Understanding Poorly Performing Franchisees

Using a four-step method to ensure that agreed-upon plans move forward on the right schedule can minimize suprises and help franchisees reach their maximum potential.

By Aaron Chaitovsky, CFE

“Franchisors live and breathe through the success of their franchisees.” This statement has been used in many contexts, ranging from a statement of the obvious, an excuse for lack of growth, or the impetus to be proactive and fix “wrongs.” We’ve also seen businesses operate using variations of “ready, aim, fire!” Keep in mind; it is referred to as “ready, aim, fire!” for a reason; it is the ideal approach, in that order.

For every business, regardless of industry, product line, or size, the importance of realistic advance planning is not only helpful — it is essential. In conjunction with this planning, you must have the follow-up procedure that when things don’t go according to plan, understanding the “why,” before reacting, must be the initial step. Unfortunately, franchisors tend to spend more time consistently putting out fires and reacting, before thinking through all the consequences.

One of these many “surprises” that seem to occur more frequently than others is the realization that a franchise concept is operating with a number of poorly performing franchisees. But the real question becomes, are these really surprises that the franchisee has created, or is it time for the franchisor to do some serious soul-searching before disrupting the franchisee operation? Did the franchisor’s lack of planning for situations and circumstances that may be inevitable create a situation that became a fire that needs to be put out?

Successful franchising is not a one-sided formula and a successful franchise relationship is never franchisor-versus-franchisee. A successful franchise relationship is the result of the teamwork of the franchisor and franchisee both looking to protect the brand and provide a profitable environment for the franchisee. Franchisee profitability must be the most important goal for both parties.

That said, franchisees must also believe that franchisee profitability and success is of utmost importance to the franchisor. Typically, franchisors don’t publicize the reasons for franchisee failure for fear that it could damage their brand name and influence prospective franchisees. Not only do all franchisors know that these poorly performing franchisees exist, but franchisors definitely monitor these poor performers as well; however, do these same franchisors really understand why? Do franchisors realize that some of the fault of the poor performance by the franchisee may be due to the franchisor’s ineffectiveness?

Now is the time for a dose of honesty. Understanding underperforming franchisees means understanding whether the poor performance is due to the franchisor’s design of the system, the franchisee’s operations, other uncontrollable outside factors or a combination of all three.

One method of working toward dealing with this underperformance issue is to address the problem through a methodical four-step plan: Understand, Analyze, React, and Follow-Through.

Understand

The understanding process begins with franchisor self-assessment by asking and answering questions honestly. The following are some examples of these questions posed during a franchisor self-assessment:

• Does the franchisor really know what it is like to operate as a franchisee?
• Does the franchisor have the hands-on experience to follow the unit matrix designed by it in order to have a successful system?
• What type of feedback or help is the franchisor giving to the franchisee?
• Has the franchisor provided the franchisee with meaningful key performance indicators (KPIs)? 
• Has the franchisor provided the franchisee with enough knowledge and transparency so the franchisee has realistic expectations of anticipated results?  
• Does the concept have sound training and support systems?
• Does the franchisor screening process have suitable selection procedures and criteria to identify well-prepared, well-capitalized candidates, with the right personality traits and expectations, before acceptance into the franchise system and qualifying as a franchisee?
• Has the franchisor made changes to the franchise model to conform to the changing economy?
• And, most importantly, do the franchisees feel that the franchisor cares about individual unit profitability?

The franchisor self-assessment is then followed by an assessment of the franchisee, which includes the following questions:

• Is the franchisee following the franchise design and system?
• Does the franchisee have the passion to put in the effort needed to succeed?
• Was the franchisee well capitalized?
• Is the franchisee cutting corners as an operator?
• Is the franchisee applying the feedback received from the franchisor (and there must be feedback)?
• Is the franchisee using and understanding those KPIs provided by the franchisor?

Finally, with regard to other factors out of the franchisor’s and franchisee’s control — if the issue is competition, location, or trends, the franchisor needs to impress upon the franchisee that he/she is not in this alone.

An example of a location and competition scenario occurred recently concerning an international franchise concept operating and expanding in the U.S. The franchisee was performing poorly and had reached out to the franchisor for advice. The franchisee felt that competition from a large chain, that had just opened a location within the franchisee’s customer territory, contributed to the franchisee’s drop in volume.

The franchisor advised the franchisee to compete with the larger chain by cutting prices. In a short time, the franchisee was investing additional capital into his franchise just to survive.

This is just one example of a franchisor analyzing an issue which resulted in the franchisee having to deal with the situation alone, without the franchisor’s support. Not only is this the wrong message, but it is the wrong result.

As a follow up to this scenario, when the franchisee approached the franchisor with the results of competing with the competitor by cutting prices, the franchisor did revisit the issue and agreed to a new approach. The franchisor then worked with the franchisee, even waiving a portion of the royalty in order to improve the franchisee’s cash flow, and put together on a game plan.

Analyze

Review your answers to the above questions carefully, and if applicable, set priorities and focus on a game plan to address each contributing factor. If the issue relates to the franchisee, work on franchisee buy-in. Do not dictate the changes and be prepared with the answers with regard to franchisee pushback. If these changes are truly for the benefit of the franchisee through increased profitability, it should be demonstrated as such to the franchisee.

React

Take responsibility. The reaction to the previous analysis should always focus first on franchisor issues and weaknesses, noting that any changes that affect franchisees must be introduced gradually. When the time comes to react to franchisee weaknesses, the franchisor needs to impress upon the franchisee, through its actions, that the No. 1 priority is franchisee profitability. If the issues relate to location, competition or trends, the franchisee needs full support from the franchisor showing that the franchisee is not alone.

Additionally, franchisors need to understand that they too are not in this alone. There are various consultants within the International Franchise Association who that have the experience and specialize in dealing with franchise-related issues such as rebranding, assessing locations, developing KPIs, marketing and public relations with regard to competition, and lastly, trends and data obtained from within the various franchise concepts are available. When choosing these consultants, the focus should always be on using an experienced professional as opposed to a consultant who occasionally does franchise-related work. Obtaining appropriate help for the franchisor in turn becomes an additional benefit for the franchisee.

Follow-Through

No surprises here. Without follow-through, issues re-occur and franchisees lose respect and trust for the franchisor. Franchisors need to use this particular step wisely in order to help underperforming franchisees increase profitability.

There is no magic formula for dealing with poorly performing franchisees and sometimes there are factors beyond anyone’s control. There are times when a parting of ways is called for, but that should almost always be a last resort. If the franchisor, after the self-assessment, believes in the concept and truly believes in its franchisee-profitability goals, the franchisor must help the franchisee understand that its goals are aligned with its franchisees’ goals.

There is no team without the franchisee and franchisor working together. The concept needs the team to prosper. The bottom line: a franchisor must always understand the poorly performing franchisees.

Aaron Chaitovsky, CPA, CFE, is practice leader, franchising accounting and consulting practice for Citrin Cooperman. Find him at fransocial.franchising.org.