The corporatisation of franchising

• the corporatisation of franchising.pdf

the corporatisation of franchising.pdf

Corporatisation is the process of developing the management structure and migration strategy of a small to medium enterprise to create an enduring business independent of the founder or single proprietor.

The foundation set by corporatisation will allow the business to grow beyond the capacities of the owner/operator substantially increasing the value of the business.

Any franchise system which has been in business for more than 10 years in the opinion of DC Strategy must embrace the concept of corporatisation or face stagnation.

As franchise systems develop they go through clear stages of growth.

Establishment period

During their formative years there is a focus on the sale of franchises to drive growth and revenues. This growth is often at the expense of careful franchisee screening and selection. Early in this part of the cycle, franchisee training and supervision is relatively high. However, as more franchisees are added and geographic considerations come into play, the level of training and development needed to drive individual franchisee sales falls away as staff and management expertise are stretched.

As a result, franchise sales start to slow as franchise management issues emerge. At the same time expenses are rising to service the communication needs of franchisees from the franchisor.

This results in a pause in growth while the franchisor learns how to manage the franchisee-franchisor relationship.

The first step in corporatisation has now begun. The founder must answer the following questions:-

Has the franchise programme been correctly developed? Are the levels of royalties covering expenses? Is the marketing levy correct? Should I review my franchise agreement? How do I manage my franchise network? What is the next step in developing the business? How relevant is my original business plan and strategy? Are my product, services and business system competitive? 

Consolidation period

As can be seen by the review of any franchise directory, many franchisors fail to address these and the miriad of other issues peculiar to their franchise network and simply fail to develop the full potential of the business. They remain small franchise networks often with under 20 or 30 franchisees. They became disillusioned with franchising. A form of the Peter principle has come into play. They have not been promoted into the level of their own incompetence as they are the boss and always have been. Instead the business has grown to a level which has both exceeded the proprietors ability to objectively review the current situation and become more complex than the proprietor can competently manage. If you find a franchisor blaming his problems on his franchisees, this is a sure sign of the Peter principle in play. I call this Young’s first law of franchising “Every franchise system gets the franchisees it deserves”.

The original proprietor may have also reached his initial “mental” objectives, i.e. “have 30 franchisees in three years” or “expand into other states” and failed to set new crystal clear goals as complexities cloud his vision. This point is often reached after five years. A review of the franchise programme and the development of a written business plan with clearly defined objectives is often needed here to refocus the franchisor. Unfortunately, this opportunity to reignite the business is often replaced by a more introverted back-to-basics shoulder-to-the-wheel approach where the proprietor simply works harder.

Slow but steady growth in both franchise numbers and network sales follows with the franchise founder finding the business owns him or her rather than he or she owning the business.

At the same time, the franchisor’s early franchisees are reaching a similar point in their own business cycle. The better franchisees often take the option of selling their franchise because there is no clear vision being articulated by the franchisor and the prospect of more of the same is not appealing.

This drain of good franchisee operators can have a drastic effect on the franchisor and his or her staff. New franchisees need intensive orientation, training and support and the longer serving franchisees need a different form of communication which focuses on improving their individual franchised businesses. The franchisor’s business also needs re-engineering to tap its potential. 

Clearly, the demand for a new management structure becomes more pressing.

In analysing many franchisors at the 10 year stage, we find the delay in restructuring the business has been costly in terms of lost opportunity.

There has been little management focus on longer term strategies. In most cases, the holy grail of more franchise sales is the only strategy being actively persued at a time when franchising as a management and marketing tool may need other parallel management tools to drive profit and growth. 

Corporatisation

The process of turning a proprietor-led business which provides a well paid job to the business owning franchisor into a valuable and enduring business asset is underpinned by an understanding that any good business is dependent on a team of people, their job roles and the processes and systems used in the business rather than one unique irreplaceable individual.

In other words, the founder and franchisor proprietor needs to accept that the franchise business he or she built can survive and flourish without his or her day to day input.

This is not an easy concept for most franchisors to accept. It is, however, the most crucial.

This will determine the future path of the franchisor’s business. One road leads to more hard work and greater reliance on the proprietor for not only vision and leadership but responsibility for supervision of people, administration, finance and operations. We see this as a well paid but inevitably finite future which constantly requires the proprietor franchisor to grow both his skill, ability and industry experience while drawing from a bottomless well of enthusiasm.

Clearly, logic dictates that this cannot continue for the long term. Either the limits of ability, enthusiasm or age will ultimately overtake the proprietor franchisor as the franchise business becomes larger, more complex and hopefully, more global in its development. We argue that this will inevitably lead to a sale of the group so it is better to prepare for the sale now if corporatisation is not on the agenda.

We also make the point that the entrepreneurial skills needed to grow the business are not the skills needed to manage the business.

This is not to say that the proprietor franchisor is redundant. Far from it. The opportunity to assume a new, more valuable role as part of a formal board of management beckons.

The road to corporatisation, if navigated correctly, offers ultimately more scope for the business, more satisfaction to the proprietor franchisor and his or her employees, and greater rewards for all. This path requires a corporate structure defined by skill sets, job roles and key performance indicators driven by strategic plans and budgets, and a clear course of action.

People are still the key but once the proprietor franchisor is removed from the management picture, the scope for a structure to drive growth can create new dynamics, and a new enthusiasm not easily replicated by an entrepreneur 10 years into the mission with several or many long term, valuable employees itching to get to the top. 

Corporatisation implies a more formal management structure and will need the right advice, careful planning and time to unlock the potential. 

The corporatisation crossroads is the point at which small and medium-size enterprises either remain that way or move down the road to become big business.

The main difference between big business and small and medium-size business is corporate structure and corporate governance. Most smaller organisations, and this includes most franchisors, do not become big businesses because either the proprietor vainly believes only he or she can lead the business, a comfort zone is reached by the proprietor which he or she does not want to leave or the proprietor does not know how to take the necessary steps to corporatise the business. 

Regardless of the above, the move to corporatisation of franchise groups has begun. 

Every franchisor will either end up competing with two or three substantially larger corporates (this business consolidation is now emerging see box), be aggregated by a consolidator of franchise systems (Gary Diamond, the proprietor of Pets Paradise, now controls Billy Baxters Coffee Shops, Warner Brothers World and has launched the British India franchise chain) or bought and absorbed by the competition (Autobarn acquired Bumper to Bumper).

The big get bigger

CONSOLIDATION OF COMPETITION IN FRANCHISE

FOOD
KFC, McDonalds, Burger King, Pizza Haven, Pizza Hut, Red Rooster, Cadbury Schweppes

TELECOMS
Telstra Shops, Optus World

RETAIL
Freedom, Ikea, Oz Design, Harvey Norman, Retravision

SERVICES
Bizzy Beez, Jani King, Jims, VIP 

PETROL
Shell, BP, Mobil, Liberty 

MOTOR VEHICLES
GM, Ford, Toyota

The Corporatisation of franchising is being further fuelled by franchising’s two greatest strengths. The harnessing of motivated owner operators at the customer end of the business and capital for expansion which is neither debt nor equity on the franchisor’s balance sheet.

While capital is less of an issue as more banks and venture capitalists understand the risks of franchising, the people issues of loyalty and commitment will continue to attract both new franchisors and franchisees to franchising. Many new franchisors are corporate big business with good corporate governance. They have a need to attract good people to their distribution networks to meet the high levels of service expected of today’s consumers, at the lowest possible distribution costs.

At the same time, franchising is entering a new phase of development and the message is clear. Tomorrow’s franchisor will need to get big or get bought by their larger more predatory competitors. The alternative is to be sidelined as a minor player of little value to either the proprietor or their larger competitors.

Growth by franchising is not the only path to getting bigger and creating a more attractive business for acquisition or consolidation. Corporatisation provides the opportunity to introduce new capital, to fuel growth and pursue opportunities not currently able to be funded by current reserves or just franchising. 

While franchising is a strategy that can build a network, it is not the only option to drive sales and profits as the franchised business consolidates. Other issues such as franchisee training and development and the mix of franchised and company owned units needs careful consideration as part of any strategic plan. 

Corporatisation goes beyond the makeup of a board of management or corporate structure. It is a process of strategic planning which, while building on past processes, needs to incorporate new ways of achieving new objectives. 

The established franchised group of today is vastly different from when it granted its first franchise. Accordingly, it should not keep doing what it did for the last 10 years. Corporatisation is the new paradigm which will drive growth and profitability for an established franchise group over the next decade.

Rod Young
Executive Director
rod.young@dcstrategy.com
02 8220 8711