Franchise systems have a surprisingly common habit of stalling out. Some get "stuck at small," but stall-outs also happen to big brands that don’t reinvent and innovate. Some simply rest too long on their laurels. This applies to personnel decisions and early investors as well. If your ownership structure hamstrings decisions or team skills are lacking, don’t wait to address those issues.
Brands can stall when needed changes aren’t adopted by franchisees. Resistance often signals strained relations. Then management fails to make a convincing case for change, and franchisees (predictably) balk. Maintain a culture of constant innovation and strong franchisee relationships to inoculate your brand against these stall-outs.
The honey pot trap
Brands can stall when founders/owners pull every spare dollar out of the business, instead of reinvesting in systems and talent. This creates pressure to close deals and collect fees, or to add new blood to re-energize.
A corollary to this trap is the broker fee conundrum. Young brands especially often recruit via brokers because they can’t afford staff. If royalties ramp quickly this works, but if not—or if multi-packs never open—broker fees wipe out franchise fees and it’s tough to fund infrastructure.
Size without underlying substance is fragile. Those brands often end up taking private equity backing (or debt) earlier and at a lower multiple.
Franchisees can also sometimes make too much money. Counter-intuitive? A franchisee operating at 60 percent effort and who makes the living they want isn’t motivated to push to 90 percent. This leaves an underserved market. Either competition or your development team will fill that open space. Either way, nearby new entrants eventually grab market share and suddenly that franchisee is struggling. If this is systemic, the brand stalls.
The burnout risk
Founder burnout is a very real issue. Many franchises are undercapitalized, creating a shoestring culture. Eventually the founder thinks, "I’ve busted my tail to get here, and now I’m entitled to the gains." They start taking as much cash out as possible after going so long without. But franchisees expect a sustainable system for their franchise fees and royalties.
If needed investments aren’t made, or the ownership team appears to be enriching themselves—especially if franchisees are struggling—there is usually blowback. Poor validation often follows.
Sometimes founders run themselves so hard they burn out physically and emotionally. One day they say, "I’m done," and want to sell the business fast without strong succession planning. Franchisees can burn out, too, especially if you’ve approved under capitalized franchisees or sold too many multi-packs to unqualified candidates.
Visions of cashing out
The anticipation of large exits can set up a series of dead ends and short-term thinking, requiring periodic new investment and reinvention to jolt a stalled brand back onto the growth curve. Franchisors often tell franchisee candidates, "We want franchisees that act like owners, not renters." But corporate teams themselves often act like renters, jumping between brands, or running the business with short-term goals in mind.
This sets up obvious tension with franchisees signing 10-year plus franchise agreements. Founders grow the brand to a certain level, then sell to Private Equity No. 1. Sometimes management stays on to help, hoping for two bites of the apple. With PE-funded investment in talent, systems, marketing and support, a new growth spurt is created.
When PE No. 1 fulfills its investment objectives, or the business hits another inflection point, PE No. 1 may flip the business to PE No. 2. PE No. 2 also has its own ROI timeframe.
Eventually another buyer comes in with fresh ideas, and so on. The potential for tiered stall-outs or periodic direction changes is almost baked in, along with franchisee skepticism about each pivot.
Strategic buyers and those creating platforms tend to have a longer-term view and are less likely to experience stall-outs of this type. Others adopt an ESOP or employee stock ownership plan model to ensure long-term alignment between franchisees and management. If you take on investors, make sure they help you build both short- and long-term value. Enlist advisers and mentors to keep you focused and create a strong story.
Big brands are often victims of their success. If the business or brand is eroding, it may not be obvious because the cash keeps rolling in. Farmers must replant, fertilize and monitor crop quality, not just quantity. Franchise management is no different. Franchising is a living organism that requires care, attention and feeding to thrive.
This is one of the reasons private equity remains excited about franchising. They know that with sufficient capital and professional management they can ignite new growth, and earn a lot of money for their trouble. Proactive new ownership can unearth improvement opportunities and kick sleepy brands back into gear.
Myopia can also creep alongside complacency. Brands can become insular. Not only do they fail to monitor their own system, but they sometimes stop monitoring the external market too. "Suddenly," consumer tastes change, new competitors emerge and development pipeline dries up.
Your development process is the most dangerous place for complacency. Just like you can’t exercise your way past a poor diet, all the operations assistance in the world can’t fix bad franchisee fit. Be just as picky selecting franchisee No. 501 as No. 1. Top leadership should provide final approvals and set liquidity standards. Don’t delegate this to your commission-compensated sales team.
Brands that stall out after achieving significant scale often have a franchise development problem, and thus likely also a senior leadership problem that needs urgent attention.
Alicia Miller is a managing director at Catalyst Insight Group. Her Development Savvy column covers smart ways to market and grow a franchise. Reach her at