The ABCs of Growing Smart

(Franchise Buy) - By . Updated Feb 20, 2011

When a company first decides to franchise, they'll rapidly learn that this decision is only the first in a series of decisions that'll ultimately affect their success or failure as a franchisor. Even before getting to the crucial issues of fee determination, the questions will fly fast and furious. How fast should I grow? Where should I expand? Should I sell franchises close to my existing company-owned operations? What support should I provide? What will it cost me?

What many neophyte franchisors fail to realize is that the answers to these and other related questions will ultimately determine the success or failure of the franchise company.

It Starts With the Goals 
Any new franchisor should begin the process by gaining an understanding of what specific goals you're hoping to accomplish through franchising. You can get so wound up in the day-to-day operations of the business that you fail to realize the business is there to serve your needs--not the other way around. So you should take a step back and ask yourself where you want to be at some point in the future. Do you want to sell the business or pass it on to your heirs? If you want to hold on to it, do you want to achieve some specific financial goals, and if so, when? If you want to sell it, when, and for how much?

Let's say you want to sell your company in five years and you know the price. Start by subtracting an estimate of the current value of your existing business from your desired selling price, and that'll tell you the growth in valuation you need to achieve your ultimate goal.

Armed with this information, you can then work backward into a game plan. To do this, you divide your required growth in valuation by an assumed multiple of earnings (based on the selling price of 'comparable' businesses) to learn the earnings your business will need to generate to achieve that goal. Then, based on a variety of factors, you would make assumptions relative to overall profitability to provide you with an indication of what revenue level will allow you to achieve that selling price. Then look at estimated unit level performance, back out an estimated royalty, and divide royalties per unit into that revenue level to achieve a rough approximation of the number of franchises that'll need to be operating to achieve your goals.

You then develop a game plan based on staging that number of franchise sales over your five-year planning horizon. And, voila! Everything starts to fall into place. Once you know how many franchises you need to sell each year, you can set your marketing budget based on an assumed marketing cost per franchise sale. You can develop a hiring plan based on staffing ratios relative to franchise salesperson effectiveness, field support ratios and other measures of an efficiently run franchise organization. In fact, this process will tell you virtually everything you need to know in order to develop a successful franchise development program.

Of course, the process outlined above has been vastly oversimplified for this article. We haven't made provisions to account for franchise fees, product sales and other sources of revenue. We haven't discussed the complexities of properly establishing an earnings multiple or estimating franchisor profitability. The truth of the matter is that this process, in practice, requires a substantial amount of forethought, planning and financial analysis--and often in numerous iterations--before a reasonable game plan can be established. But in every instance, it starts with goals and ends with strategy and tactics.

And while goals should drive strategy and strategy should drive tactics, there are some rules of thumb that apply to virtually all new franchisors.

Don't Try to Eat the Entire Cow With One Bite 
You're generally well advised to get your feet under you as a franchisor before stomping down on the accelerator. The problem is many people get into franchising in the first place as a means of leveraging their assets. They don't have the people or the capital to develop company-owned units as fast as they would otherwise like, and so franchising provides the magic pill for low-cost growth.

Unfortunately, one of the biggest advantages of franchising--the relatively 'unfettered' nature of the franchise growth process itself--can be one of its biggest problems. Without capital constraints, a franchisor can literally sell itself into a position in which it can't provide adequate support to its new franchisees. This can lead to franchisees who fail, franchisees who don't open or franchisees who feel disaffected. And since all these franchisees will be listed in your Uniform Franchise Offering Circular, this initial burst of speed can ultimately be responsible for locking up the brakes a year or two down the road.

My advice: Don't grow faster than your ability to support your franchisees. And until you know just how much and what type of support they'll need based on practical experience, you should err on the side of conservatism.

Over-support your initial franchisees. Make sure your first franchises are wildly successful, even at the expense of more rapid growth, because franchise marketing is driven by word of mouth. Remember: If your franchisees fail, you fail. But nothing drives franchise sales as well as wildly successful franchisees. Nothing.

Stay Close to Home 
A corollary to this first rule is that the new franchisor should stay as close to home as possible. Getting back to the previous rule urging you to over-support your initial franchisees, I advocate initial marketing efforts that'll limit franchise growth to within about a three-hour drive time of your franchise's headquarters. That way, if an initial franchisee is in need of assistance, you (or your staff) can get up in the morning, be at the franchisee's operation by the start of business, and still be home at the end of the day.

But more important, it means you can respond instantly to a franchisee's problems or requests. You don't need to book a flight and a hotel room--and will never have to wait two weeks to get an advance booking discount with an airline.

This local approach will provide you with economies when it comes to the franchise side of the business. Franchise marketing can be done more effectively. Rather than relying on national publications that may be too expensive for the new franchise, you can focus on less costly local media. The support will not only be easier to provide, but it can be provided more economically--not only from a transportation perspective, but from a staffing perspective as well. Clustered support allows fewer field support staff to handle more units, thus producing reduced cost combined with more 'face time' with your franchisees.

Likewise, this more local approach offers you a number of advantages with your consumers. Consumer advertising can be clustered, as can the operations themselves, leading to a bigger brand presence. A franchisor with 25 units spread across the U.S. can never obtain any brand dominance, whereas a franchisor with 25 units in Chicago will have a significant footprint, and can achieve economies of scale in both purchasing and in advertising. And since you have already built a reputation locally, your franchisees will be better able to take advantage of your existing goodwill.

Rules, Like Thumbs, are Meant to be Broken 
Ultimately, however, all the decisions relative to a 'best practices' growth plan relate back to goals and the marketplace in which you're operating. Conservative growth carries its own risk--the risk that while you're growing slow and steady, you're possibly losing the race to a more aggressive competitor.

And thus, while the easiest and most reliable growth plans will be conservative and local, risk tolerance and an assessment of your market's direction must also play a role in the assessment of the most appropriate growth strategy.

Ultimately, it's a balancing act. You need to provide adequate support to your franchisees to help ensure their success. But the faster you intend to grow, the more people you'll need to hire in anticipation of providing that support. This leads us back to the basic risk-reward equation--it'll be the franchisors that best manage this equation that'll ultimately enjoy the greatest success.