EXPERT ADVICE: Jason Gehrke | Director | The Franchise Advisory Center
Potential franchisees are drawn to franchising to minimise their risk of going into business, and most of the time this works out well for all concerned. But sometimes it doesn’t. Sometimes franchisees run into difficulty and even go broke. This is obviously bad for them, but also bad for the brand of the franchisor, and the reputation of franchising as a whole. Where individual brands suffer reputational damage, not only is the franchisor affected, but so too are its remaining franchisees as their resale values erode despite operating successful businesses. Consequently, franchisors should do everything within reason to ensure that franchisees in their network do not fail. The consequences of underperforming franchisees that go broke reverberate throughout a network and beyond. Here’s six ways to manage franchisee underperformance to mitigate the risk of the franchisee themselves losing money, and the risk of reputational damage to the network.
1
Recruit better quality candidates to start with
This tip might seem like a blinding flash of the obvious, yet franchisors often admit they have allowed sub-optimal candidates to join their networks. Mostly this is because the franchisee selection criteria is poorly defined, or not defined at all.
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The irony here is that if an organisation was to hire an executive on a salary of $150,000 per year, they would apply a very high level of scrutiny to that candidate, yet if the transaction is reversed and someone is paying $150,000 to buy a franchise in that same organisation, the franchisor might apply very little scrutiny of the candidate (except in regards to their ability to pay). Even if rigid selection criteria do exist, these can often be compromised by other factors, especially when an existing franchisee finds a buyer for their business (who may be unsuited to the franchise) and presents the sale to the franchisor as a done deal. This can often result in a competent franchisee being replaced with an incompetent franchisee, and a franchisor caught in the middle and who is damned by the vendor franchisee if they don’t consent to the sale, and damned to managing an underperforming franchisee in the future if they do consent to the sale.
2Require a business plan
Every franchise candidate should do a business plan before committing to a franchise. Good franchisors will not grant a franchise until they receive a business plan that broadly aligns with the franchisor’s prior experience of the operation of other outlets in the same network. Unfortunately, some franchisors don’t insist on a business plan as a condition of granting the franchise, or will accept a business plan to tick a box in their recruitment process but
