Concerns have been raised that many franchise chains are failing to support their best performers, with one former franchisee telling My Business they got to the point where “we’d rather go out of business than continue”.
FC Business Solutions director Corina Vucic told My Business of her concern at the number of franchisees seeking advice on how to break away from their franchise agreement.
Ms Vucic said that she has received eight separate requests since late last year. While that number may not seem like much, Ms Vucic said that the usual rate of such requests was “zero”.
“I haven’t dealt with this before. To have eight different systems, eight different conversations, eight different groups of franchisees [saying] ‘I’m not happy, this is how much scoping I’ve already done, this is what my legal person has told me...’ [is alarming],” she said.
“We’ve only noticed that back end of last year, and a very significant kick-off to this year.”
And Ms Vucic said that it is well-established, “high-performing” franchisees — from a range of industries — who are seeking to exit, and leave not just their existing franchise network, but the franchise system altogether in favour of going independent.
“If it was low performers and people who were just bubbling along, I would say [the cause is] fatigue, exhaustion, looking for a quick win to get out,” she said.
“But the fact that we are dealing with high performers, people that have been in their systems and their businesses for a period of time, are highly engaged, high performers both from a brand ambassador perspective which translates into their turnovers with successful bottom lines, I think it is the fact that they are seeing minimal value from the franchise brand and are looking at options.
“They are saying, ‘I pay my marketing, I pay my royalty — whatever fees there might be — I’m not getting value and I’m not requiring that value, and if I do my numbers, then I’m better off running my own marketing, running my own supplier negotiations and running my own local delivery for the local market’.”
Ms Vucic added: “Rather than the franchise model being broken, I think it’s that our high earners, our high performers, are not getting value from the franchise system, or the model, because they’re more independent, they’re more savvy, they’re probably mentors to other franchisees — the value they get from the field coach or from the system itself, they are no longer seeing that value.”
Franchise ‘lacked transparency’, ‘defensive’ about feedback
One now-former franchisee of a major ASX-listed services franchise, who wished to remain anonymous for legal reasons, told My Business that the decision to leave was driven by a strong sense of paying fees simply to line the pockets of shareholders, with no real value in return.
“To be honest, a major issue was transparency on what was going on there. I really didn’t like the structure [of the franchise]: it’s a listed company and yet they’re supposed to be helping out the stores,” he said.
“I found it conflicting. They’re trying to return for the stores, but they’re also trying to make money for the investors — which is it?
“And I couldn’t see anything on the annual reports to say breakdown [of] the revenue, this is what’s being provided by the stores and this is what’s going back to the stores — the stores within the franchise agreements get rebates, sort of overrides, from the products they sell. But a certain proportion of those monies, I’m assuming, is going back to investors as well.
“I struggled with that a little bit.”
He also said that it was “pretty obvious” that, as a franchisee, he was “supporting some really hefty corporate wages”, which would not necessarily been a problem had he been seeing value from that.
“I’m sort of OK with that, but so long as you can provide the value that’s coming back to us, and I struggled to see the value,” he said.
“All of the systems that we used internally were not [the franchisor’s] systems. We had our own individual supply contracts... none of them were provided by the franchisor.
“As far as I could see, we were paying lots of money for Channel 9 and News Corp [advertising and marketing] — I don’t even watch Channel 9 and I don’t read News Corp papers, and I don’t know who does — and they certainly don’t in our local area.”
He added that remaining a fee-paying member of the network ultimately became unpalatable:
“I think we were prepared for the worst-case scenario: we’d rather not be in business than continue on with the current arrangement that it was — and we were prepared to follow that through.”
The business owner said that the franchisor had been “defensive and put their back up” every time that he tried to raise his concerns, so when completing the exit, he declined to provide the real reasons for his decision in order to “keep things amicable”.
“We did have a good enough relationship that I would love to have given them that true feedback, but in the end, we were that nervous about the directors... so we decided not to reveal the real reasons,” he said.
He did, however, credit the network with allowing his business to leave on good terms and have a smooth transition to becoming an independent operator.
Despite his own concerns around value and transparency, the ex-franchisee said that he had met better-performing owners within the same brand who were happy to remain part of the franchise, “for whatever reason”.
What can networks do to retain franchisees?
According to Ms Vucic, many franchise chains need stop taking strong-performing branches for granted if they are to retain these business owners.
“Communicate,” she said emphatically.
“Just because you’ve got successful franchisees, doesn’t mean that you need to let them be as independent as you have.
“Find a channel, find an ability and find the right level of person in your businesses to stay communicative with them, to keep them engaged and keep reinventing the support and the services that you have to give your high performers.
“It is a different level of service; it’s a different relationship.”
The former franchisee My Business spoke with agreed that change and reinvention is key to retaining good operators, but that it can be lacking in franchise brands.
“It’s a very dangerous position to be resting on laurels and resisting change in industry,” he said.
“I actually think that that [resistance] comes from the top a bit... whether it’s franchisors or whether it’s old men running footy clubs, the people who are resistant to change — and the acceleration of change is at a pace we’ve never seen before — so if you do stand still, not only do you get left behind, but you get left behind quickly, and then it’s a long way to come back.”
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.