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Good, bad or ‘oh my gosh’ franchises


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Suppose you join a franchise system as COO and within a handful of weeks the CFO leaves, the CEO leaves, the VP of ops resigns, the training team resigns and the director of IT says goodbye. Meanwhile, your 250-some franchisees feel ignored as you’ve poured time and treasure into building corporate stores, and your cash on the balance sheet has dwindled from $16.8 million to $6.1 million in just six months.

Oh, and you’re publicly held, having done an IPO to fund the buying or building of all those corporate stores, and Wall Street is breathing down your neck.

If you’re Peter Holt, who joined The Joint Chiropractic 18 months ago and today is CEO, you believe “if you can stomach this you have an incredible opportunity to build your company’s culture from the ground up—if you can survive.”

He shared the true story of his brutal introduction to The Joint at the International Franchise Association Emerging Franchisors Conference in Phoenix in November, along with several other franchise executives and development consultants, whose advice for young franchises is shared here.

Most emerging franchisors (by definition those under 100 units, but realistically more likely under 15) probably gaze at brands like The Joint with envy. The chiropractic franchise today has more than 400 units in 40 states.

But look behind the scenes and you’ll see a tale that could hearten any franchise struggling to grow, and those who follow Holt’s playbook could get their systems on more solid ground.

‘Take a step back’

Jania Bailey is the CEO of FranNet, which was started in 1987 and in 2006 became a franchise. It’s a franchise that sells franchises for client companies. “We’re franchise brokers. We have 150 concepts in our portfolio,” she said, along with tools meant to help the process, including Proven Match, Franchise Works and Pinnacle.

“We see the good, the bad, the ugly and the ‘oh my gosh, they’re not going to make it,’” Bailey said on a panel at the Emerging Franchisors conference. “I tell people, take a step back and get your house in order,” especially on the financial side. “You can literally sell yourself into bankruptcy. You must have capital and infrastructure” to avoid that fate.

One of the biggest challenges for young franchises is that prospective franchisees will be a certain, risk-taking type. “The people who are attracted to those with 0 to 25 units, they are risk-takers. They’re going to want to be part of refining your system.”

She advises franchises to find a balance between flexibility and standing firm. “Brace yourself, and get your skin thicker, but at the other end of the spectrum, don’t just change it.”

Stan Friedman, president of FRM Solutions, led a panel to turn the popular phrase, “It’s all about unit economics,” into a habit plan. “I understand your pain,” Friedman told the conference attendees, as a franchise operator and now consultant on franchise recruitment, operations and support, legal compliance and more.

He asked panelists to describe “how to make a habit of doing those things that we need to do to keep franchisees profitable.”

Cutting out the costs

Lisa Merry, COO of Huntington Learning Center, said her brand is not an emerging franchisor—Huntington was founded in 1977 and started franchising in 1985. “In 2007 we were as strong as 400 units awarded, and then the bottom fell out of everything and through 2009 to 2012, we got as low as 200 units.

“We had quite a few units that closed, and the primary driver of that was unit level economics. If that franchise owner can’t survive through a down time, that can lead to death for a brand.”

Her prescription is to first find out the franchisee’s definition of profitability, as it may be different from yours, the franchisor. “Some are looking for a certain percentage; some are looking for a certain dollar amount. You have to learn what theirs is.”

Next, they evaluated opening costs, which had crept up from $100,000 to $250,000 to $300,000. “We were having franchise owners open in prime retail space, huge signage, with 2,500 average square feet. In re-evaluating that, we had this epiphany. When you first open a learning center, guess how many kids you have? None. I don’t need to start with 2,500 square feet. We then said, let’s say the space doesn’t need to be that big. We’re now averaging between 1,500 and 1,700 square feet in new centers, and we’ve given them alternatives.

“We used to go with strip centers, prime real estate. Now we’re telling franchisees, they can go to prime retail but they should also consider second story,” she said.

All the changes “made a big difference,” such as taking average rent from $7,000 a month to $2,500 to $3,000.

The results of all the efforts? “In the last three years, we’ve hit our stride again. I’m excited to announce that on Wednesday” in early November, “we just awarded unit No. 300, so we are back on our way to hitting 400 and then 500.”

For brands just starting out, a maniacal focus on keeping those costly habits down is key to happy franchisees. As Bailey of FranNet says, “unhappy franchisees don’t
validate well.”

Back to culture

Back at The Joint, CEO Holt began his effort to re-make the culture by calling a three-day mission, vision and values meeting, held off-site and using an outside professional facilitator. He included the entire board, all corporate employees and key franchisees, “even the most complaining,” so the culture could be “brought from the ground up.”

As his mother-in-law told him when he was newly married, 32 years ago, “the fish stinks from the head down,” he said, so he advises avoiding corporate exercises that generate ideas from the top.

A mission statement, he said, is “a short statement of purpose identifying what you do and who you’re doing it for.” A vision statement is “putting into words our preferred future together.” And the values piece is “the matrix we use for decision-making. They’re aspirational.”

Anyone can write these statements, and then the goal is to spread them through the organization. To do so, Holt will hand out cash prizes for those who can recite the mission statement or the values, for example. For another example, employees now nominate other staff members for putting values into action.

It’s starting to work at The Joint, he said, although he feels they have a long way to go. Average tenure for corporate employees when he started was under nine months; now it’s 22 months. Franchisee satisfaction, however, as revealed by a first-time survey taken early in 2017, showed a hard road ahead. “We’re below every benchmark out there. They are bad,” he said of the franchisee satisfaction numbers. “But you have to start where you are.”

Holt has a few lessons to pass on. “Franchising is the business of forced listening,” he said. “The power of franchising is you are forced to listen to your franchisees.”

Emerging franchisors can help themselves by listening, too, to the true stories told by franchises fighting to grow and the consultants who try to help them.

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