Sustainability within any business commences with understanding the drivers of revenue streams and profitability. In finance circle this is often referred to as the “jaws” i.e. keeping the revenue line growing upwards on a graph faster than costs and expenses. Understanding the market the business operates, variations in consumer sentiment, known competitive advantages and old fashioned value for money and profit margins are all imperative. With franchise groups there are few that don’t have designs on dominating their given market whether domestically or internationally. A franchise group will have a heavy focus on creating best practice in their operations which are meant to reflect a consistently superior product or service than that of a non-chain competitor. Getting the product or service to market takes a good business mind generally with extensive retail or marketing mindset. Getting a successful product or service to market is only half the battle. Maintaining a sustainable brand and network requires focus and dedication and the ability to understand that without a sustainable franchisee proposition the situation is eventually destined for disaster. Unfortunately sustainability isn’t always given its due focus and failures at both franchisee level as well as franchisor level occur. Whilst I can appreciate the administrative constraints of the Franchising Codes of Conduct it reflects the desired rapport required that any given franchise group can lay its foundations on.
Whilst every business is unique and requires a variety in structure and operations the basics of sustainability commence with following rules:
1. Accept that without sustainable franchisees your product or service can’t be delivered to the market and create valuable revenues for the group.
2. Ensure that all interactions and agreements between franchisor and franchisee reflect point no1. Franchisees will see through any imbalance in agreements or practices.
3. Having a dedicated business practice for full disclosure of franchisee financial operations and the analysis of same is imperative.
These rules culminate in a practical and ardent process outlined in point 3.
The very nature of franchising produces a contradiction. Franchisors makes it core revenue from the franchisees performance on its top line sales because it charges royalties at that level. The franchisee on the other hand takes home its bottom line or profitability. The franchisor on the surface financially is unaffected by the franchisee’s profitability hence most franchisor tracking methods are aimed at top line performance because that captures the franchisor’s core revenue streams. However the truth is the franchisor’s viability is actually effected in many ways by the franchisee’s profitability. Firstly any worthwhile potential franchisee will perform their own investigations including talking to existing franchisees within the network before committing. It doesn’t take Einstein to work out that a franchisee making money will be more receptive to positive endorsement than one that isn’t. Secondly whilst one franchisee failure may not sink the entire group it casts concern for other franchisees and if the trend continues then the royalty stream is adversely affected and the group’s sustainability is in question.
Sustainability is about longevity and may vary for each brand or system however it has some critically common attributes:
1. Full financial disclosure from franchisees is required. Franchisors require suitable POS software that easily translates to performance data including franchisee comparative analysis programs. Regular franchisee profit and loss accounts are imperative. Most business run on at least a quarter BAS so these can be quarterly.
2. Meet face to face to discuss facts of financial performance. It is important to discuss triggers and early warning signs and have an action plan as opposed to attempting to correct a lost cause.
3. Use these meetings to receive feedback. Sometimes the feedback from franchisees is not enjoyable and may result is reinforcement of previous communication but the franchisees live and breathe the brand and its business.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by QSR Media. The author was not remunerated for this article.
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Rodd Nuttall is a Managing Director, Best Practice Franchising.
Best Practice Franchising Pty Ltd is a consulting firm dedicated to supporting Franchise groups & brands achieve success. Our firm has highly experienced franchising and finance experts who can assist with 5 core specifics Access to Capital Strategies, Franchisee Sustainability Controls, Bank Accreditation and Management, Franchise Finance Delivery, Realising Value Execution.