Franchising: Once bitten

[Peter Elliget]…"What you need [as franchisees] is people who can't afford to lose the money," he says. So when business migrants show interest in the business he will make sure they are interested in running it.

BRW Inside Business
March 3, 2005

Franchising: Once bitten
Some of Australia's most successful franchisors recount the mistakes they have made in their businesses, and the lessons learnt.
Jacqui Walker

Imagine hiring someone for a job and the next day someone else turns up to do it in their place. This is akin to what happened to Dennis Polivnick, the chief executive of the retailer Mrs Fields Cookies, last year. "[The franchisee] bought the franchise on the pretext that she was going to run it herself," he says. "The lady was perfect, she had the right personality." But after setting up the store she came in less and less. "Eventually she would be only spending an hour a week instead of eight hours a day [in the store]." In her absence, the franchisee left her mother, who had not undergone any of the training or met Mrs Fields' selection criteria, running the store.

"We are pretty strict in our standards so every time they breached our standard we had to issue them with a breach notice," Polivnick says. "Sadly, when you do that, the relationship goes south."

The stores' sales were poor and eventually Polivnick offered to help the franchisee sell the business. "Fortunately, they saw the logic in that." The franchisee he recruited to take over has increased the store's weekly turnover compared with the same week in the previous year by between 30% and 100%. There was a big lesson in the experience for Polivnick: "I have another agreement that I have had my lawyers draw up [that stipulates] that the franchisee undertakes to be the manager of the store as well."

Polivnick is not the only successful franchisor to make a mistake; nor the first to learn from it. BRW asked all the franchisees that took part in the survey for the franchising special issue on January 20, about the biggest mistake made with a franchisee in the past 12 months. The errors included putting too much faith in an untested franchisee, granting multiple stores to unprepared franchisees, taking on under-capitalised franchisees and not protecting the brand from former franchisees setting up in competition. Importantly, the fast-growing franchisors all learnt from their mistakes and found strategies to improve their operations as a result.

James Fitzgerald, the chief executive of Foodco, which owns the retail chains Muffin Break and Jamaica Blue, says his biggest mistake of the past year with a franchisee was failing to recognise the extra skills that franchisees need to be a multi-store operator. He says he gave a husband-and-wife team running one of his Muffin Break stores the opportunity to take on a second store that had been underperforming. But at the same time the couple took over the store, the wife took up a course of study. "All of a sudden we had one person with two stores [instead of two people with one store], so the non-performing store improved a bit but the existing store fell back," Fitzgerald says. "So the franchisee is not happy and nor are we."

He says the mistake was failing to recognise the contributions made by both members of the team. "If we had our time over, we would look more closely at the husband-and-wife team and their respective contribution and probably more closely at their ability to manage people, because these are more important skills when you are running two stores."

Malcolm Long, the co-founder of Sleepy's, a fast-growing mattress retailer with 32 franchisees, also made a mistake in granting multiple outlets to one person. Last year he granted one person five franchise units, three in Queensland and two in New South Wales, and they proved to be too much for them to handle. "It was far too much for one person to control," he says. The stores have struggled and Long is now dismantling the structure. He says the experience has taught him to make sure multiple-store franchisees have the different skills required for running more than one store.

Long says: "You need an exceptional eye for detail and good systems for people in stores to report back to you." He is now cautious of franchisees taking on more than one store and he ensures their suitability by having interested franchisees develop a business plan and a detailed explanation of how they will make the multiple-store business model work.

For Wayne Butcher, the chief executive of BBNT, an emerging chain of fast-food outlets, his biggest mistake of the past 12 months was particularly costly because the chain is in the early stages of its growth. Butcher, who works in Melbourne, used a franchise consultant to recruit his first franchisees in New South Wales. The consultant found an applicant who satisfied all of Butcher's criteria: "Financially, he looked good and he seemed [he would be] a powerful advocate for the brand," he says. On the strength of this assessment Butcher travelled to Sydney and started setting up infrastructure and negotiating with suppliers and agents for a site.

Butcher estimates that he invested about $20,000 and 200 hours over eight weeks before the deal fell through because the bank refused the franchisee finance. "We took his word on his assets and liabilities, even though he had not been approved for finance by the bank." It turned out that the bank's valuation of his assets did not match the franchisee's valuation. Butcher says that in future he will be making sure that franchisees are financially qualified before trying to find a site for them and investing in their business.

Nipping problem franchisees
Peter Elliget, the chief executive of the franchised retailer Cookie Man, says his mistake was in accepting franchisees with money but without the necessary commitment to make a new store successful. "I have a saying, 'People who have money can be fat and happy'." He says he regretted taking on business migrants as franchisees because it has turned out that they made the investment in Cookie Man to satisfy visa requirements but had no real interest in operating a franchise.

Now Elliget has a comprehensive vetting process for franchisees, including psychological profiling. He devised a test with a Canadian company called Franchize, which tests applicants for particular qualities modelled on the personalities and qualities of his 10 most successful franchisees. "What you need [as franchisees] is people who can't afford to lose the money," he says. So when business migrants show interest in the business he will make sure they are interested in running it. "I don't open stores for growth's sake. It's not a matter of numbers, it's a matter of quality of numbers, and a problem franchisee can drag you down for years."

John O'Brien learnt this the hard way. He is the founder and chief executive of the pool and spa franchise company Poolwerx, which has 151 franchisees and recently started opening retail outlets. O'Brien says the biggest mistake he made last year was failing to protect the business from franchisees dropping out of the Poolwerx system and running their business in competition. Last year one of his first franchisees opened a Poolwerx retail outlet but started struggling financially because of personal problems.

O'Brien supported the franchisee by offering him a moratorium on franchise fees. But one night the franchisee took down the Poolwerx signs and announced to O'Brien that he would not pay any more royalties, including those already owing. The franchisee kept trading at the same site and there was little that O'Brien could do about it, except to take expensive and time-consuming legal action. "We didn't have practical protection," he says. Without O'Brien having control of the telephone number the former franchisee was using and not having a relationship with the franchisee's lessor, it was easy for the former franchisee to keep trading.

O'Brien says the legal action was successful in enforcing his agreement with the former franchisee in that it prevented him from continuing to trade and forced him to pay $62,000 towards Poolwerx's legal costs. But it wasted time and distracted management's attention from the business for about nine months. O'Brien says it would have been better to have controlled the situation by owning the telephone number and holding the head lease for the franchisee's store.

But he has learnt the lesson and he has changed operations to make sure he never has the same problem again.

Franchising mistakes:

  • Allowing a competent franchisee to take an existing underperforming unit as a second unit: the first suffered and the second did not realise its growth potential.
  • Selling a franchise to someone who buys it under the pretence that they will work in it themselves but then employs their unskilled family members.
  • Recruiting undercapitalised franchisees.
  • Recruiting a franchisee on the basis of their financial status above all other criteria.
  • Trusting a franchisee not to set up in their former territory in competition.
  • Allowing franchisees to negotiate ownership of a lease.
  • Not acting quickly enough to rectify a situation where a franchisee is not conforming to the system.

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