Franchising with Disciplined Planning = Capital Gain
Franchisors who have achieved a certain level of success naturally begin to think about the next phase of their company's growth and development. Simply observing others who have gone through the various stages of growth, however, they will see there are many ways to fall short of their objectives.
Of the myriad potential trouble spots a franchisor may face, none is more devastating and pervasive in its impact than a loss of confidence in the brand in the capital markets. At the same time, nothing can have a more positive impact on a company's ability to fuel its growth with the capital it needs - when it needs it - than enjoying a favorable view from those capital markets.
In my experience, there are several elements that enable a company to gain and maintain a high level of confidence among early-stage investors, financial institutions, private equity firms, or the public markets. These are:
- a disciplined approach to planning;
- a business model or strategy that's defensible against competitive pricing and margin pressures;
- following best practices for financial controls and processes;
- effective communication over time;
- an ability to address issues and change course without waiting for external pressure;
- a strong internal culture that focuses on customer satisfaction; and
- significant equity ownership among leaders and employees.
Each of these topics deserves special attention, but we will begin with the first - a disciplined approach to planning.
"Adventure is just bad planning," said polar explorer Roald Amundsen.?Now there's nothing wrong with the occasional adventure. Some of us like living on the edge. For example, the world is divided into people who carefully read manuals and directions, and those who don't. No problem. You know who you are.
The problem comes in getting an organization - particularly a franchise organization - to execute, day in and day out. Any business has, over time, developed a personality and a way of doing things. It has an attitude toward risk; it has a framework it uses to understand its world; and it has a set of controls and guidelines that, hopefully, keep it out of the ditch. Every organization has these things, whether or not it used a formal planning process to put them in place.
Many companies engage in what we call "planning by default," which works fine for a while, maybe even a long while. But its weaknesses as a leadership philosophy come into sharp, and often painful, focus when there is a turn in the road - a severe economic downturn, a period of rapid expansion, an unexpected move by a competitor, or a sudden need to change leadership or sell the business. In the last instance, a prospective buyer coming in with an extensive due diligence checklist can be a sobering experience. "We didn't think of that" is not something you want to hear yourself saying in response to a buyer's or an investor's question.
Getting to the matter at hand, this topic should be important to successful franchisors as they take their businesses to new levels. The reason is that as a franchised systems grows - and grows rapidly - things change. And not only that, new people and skills are needed, new relationships must be forged, and new sources of capital such as banks, private equity, or other investors may be needed to support growth.
The good news is that most of these demands can be anticipated. But that doesn't mean that it's any picnic orchestrating things. For example, let's look at just two areas that will surely need special focus: 1) building the company's capabilities to prepare for the due diligence process that comes with external financing of any kind, and 2) understanding what it takes to lead a large franchise system.
A successful financing or partnering depends on having a variety of things in place well before reaching out to potential allies for growing your business:
- a business plan that is fully understood and supported by the leadership team;
- an efficient means of scaling your business, taking into account the various costs incurred in supporting a growth program;
- a firm grip on all business processes including systems, risk management, controls, reporting, and clear notions of events and factors that could pose a disruptive threat to your operations; and
- an organized paper trail for contracts, letters, real estate documents, and other such items that may not reside in one easily accessible place.
In addition to these organizational matters, being a franchisor - particularly as you grow outside of your home markets - involves a number of special concerns:
- ensuring you have a profitable franchisee business model;
- knowing your customer base as you expand to target the most appropriate markets for continuity in growth and brand development;
- defining best practices to ensure the right growth processes, procedures, and systems are soundly in place to support existing franchisee expansion and a growing new population of franchisees;
- having an appropriately trained staff that includes sales, administration, operations, and other supportive disciplines;
- knowing your "best in class" franchisee profile;
- identifying your underperforming franchisees and/or "distressed" franchisees and having a plan to bring them to health or to a healthy exit that can elevate the brand value and vitality as a whole;
- developing a strategic growth plan that is sensible and executable to reach the targeted goals; and
- understanding the "new era" of sophisticated franchisee candidates and their expectations, because competition for new franchisees will be brutal.
One more thing!
Planning is a discipline, not a binder full of PowerPoint presentations and charts. It is not list-making. It is not a story. Maybe the problem is that the word planning itself is dry as dust (or that it can bring to mind documents that are in fact collecting dust). It can sound bureaucratic. Using words such as "scenario," "agenda," or "program" could help. Whatever you call it, though, getting better at it as a team will allow you to spend much more time playing offense rather than defense as you expand your franchise to its full potential.
Lynette McKee, CFE, is the CEO and Managing Partner at McKeeCo Services, where she serves as a strategic franchise and development advisor to restaurant and hospitality brands. She has spent more than two decades at companies including Dunkin' Brands, Burger King, Denny's, Checkers, and the Metromedia Restaurant Group. Most recently, she was Executive Director of the National Restaurant Association Educational Foundation. Contact her at 407-333-3533 or visit www.mckeecoservices.com.
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