Why Franchisors Fail - and How To Help Them Succeed, Part 5

Why Franchisors Fail - and How To Help Them Succeed, Part 5

This is part 5 of a 6-part series on why new and emerging franchise brands fail. In the first two parts, we discussed 8 reasons they fail. Part 3 began our discussion on how franchisors can get it right. The remaining installments dig further into what they can do to succeed.

Financing: Isn't there a better way?

Private equity has entered franchising in a big way. If you are an emerging growth franchisor who has not attained royalty self-sufficiency, chances are your brand has little book value because you haven't profitably monetized your intellectual property.

The franchise may not yet be creditworthy, lacking normal credit lines or access to commercial loans to fund growth. Or it still may be worth less than the franchisor has already invested, since a franchisor's book value is determined by 1) its assets (and many franchisors don't have many hard assets), 2) EBITDA (emerging growth franchisors typically won't have strong EBITDA), and 3) long-term predictability of their royalty streams (franchisee fee revenue is a "one-time hit" and not sustainable, so private equity firms will often discount the value of the franchise fee revenue the same way they would discount a one-time tax rebate; they will, however, assign some value to the predictable royalty revenue of new franchisees who are not open yet).

Thus, you are faced with a decision: Do I own 100 percent of something with predictably little value and long-term sustainability that is highly likely to fail, or do I own a smaller piece of something with great future potential that is better positioned to win? If you can live with a smaller piece of something with potentially greater value, you still stand to make out in the long run, and that might be the best decision for your company. Taking on a partner or private equity may be your best play.

Second, you must ask yourself, "What type of experience am I looking for in a partner?" Partnerships and equity firms will offer you varied levels of involvement and experience, depending on what they are looking for. Many franchisors may experience a knee-jerk reaction and think, "I don't want the 'blue suits' running my business and calling the shots!" But besides money, the right partner can offer a franchisor a particular brand of genius or experience they couldn't afford to pay for right now... which may prove to be the missing ingredient to their overall winning formula. The right equity firm or financial partner may bring the A-game.

One of the pitches franchisors make to franchise candidates is, "Don't go it alone. Buy into our experience. You will ramp up quicker and have a higher probability of success." And, on balance, they are right. But as a franchisor seeking funds for growth, you might find the shoe on the other foot. Too many franchisors go it alone, undercapitalized, under-resourced, inexperienced, and making the same rookie mistakes as legions of franchisors before them, never fully monetizing their franchisor business model.

Numerous equity firms and potential partners are operating today in franchising. Start with knowing what your organization needs, structure an offer, and then search out one that meets your needs. For instance, we operate a franchisor-growth equity firm called FPG Capital, which makes investments in emerging growth franchisors and brings with it highly skilled experts and proven intellectual property in lead generation, franchise sales, franchisor leadership, strategic planning, technology, operations, organizational development, and franchisee-franchisor relations. While we are highly hands-on and not for everyone, an equity firm like ours simplifies the franchisor's business by taking over some of the critical day-to-day functions such as franchise sales and providing the needed expertise to avoid pitfalls and ensure success.

We prefer to work in partnership with the existing leadership team, increasing their capacity, and "turbo-charging" their franchise program. Other equity firms seek operational control and bring in their own people, while others are completely hands-off and track their investments through key performance criteria and monthly board meetings.

Conclusion

Franchising is unforgiving. Franchise candidates do not want to finance their franchisor's learning curve, or bankroll their expansion with their franchise fees. They are paying for the franchisor's expertise and experience, not just how to sell products and services and run their operation. They don't want to wait for the people and tools you should have gone to the market with in the first place. They don't want your B-game. Smart money won't put their dollars there - though inexperienced franchise candidates might. You will never build a meaningful, sustainable, and profitable franchise brand leading a confederacy of naive franchisees.

Next time: Part 6, final installment. The big payout for doing it right, and the three things a franchisor needs to succeed.

Joe Mathews is a founding partner of Franchise Performance Group, which specializes in franchisee recruitment, sales, and performance. Thomas Scott, senior consultant at FPG, is a franchise lead generation specialist and an expert in creating franchise websites, blogging, SEO, social media, and PR campaigns to recruit qualified franchisees. This is an excerpt from their recent e-book. Contact FPG at 615-628-8461 or joe@franchiseperformancegroup.com.

Published: August 5th, 2014

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