefully and, if in doubt, discuss it with someone you trust in the franchisor’s organization before moving outside the business.

 

If you are going to go the extra mile to make your new franchise a success, think very carefully about your expectations for the bottom-line.  If they are unrealistic and inconsistent with the likely profit flows from your business, you may quickly jeopardize your own morale and that of your people, sending the business into a downward spiral.  With some solid homework, however, you will enter and run the business with a healthier business philosophy and with more realistic expectations for its results.

The Right Stuff About Buying a Franchise – Lesson 1: The L Word

Location.  Location.  Location.  It’s true.  Location is the most critical factor in the success or failure of any new franchise business, and most other businesses, for that matter.

 

Some franchisors have locations already available for the consideration of potential franchisees.   Some facilitate the purchase of existing outlets in established locations from franchisees looking to sell.  Others may leave the choice of location entirely up to you, although they will normally keep a watching eye on your choice.

 

When I returned from teaching an MBA class in New Venture Creation at Utah State University in 2001, I explored franchise ownership for the first time.  I had enjoyed teaching about franchising and had enjoyed excellent customer experiences at franchises such as Subway, Cold Stone Creamery, and Boston Market.  At the time, none of these brands were established in Australia in any meaningful way.

 

Thus, soon after our return, I attended a Subway meeting for potential franchisees held at south-western Sydney.  After Subway’s Regional Manager informed us that franchisees must first select their own location, I discussed with him two possibilities I then had in mind.  To the first, he said that the site, a shopping centre under construction, was already taken by a new franchisee.  My second suggestion was a regional shopping centre then several years away from development.  Unfortunately, it too was taken, this time by an existing franchisee in a nearby area.  Since I had no other good alternatives, I let the idea drop for a time.

 

I got back on the franchise horse via the purchase of an existing bookstore franchise in late 2007.  Fronting a pedestrian plaza in the middle of a regional business district, I confirmed the value of its location by sitting out front of the store and counting customers as they entered and left one afternoon.  I counted both buyers and browsers for about 20 minutes.  The numbers looked good.

 

Looking back, they were good, but perhaps not as good as I had first hoped.  Why?  Because I had observed the store during that time of day when it was, by far, at its busiest.  It was lunchtime, and I have learnt since then weekday lunchtimes, from noon until around 2:00pm, can account for 70 percent or more of the day’s takings.

 

Therefore, while the store continues to perform well, it would work a whole lot better if the lunchtime crowd was representative of customer flows and revenues across the entire day.  It’s not, and that’s life.

 

At another time in the recent past, I created two temporary retail stores at other locations, taking advantage of the busy pre-Christmas period to sell as much as I could in as short a time as possible.  The first was again at a place disproportionately favored by the lunchtime crowd, however the rent and overheads were sufficiently low to make the economics of the store work in my favor.  It did pretty well.

 

The second store was much larger, something all retailers would normally see as a huge positive, however the building itself was isolated from the main center of a regional shopping mall.  While it received plenty of passing automobile traffic as they entered and left the car park, the effort required for shoppers to actually come across to the building worked against its success.  While I didn’t lose money on the deal, I had paid a much higher rental for the site in the hope that the additional space would mean higher sales.  I was wrong.  It was not nearly the goldmine I had hoped it would be.  Ironically, the building had formerly been a Boston Market, a franchise that didn’t last long in Australia since it didn’t catch on.  Perhaps I should have learnt from their failure at the site some years before.

 

The other day, a friendly supplier gave me a great piece of advice.  He said that the target for any new retail store should be an average of 15 people walking past the location every minute.  While I suspect that many stores may still succeed with fewer pedestrians than this, it is a great “rule of thumb” against which we can evaluate any locations we are seriously considering.

 

This is the kind of research that only you can undertake.  Franchisors will cover themselves in legalese to ensure that they are not held accountable for any preliminary estimates of customer numbers and turnover.  The owners of shopping malls will do the same.  This is a job for you. 

 

Learn from my mistake.  If it is an existing site, survey the traffic flows at various times of the day and at different days of the week.  If you are thinking about an entirely new site, find comparison shopping centers and malls that have similar demographics to yours and a similar mix of tenants and make counts of the shoppers walking in and by stores like yours.  You will need to allow for the fact that the center may have grown its traffic over time, whereas a new mall will take time to pull a crowd, particularly in today’s challenging retail environment. 

 

If you get it right, however, a great location will ensure that your franchise business is a true boomer rather than a business which is here today and gone tomorrow.