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While it’s not a franchisor’s job to make money for a franchisee (that’s the franchisee’s responsibility), it is the franchisor’s job to know that the franchisee is making money. In fact, it’s the franchisor’s responsibility!
Ouch, did that sting?
Think “responsibility” is too harsh of a word here?
Think again.
Will investors let you off the hook?
If you’re a franchisor and you’ve got investors, how do you explain to them that it wasn’t your responsibility to know that the franchisees weren’t making money and therefore you weren’t making (enough) money and you’re now out of business?
How about successful franchisees?
If you’ve got franchisees who are making money, supporting the brand, building their futures around their businesses, and you go out of business because you had too many franchisees who weren’t making money, how do you explain that to your productive, profitable, responsible franchisees?
How do you explain shutting your doors to vendors to whom you owe money? Think they’ll hold you accountable? How about your bankers?
Yep, you are responsible, franchisor
Like it or not, it is the franchisor’s responsibility to know that franchisees are making money.
And yet, go to any meeting of franchisors and many (maybe most) will not know who is and who isn’t making money among their franchisees. They have vague ideas, they think they know, they have some benchmarks they’ll use, but ask if they’ve reviewed the franchisees’ P&Ls and you’ll get a good laugh in response. Ask if they can make sense of the franchisees’ P&Ls and they’ll laugh harder.
Not a laughing matter
But this is no laughing matter because if franchisees are not making money, the franchisor won’t make money — for long. You may be living off sales of franchises, or product sales, or membership fees, or a combination of these and other revenues, but your profit is not sustainable and eventually you’ll be forced to close your doors. Watch the franchise media and you’ll see more evidence of this during the next year or so.
As a franchisor, it’s your responsibility to educate your franchisees about their unit economics, and to be certain that they understand. This may require you to roll up your sleeves, get more involved in a franchisee’s business, and consult with the franchisee.
Review their financial statements
You get their financial statements, don’t you? (Thank you for only smiling and not laughing). Insist on collecting those statements and then review them. Franchisees often say: “Why should I bother sending them my financials? They don’t read them anyway. I never hear anything from them about my financials, so who cares?”
Other franchisees don’t send their financials because they don’t want the franchisor to know they’re losing money (“They’ll take away my franchise.”) — or maybe, making more money than they’ve reported (imagine that).
Who’s the franchisee’s financial guru on your team?
Who on your team reviews the financial statements? Who then follows up with the franchisees to point out how they can improve the economics of their business? (This is more than a one-person job — it will take a team of finance and operations folks).
Taking on this responsibility is the only way you can really know what’s going on financially in your network.
Help franchisees look realistically at the business
With the franchisee’s financial information in hand, you can now consult with each franchisee and help them realistically look at their business. They may not like what you tell them, but that’s okay. The sooner you get to them the better. You can probably show them where and how to cut expenses, and where to look for improvements. Maybe you can help them talk to the landlord for a reduction in rent, or you can point them to vendors to whom they can outsource some of their work.
It’s painful, but there’s no choice here
Franchisees are often too close to the business to recognize the sacred cows and to see where they have opportunities to improve. This is a painful process for a franchisee, so handle it sensitively – but handle it!
Otherwise, you’re going to get a surprise that neither you nor the franchisee wants. It’s called a bankruptcy notice.
Franchisees: You’re not off the hook. It’s your responsibility to make money in your business. That’s what you promised when you signed the franchise agreement. Work with your franchisor to take every opportunity to succeed. Especially now.
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