The top 10 franchising mistakes

The past decade has been very kind to the franchising industry. The sector now represents 14% of the nation’s economy. But growth in franchise chains is slowing, as consumer confidence has moderated and the sector is competing with the booming mining and construction industries for franchisees and employees.

Tougher times mean franchisors have to be better operators to make money and grow. And it is more important than ever that franchise chains don’t make mistakes. Mistakes in franchising can lead to disharmony within the franchise system, disputes, loss of reputation, and business failure.

You do not have to look any further than the well-publicised disputes in the Midas car care chain and the Bakers Delight systems to see how problems in the ranks can trouble successful businesses.

Here are 10 of the worst mistakes you can make in franchising, and how to avoid them.

1. Selling franchises, not granting them

Part of the attraction of the franchise business model is that franchisees contribute capital to the business to help it expand. Every extra franchisee is extra cash into the business.

But beware. This can be a trap. Franchisors can be tempted to sell a franchise to anyone with the cash and “a pulse”, or so the saying goes. Not all comers are suited to franchising and many will be unsuitable for a particular franchise system.

They may not have the skills, the inclination, or a true understanding of what will be required of them. Once the franchisee has made the investment in the franchise chain, they have an expectation of success. If those expectations cannot be met, there is likely to be conflict and disharmony, which may spread to other franchisees.

2. Making inappropriate acquisitions

Aggregating franchise systems is very fashionable. ASX-listed Retail Brands Group, the owner of the bb’s café and Donut King chains, recently bought Brumby’s Bakeries and Michel’s Patisserie.

The deals follow the sale of icecream chain Wendy’s to the Asian private equity firm Navis Capital Partners and bookseller Angus & Robertson’s sale to Pacific Equity Partners. In November 2005, the owner of the doughnut maker Krispy Kreme Australia, Hunter Bay Partners, entered a joint venture with Souls Private Equity to form Food and Beverage Company, which owns the Jesters Pies franchise (which merged with Shakespeare’s Pies in July 2004).

It is a tempting way to grow quickly, particularly for retail chains that have opened a store in every quality shopping centre. But the strategy is a lot harder than it looks.

Franchising culture is important to the success of a franchise system and each franchisee within that system. There is a big risk of losing the culture and vision when one franchise system merges with another. Sharing back-office resources could mean less support for franchisees, or a dilution of what makes the franchise brand and the franchise system different and gives it its competitive edge.

Wreck the culture with an inappropriate merger and you wreck the franchise.

3. Going international too early

Franchisors are moving overseas earlier and more often. A quarter of all franchises were operating in international markets in 2006, according to the Griffith University Franchising Australia report. Franchisees had an average of 29 units before venturing overseas in 2006; four years ago this number was 60.

There is nothing more tempting than an email from China or India seeking to buy a master franchise for $US250,000, but it could be the biggest mistake a franchise can make.

It is never as straightforward as it looks and it will cost you time and money. Big pitfalls include setting up supply-chain logistics, the need to customise products, services and brands to the local market; foreign legal systems and regulation and intellectual property protection.

Kip McGrath Education Services learned some of these lessons the hard way. The education franchise sold a master franchise agreement to a promising business partner in China in 2003 with plans to open 1000 franchises within a decade. But two years later franchise sales were suspended because the master franchisee sold 24 franchises in the first month but most didn’t last because they were the wrong people. The company lost $144,000 in 2005-06.

Their latest plan is to buy out the master franchisor and sell master franchise agreements that govern provinces, rather than the entire country. And they’ll spend more time training the master franchisees.

Going international eats up capital and distracts management from the local business. Senior management get absorbed by the travel and the lure of big money, and can take their eye off the domestic market. So don’t go before the local business is solid. Or risk damaging the brand internationally.

4. Expanding too quickly

Many franchise systems get into trouble because they grow too fast and can’t support franchisees they already have.

New franchisees need more attention than established franchisees. So taking on too many franchisees too fast will stretch the franchisor’s resources to breaking point.

If the franchisees are not properly supported with training and advice, they are unlikely to be successful. If the franchisees are struggling, so will the franchisor.

5. Setting the franchise fee too low

Some franchisors try to set their initial franchisee fee low to attract as many people as possible to the business. But it can backfire.

People buy a franchise expecting support from their franchisor. If the franchisor is under-funded and cannot provide the support required to set up and maintain healthy franchises, the franchisees will be dissatisfied and many will struggle.

“Franchisees want more, not less support. Funding has to come from somewhere. Charging low fees is short-term strategy.” says franchising lawyer Stephen Giles

6. Master franchising

Master franchising can be a mistake domestically and internationally. It is an attractive strategy because it enables fast growth. It involves entering an agreement for the master franchisee to take your brand and business system and develop it within a certain territory.

But it rarely works in the long term. If it’s not done properly, it will add another level of management and more people taking a cut of the profit, without adding a lot of benefit. Long term there is often not enough money to go round. The franchisor has to share with the master franchisor and still has to provide support to the franchisees.

Many franchise systems that started by setting up master franchises in parts of Australia have ultimately bought those master franchises back. Michel’s Patisserie is one.

If you sell master franchises overseas, you have to be very careful who you select as you master franchisee. Printer re-filler franchise Cartridge World has had to buy back its franchise rights in some territories in the United States when the master franchisor has not worked out.

Direct development, as Roger Gillespie is doing in Canada, is safest, says Giles. Gillespie, co-founder of Bakers Delight, is developing his chain in Canada himself under the brand name Cobbs. He has spent a lot of time in Canada and he has relocated local staff to get the business up and running. It is the more expensive strategy.

7. Failing to take proper care of relationships with franchisees

Greg Nathan of Franchise Relationships says embarrassing a franchisee in front of their peers is a big mistake franchisors can make. It can turn franchisees into “enemies within”; repairing toxic relationships can take a lot of work.

He says he has seen it happen many times. At a conference or a franchise system meeting, a franchisee will question a senior executive. The executive, feeling challenged, might snap and give a sarcastic or even abusive reply.

It can play out into a major dispute, which has at its core a personal issue where someone has been personally jilted.

8 Failing to consult adequately before launching a new initiative

Nathan says it is a big mistake to announcing changes to franchisees without consulting them. This doesn’t mean all big decisions need to be made by consensus, but franchisors should always seek feedback from franchisees on strategic changes for the franchise system.

If franchisors do not get the opportunity to give their feedback before a plan is implemented, they are likely to feel angry and resentful even if the plan is a good idea. “They feel they should have had imput; they feel it is disrespectful,” says Nathan.

“Franchisors often think silence from franchisees when a plan is announced is agreement, but it could be they are in shock. Then later you will get a backlash of resistance that catches them unawares.”

He recommends finding out the strengths and weaknesses of a particular strategy before rolling it out. Get people into small groups and have a discussion. This way it stays controlled, and you don’t have loud people dominating. People can clarify their thinking. The best communication is face-to-face.

But beware, it’s also a mistake to listen too much to the loud people in the franchise network and assume they are speaking for the group. A good way around that is to do surveys so the quiet majority has a say.

9. Becoming office-bound

If senior management are becoming office-bound and not getting out into the market enough and more specifically not talking to customers, they can lose touch.

Executives need to get behind the counter, get their hands dirty and work directly with customers. If they don’t, they risk becoming disconnected from changes in the market and can miss opportunities.

Often franchisees won’t see the opportunities because they are caught up in the day-to-day operations; it requires the fresh eyes of the franchisor working in the business to pick up on them.

Market research is not enough. Also, being out there with customers and franchisees helps the franchisor emphathise with the franchisee and it is good thing to be seen doing.

10. Co-branding inappropriately

Recently, quite a few franchise systems have started co-branding. Fast food brands inside petrol retailers are one example.

But it can cause problems because the two systems have different cultures. Lorelle Fraser of Griffith University says the main issue seems to be working out who is boss.

In the end, she says, many brands have co-branded with themselves, instead of partnering with other franchise chains. McDonald’s and petrol retailer BP used to co-brand, but now McDonald’s has McCafe and BP has developed its own coffee brand.