January 29, 2015 at 4:49 pm #385Marican IncorporatedKeymaster
USING THE FRANCHISE E-FACTOR TO MONITOR EARLY SIGNS OF BUSINESS DISTRESS ……
FRANK, A FRANCHISEE FABLE …….
There was a franchisee, his heart was filled with GLEE. ‘My franchisor, has not one flaw. I just feel so hap-py!’
The first few months were tough. At times, he ran out of puff. His customers were demanding and his staff needed careful handling.
Soon, although his sales were fine, he stopped to view the bottom line. He stared and stared, at the royalty FEE and thought ….. Hmmm ….what do they do for ME?
The more he thought about this lot, the more he thought there was a plot. ‘I work all day and still I pay. What do they do for ME?
His franchisor took all the dough, while he was really in the know. ‘They all just sit around all day. While I am the one that has to pay.’
He felt like he was in a cage and got worked up into a rage. ‘I am not just sitting quietly, you have to set me FREE!’
His franchisor could feel the heat, and set a place where they could meet. ‘How’s it going Frank?’ he asked, then he waited for the blast.
As Frank complained of how he felt, his anger soon began to melt. For a while he was extremely pensive, his franchisor was not defensive.
Soon Frank became reflective as he saw a new perspective. He learned of things he did not know and felt a little like a shmo. ‘Oh …. I never realized that. Perhaps we should have had a chat’
Plans were shared, discussed and stated and certain things negotiated. They also talked about the val-ues and stood inside each other’s shoes.
Frank realized that he had a choice on how he used his time and voice. He could see the worlds of ‘You and Me’ or make the shift to ‘Us and WE’.
That my friend was not the end, though this may have raised your hopes. For franchising is a journey and you have to learn the ropes….
This fable has obviously alluded to how a franchisee’s feelings about being part of a franchise system can change over time. This behavior pattern which is surprising common and consistent has been mapped by a corporate psychologist, Greg Nathan and has given the name “The Franchise E-Factor’ for obvious reasons.
This model is used to better understand the stages and state of franchisee business. The state of the business is a direct image of franchisee behavior and perceptions.
The model comprises of six distinct phases and franchisees tend to move through these stages at their own pace, depending on a number of factors.
The characteristics of each stage can provide valuable guidance to a Field Consultant and Financial Department.
The main purpose of this model is to motivate and promote franchisees and franchisors succeed together as an united team. Let’s view it as a modern ‘Failsafe risk management’ tool.
Below are the 6 stages in summary:
months Stage behavior and emotion operations financial
1 -3 GLEE Initial phase. Nervous, Excited and optimistic Strives for perfection and follows every procedure Meets operational expenses and honors loan repayments 3 – 12 FEE Become increasingly sensitive to franchisors marketing and royalty fees. An emotion of skeptical prevails. Start analyzing amount of turnover in relations to fees paid out to franchisor Starts to pay royalty late and possibly default on royalty payments due. 12 – 18 ME Focuses on MY success and hard work. Starts to play down the contribution of the franchise system. An emotion of self-centered, proud and frustration is resonated. Under declares turnover amounts or finds alternative suppliers of the same quality stock to deviate from purchasing stock from head office Large salaries and withdrawals are made or acquiring personal capital assets such as a new vehicle. Taking long periods of leisure away from business. Cash availability begins to decline. 18 -24 FREE Has a need to break free and test the franchise systems boundaries. Aggressiveness, cynical, constrained and combative. Leaves operations to store manager and staff. Interests are directed to other brands in the similar market Gross margins are erratic and volatile due to shrinkage, pilferage or incorrect buying procedures. Loan repayments have defaulted. Royalties in arrears by two months, if not more. Net profits begin to decline 24 -48 SEE Meetings and open discussions with franchisor can help to better understand each other’s viewpoints. Each party has and plays an important role. Becomes inquisitive, open minded and empathic. Focus is shifted back to operations. Possibly even reduce staff count Cash flow is poor and possibly more capital is injected back into the business. Workout with creditors may be an option including loan repayments is restructured. 48 < WE Work out the best way to maximize your success and satisfaction by working with, rather than against, the franchisor. Decides to co-operate, is assertive and forward thinks to salvage the business. Revert to operations manual. Training becomes a focus. Payments are honored and costs are monitored closely. Budgets and sales forecasts are revised.
The most critical and vulnerable stage is between 12 to 24 months as financial distress emerges and fear of failure becomes overwhelming. There is only one person to blame and that is the franchisor.
As the franchisee’s business confidence grows, their drive towards independence increasingly assets itself. The Free stage is characterized by need to break free of the restrictions and limitations of the franchise and a testing of the systems boundaries. A franchisee might also test out how tight the franchise agreement is and may even try to break free of their contractual obligations. Obviously changes of conflict are of greatest at this point. Franchisees in this stage can become a negative influence on others and may also be exploited by someone wanting to provoke trouble in the franchise network.
Conflict in relationships seldom goes away by ignoring it. To move to the SEE stage there needs honest and open discussions regarding every aspect of the business including a financial strategy. It is usually at this stage that business rescue or turnaround measures are adopted and applied. If the franchise system has been managed fairly and effectively the franchisee will generally come around to seeing that without consistency and adherence to the systems, the strength of the entire group would be lost. It is this shift in perception that characterizes the SEE stage, where a franchisee is likely to experience open mindedness to change and accept the need to change.
To reach to the final stage of WE, the franchisee has matured and is objective and commercially minded. Most importantly, they MUST be profitable with adequate cash flow. A franchisor that wants their franchisees to move into the WE stage must deliver on their obligations and be fair and consistent in their dealings.
Franchisees who have negotiated their way through the franchise relationship minefield from the Glee to the We stage are a franchise network’s greatest assets. This is the ideal of a healthy interdependent relationship is something franchisors and franchisees should strive for.
They will often be quiet achievers who keep one eye on their profit and one eye on cultivating healthy business relationships, not just with their franchisor but with their suppliers, peers, and of course, their customers.
One of the most important management roles of the franchisor is to effectively guide its franchisees through the franchise E-Factor, also provides a greater level of detail on how to manage franchisees through each stage and improve business performance.
By: Maria Vannucci
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