Powills: Pay Franchise Development People More

There is not just one fundamental problem in the franchise industry; there’s a wealth of them. Marketing doesn’t drive enough customers. When it does, operations is ready to screw up the relationship and make it a one-night stand. The CEO is so focused on sales that the real issues in marketing and operations are ignored and the staff hack job goes against the wrong people. Oh, and then there’s the franchise development team — the ugly stepchild who is constantly not performing as well as they should and blamed for everything anyway (not enough leads, not enough sales, the wrong franchisees and the increased growth demands every year). Clearly, the above does not identify, in detail, each fundamental issue. It simply provides the path for discussion. In franchising, it all starts with franchise development. Without it, our brands don’t grow. POINT ONE: Pay Franchise Development Executives More My theory is this: if we paid the people who are responsible for driving the growth of our brands more, then they could be encouraged to bring on the right people, rather than just filling seats with anyone who has a dime. Say the average franchise development salesperson makes a base of $100,000/year. Say they are given commission opportunities to make another $50,000 if they reach their goals. Say those goals are to bring in candidates and award 20 locations. Is that only worth $50,000? Set the expectations higher. Would you rather have 100 franchisees who make $100,000 AUV or $1,000,000? Would you rather have franchisees who are single unit focused or want to be trained to become the next big multi-unit owner within your system? Higher demands should come with a higher paycheck. Don’t let the sales guy sell just to sell. Have him or her sell to the right people who will make you more money, give you less headaches, and help you build a legendary brand. If you pay me $300,000/year and tell him that you want just four (one/quarter) great franchisees who will be $1 million franchisees for the next 10 years, the ROI works itself out. You will have a franchise fee. You will earn royalty. And you want this guy to bring you 12 great zees of the next three years. The ROI is this: Franchise Fees for 12 Zees: $360,000 ($30,000 X 12) Total 10-Year Royalty For 12 $1m franchisees (10 X $1m X 12 X .05 in Royalty): $6 million Minus Salary (Even if salesman stays for 10 years and only brings in those 12 deals): $4 million (and to be fair, let’s add another $1m in healthcare, 401k and extras) - $240,000 for marketing costs for 12 zees Leaves you with a ROI of $2.12 million Sign me up now if someone can bring me that ROI at our company. POINT TWO: Deals cost money. Lots of money. The issues start much earlier in the process, though. In order to change, we must adjust the entire model. I would love to see an innovative CEO take a risk and rewrite the system, and when he/she does, shout loud about the newly adjusted idea’s success. I get it. We want to find the most cost effective ways to drive credible and qualified leads. Why wouldn’t we? But history shows it will cost between $8,000 – $12,000 (depending on the brand — restaurant vs. retail vs. service) in marketing expenses to drive each deal. For the school franchises, that number could reach into the $40,000 range. This provides a baseline. Not the be-all-end-all number, but a glimpse. When I hear of growth goals in the 40s or 50s or even the 100s, I ask what the budget is. When the response is $150,000 for outbound marketing, I pause, and realize there is a lot of work to be done. There are certainly exceptions to the rule. We work with an amazing sales guy who took a $100,000 budget and produced 50 deals totally $1.5 million in deposits. That’s a great ROI — in fact, I will write anyone a check for $100,000 if they agree to give me $1.5 million back. The $1.5 million in deposits certainly seems attractive, but at what cost were those franchisees brought in? Was the sales guy pressured, so much so that he had to deliver candidates that would never reach their development agreements in full, or who really aren’t the right fit? Yes, yes and yes. But, it’s not his fault. It’s the fault of the industry. It’s the fault of pressure. It’s the fault of not paying the keeper and grower of the brand enough of a base salary to encourage him to develop the right way. It’s the fault of a low budget and the need to sell to anyone who has a dime, whether they the right candidates or not. Again, it is not his fault. The solution is not simple, though. It would require a significant internal cash flow to support my vision. But with $1.5 million in deposits, it should be possible. Pay that salesman a large base. Clearly he knows what is doing from a sales perspective. Provide him with the vision that his job — his No. 1 job — is to bring in candidates who will provide many long-term riches in the form of royalties and unit growth. Set the expectations differently. POINT THREE: I don’t like franchise fees. I don’t like franchise fees. I don’t like what they do. I understand the original reason — to cover the expense of getting the franchisee open. But that doesn’t change the fact that I don’t like them. We worked with a start-up brand that had a great concept. The total cost of investment was around the $100,000 mark. They were perfectly positioned for the downturn in the economy with limited financial resources of many candidates. Their franchise fee was $40,000. Why? Well, first, they wanted the fee to cover the brokers. Secondly, they envisioned that every deal that came in would help keep the lights on. I once asked the founder this: A few years from now, would you rather have 100 units paying you a 5 percent royalty or 15 units paying you $40,000 franchise fees minus $30,000 to the brokers? This question puzzles him because of the way consultants helped him structure his organization: 15 units paying $10,000 ($40k - $30k) = $150,000 5 units averaging $100,000 in sales in the first calendar year that they are all open = $25,000/royalty in year 2. 5 units averaging $150,000 in sales in the second calendar year = $37,500/royalty + $25,000 for 5 new units = $62,500 And then, let’s say you can pull in $100,000 in total royalty in full calendar year 3. GRAND TOTAL = $337,500 ESTIMATE of 30 percent net = $101,250 Do you have enough money to pay a great sales guy to grow your brand? No. Do you have enough money to really market to the brokers to grow your brand? No. Did you make millions for all your hard work? No. Now, on the reverse: 75 units paying $0 in franchise fees = $0 75 units only making $100,000/year gross X 3 years X 5 percent royalty = $1.125 million X 30 percent net = $337,500 or $112,500 year Now, do you have enough money to pay a great sales guy who brings in franchisees who will make more than $100,000/year? Yes. I know the formulas are not perfect, and based on the cost to market for those 75, there are other variables. However, that start-up brand we worked with is now out of business. He scrambled for 5 years to make something work. Great concept, bad formula. Hundreds of thousands of dollars into consulting and becoming a franchise, and the crap shoot failed. CONCLUSION: It’s all about slow and steady growth We work with many great and growing brands. The commonality among those great brands is that the have built a great team and have grown in circles rather than dotting the map. There are certainly other parts that go into it, but “smart people + smart growth = success” seems like a simple enough formula to understand. In the case of franchising, the tortoise seems to always win. But if you expect a hare to act like a tortoise with the pressures of having to meet unrealistic growth goals given the budget you have to market, don’t expect long-term success. Brands should dream big. That 100-unit mark is possible. As is 250 or 500 or 1,000. But I have learned it starts with the people, then the plan, then the places and then the profits. My opinion is not always right. But I do believe that if some of the franchise development folks I know were paid better and given the expectation to grow the right way with the right marketing budget, then CEOs/founder or private equity would see greater returns on investment.