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Restaurant analyst Stas Kiselev of Capstone Investments made several key points for everyone engaged in franchising when he was quoted in a Dallas Morning News article regarding Fuddruckers, which is in bankruptcy.
He said that while consumers love the Fuddruckers brand, management botched up the business. Among other things, “they didn’t get along with the franchise owners,” he clarified.
Who’s managing the franchise?
“Fuddruckers was managed by bankers, accountants and Wall Street types,” he added. But now that the Pappas brothers have acquired Fuddruckers, he said, “(they) know how to manage a restaurant and I think they will listen to the franchise owners.”
Through the years, I’ve had some experience with franchise companies changing hands, and all too often a good brand, even though it may have been struggling, got “botched up” by the new ownership and/or management team. As much as I appreciate “bankers, accountants and Wall Street types,” they usually can’t find their groove in franchising. Their first obstacle is to understand that franchisees do not take orders from the franchisor, and that franchisees are investors who will (sometimes) demand to be heard (not all franchisees are bold enough to tell the franchisor what they really think). When they’re not heard, disgruntled franchisees can easily advance the demise of a franchise brand. Franchise history serves up plenty of examples.
Beware the analysts!
I was recently involved in a franchise acquisition with “analysts” (though I use the word loosely in this instance) and it didn’t go well. The last person a franchisee wants to hear from is an analyst who has never operated the business (or any business for that matter). And when the analysts start making decisions – which is rare, fortunately, because it takes them out of their comfort zone – or when they begin to control the direction of management, any brand is headed for a disaster. Often times “new ownership” sends in “analysts” to band-aid a situation where the obvious answer is better controls by a capable management team and more cash. The latter is often the problem and it can only be exacerbated by analysis, even though the ownership will claim that there’s no sense spending more money until the analysts define the “current situation.” Out come the spreadsheets — but numbers and spreadsheets tell only part of the story and do very little to describe the real issues.
Kiselev obviously knows his role (he doesn’t make decisions for brands) and I appreciate what he said for two reasons:
- Management, first and foremost, needs to “get along” with the franchisees. It’s a requisite, and it’s not all that difficult to achieve. However, building a relationship with franchisees requires trust, and in a franchise company analysts do not stir up trust among franchisees. Analysts track numbers, but their information is often meaningless without understanding how the business operates (or how franchising works). Not all franchisees deny that they are part of the problem – but they want a franchisor that will address the real issues, not hide behind spreadsheets.
- Leadership must be provided by people who know how to manage the business, not just build and read spreadsheets. Bankers and accountants know numbers, and generally do not know how franchises operate. Just the idea of franchising scares the hell out of many of them. I’ve seen instances where accountants torpedoed a franchise deal because they didn’t think their client should pay a royalty. The suggested opening a business independently . . . or not at all! Leaders rely on numbers, but a number has never been responsible for building a relationship.
Suggestions for franchisors
Here’s how I interpret Kiselev’s points for franchisors:
- Measure your relationship with franchisees. How good is it? And don’t expect franchisees or prospective franchisees to take your word for it. Where’s the proof?
- Make certain that the people who sell your franchises and support your franchisees understand how to operate the business successfully. If all they can do is talk about their spreadsheets they won’t get to first base with a group of savvy franchise operators. And there goes the trust.
- Listen to the franchisees. If you don’t have a Franchise Advisory Council, create one. If you’ve got one, make sure the franchisees believe it has clout. And once again, prove that you listen to the franchisees – let’s see an independent survey.
Suggestions for prospective franchisees
If you’re looking to acquire a franchise, here’s how Kiselev’s points make sense:
- Evaluate the franchisor/franchisee relationship. Ask the franchisor and franchisees how they size up the relationship. But then ask to see an independent survey that has recently measured the relationship. Franchisors that say they don’t need such a survey, or they refuse to submit to one, probably have something to hide. They’re unworthy of your investment.
- Look at the qualifications of the people who manage the franchise, as well as those who sell the franchises and support franchisees. What do these folks really know about operating the business? How many of them have been franchisees in the past? When they tell franchisees what they should do to be successful do the existing franchisees believe them?
- Who’s listening to the franchisees? Find out! Again, ask for the results of an independent survey. If there’s a Franchise Advisory Council, what has it achieved recently? Are franchisees eager to serve on the FAC? And do those who serve believe they are making a difference within the franchise network?
Franchising isn’t for everyone
Franchising isn’t perfect, which means it’s not for everyone. In fact, it’s not for most people. However, it works almost perfectly when franchisors and franchisees get along. And yet, isn’t it interesting how often franchisors seem to go out of their way to botch it up?
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