What Franchisors Don't Teach Franchisees
Jun 11, 2024
At the beginning of June, I had the chance to chat with Dan Rowe, CEO of Fransmart, for the Smart Franchising podcast. Dan invited me over to discuss some of the most critical topics that multi-unit franchisees care about to have success with their businesses.
Among them, we got to talk about the many gaps between franchisor training and franchise success. Or, in other words, what franchisors don't teach franchisees. In this blog post, I’ll sum them up to share this valuable information with you.
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As Dan pointed out, there's a gap between what the franchisors teach and what the franchisees need to know to be successful.
“Franchisors train you to make the burger, to paint the house a certain way, and do whatever the franchise is about. But that's not why people buy a franchise. They're buying a franchise to get wealthy, to have financial freedom, control, legacy, a family business… But all those things are not taught by franchise owners”.
It’s true: franchisors teach how the franchise works but not how to run the business and what franchisees go through on a day-to-day basis. And almost no one shares with them how to grow into a multi-unit enterprise, which is an aspiration for most brands nowadays.
That’s where the American Franchise Academy comes in! To close that gap by giving franchise leaders the tools, resources, and knowledge to turn their revenue into profit so they can be successful with their franchise business.
During the conversation with Dan, we went over some of the most common challenges that franchisees face when they get into the franchise industry. Many of them have to do with the fact that franchisors don’t teach critical business knowledge to properly run the business. That’s up to the franchisee to learn and implement on their own.
Some of those challenges are:
1. Not knowing how the franchise model works
Here at the American Franchise Academy, we separate the franchise business into two parts:
- The franchise systems: including the product, the service, the image, and the marketing that the franchisor is providing. This is really what you are acquiring when you buy the rights for a franchise brand, and what will bring sales and revenue. These are the reasons why customers are willing to give their money in exchange for that product or service.
- Your business systems: everything that you put in place to control your costs, manage and inspire your team to provide good service and scale your business, and understand financials to increase revenue year over year. Those systems will help you turn the franchise revenue into profits and scale.
As I say, one of the biggest secrets in the franchise industry is that when you buy a franchise, you do not get everything you need to be successful.
As Dan explained it: “People think they are buying a paint-by-numbers checklist and that everything's going to be in there”.
Yes, you get a proven brand, which is amazing because you obtain a product that people like, the vendors in the supply chain, as well as the brand identity and the interior design that actually attracts customers. And what’s best: you didn’t require any of the skills and abilities to come up with such a brand, so you save time, effort, and money.
The downfall: you don’t get the business side of the franchise, which is what will give you profit.
2. Lacking business acumen
You may have a 25-year career in the corporate world but that does not mean you know how to be successful with a small business. Managing a multimillion-dollar budget does not equate to running a small business. Planning for your annual budget is not the same either. Not to say managing a whole payroll versus a team of people.
Keep learning: 6 Key Financial Insights for Multi-Unit Franchisees
Having a business acumen is important to be a successful multi-unit franchisee. But you have to be self-driven because the franchise owner won’t teach you that. You have to acquire those skills and information somewhere else because the franchisor won’t instruct you in critical matters, such as:
- The correct hiring process
- How to do internal promotions
- How to motivate and discipline people
- What are the cost of goods
- How to control the variable cost and the fixed cost
- How to get to the break-even point
Having and applying all of this business acumen is what you need to run a franchise with confidence and success.
It’s like Dan explained: “People think you can make it up in volume but you don't. Or that by increasing 10% sales you’ll be more successful when it’s usually about making something more efficient or more effective”.
3. Not leveraging on their financials
As I pointed out with Dan, a lot of franchisees use the financials basically to pay taxes, instead of seeing them as a dashboard to know where the business is.
They also should have a 12-month business plan when the franchise opens, and review it every month to analyze if what they envisioned is happening or if something has to be adjusted. That's one of the things we teach franchisees: every October you have to prepare your financial planning for the next year to have a clear picture.
The same thing should happen when you open a new unit, especially if you have a prior unit so you can compare the data and information.
Also, you need to understand what the financials say to really understand the business at a very detailed level. I know it sounds like a lot, but if you do that in the first couple of years, by the time you have 20 units, it will be easy. Once you get that level of knowledge and understanding, you'll have it forever, and you will know what is happening and what to do about it.
4. Growing ahead of time
We always say that one unit is a job while multiple units are an enterprise. Franchisees want to go multi-unit because they understand that’s how you achieve true long-term success. But, until they open their second, third, and fourth units, they realize that the business complexity has doubled, tripled, and quadrupled as well but they don’t have the tools to deal with that.
That's what I call “the hell of 2 to 4 stores”: you are exponentially growing, increasing the number of challenges you have, but you haven’t defined or documented the systems to properly delegate how to operate your organization. So, you struggle and suffer from many growing pains, especially as you grow from one unit to being able to hire your first district manager.
It’s true. Growing is the best way to achieve time and financial freedom. But to get there, you have to have systems, processes, and procedures. And that's where a lot of people get trapped because franchisors don’t teach them how to do the business the right way, and they commit to opening 4 or 5 stores not understanding what that looks like.
Keep learning: When to add a District Manager to your Organization
5. Managing people and building the right team
Franchisees need to remember that they are in a people’s business because whatever product or service the franchise sells or provides, they do it through the people. So, to be successful, they need to, first and foremost, care about their people.
If they do, they'll make the right decisions to inspire them.
When you become a franchisee, you say yes to owning a business, to being part of a great network, and also, to being a counselor, mentor, and teacher to your employees. Especially with the younger generations because many of them have their first job in the franchise industry so you end up even teaching them how to be good employees.
6. Leadership style
Successful franchisees are self-driven, very organized, and proactive. They don’t can’t wait for somebody else to solve the problem. This requires a lot of true entrepreneurial spirit to take on whatever challenges there are and look for answers.
It also requires having strong emotional skills so they can address issues with intelligence and have the necessary difficult conversations so the business can move forward.
Sometimes we tend to give people what they want because we want people to like us, but that can damage the business. But approaching these matters with partners, managers, district managers, and employees is very important.
If you are fair and objective, and you communicate your arguments effectively, any conversation, no matter how difficult, is possible.
What Franchisors Should Be Teaching
To wrap things up, Dan asked me what are the three things I would advise franchise owners to teach their franchisees. These were my answers:
- If you are a retail or food service business where the cost of goods is your largest expense, which is true for most franchises, give your franchisees the ability to calculate and understand what the ideal and theoretical cost of goods are. Also, please teach them about inventory and how to tackle that waste.
- I know that the franchise’s policies and business model will affect the outcome of the labor cost. However, I would recommend the franchisor guides on how many people the franchisee should have, and when and why, so they can understand those nuances of the business, interject their policies, minimize the expense, and reduce the waste.
- I know franchisors do go a little bit over the financials, but it would be great if they could go to the line-by-line item of what they mean. Also, give them some ideas on what they could potentially negotiate with vendors to get better costs and control the outcome of their profitability.
In case you missed it: How Can Franchisors Help Franchisees?
Dan contributed with these other recommendations:
- Separate the startup cost from the PNL of the business. “When a franchisee opens, the franchisee can get into a panic if they feel they are not making money. That’s so avoidable if the franchisor would just separate the startup costs, or CapEx, in a different account, and run the PNL of the business at another one. That way, if their bank account feels empty, at least they can reconcile why”.
- He added another suggestion for the opening stage: “They have to be able to tell a franchisee “your food and labor cost your first 90 days are going to be whacked. Here's why”.
- Help franchisees have a plan to deal with turnover because not everyone you hire will stay with you.
While I agree on the crucial aspect of turnover, since it is the largest hidden expense in any business, I think this issue should be addressed directly by franchisees, because it has to do with people.
What would you like franchisors to teach you so you can be a successful franchisee? Let us know on our social media! And if you are struggling with your franchise business, don’t worry! The American Franchise Academy can help you achieve your goals and save your business ownership dreams!
We have training programs for unit managers, district managers, and for developing multi-unit franchisees and we can support you in your journey of achieving your highest potential.
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