The ABCs of Developing a Smart Expansion Plan

By: Mark Siebert - Author

 

When a company first decides to franchise, they will rapidly learn that this decision is only the first in a series of decisions that will ultimately impact their success or failure as a franchisor.  Even before getting to the crucial issues of fee determination, the questions will fly fast and furious.  How fast should I grow?  Where should I expand?  Should I sell franchises close to my existing company-owned operations?  What support should I provide?  What will it cost me?

What many neophyte franchisors fail to realize is that the answers to these and other related questions will ultimately determine the success or failure of the franchise company.  


It Starts with the Goals

At the iFranchise Group, we are staunch advocates of goal driven business planning.  As the old saying goes, "If you don´t know where you are going, every road will get you there." 

So we encourage any new franchisor to begin the process by gaining an understanding of what specific goals they are hoping to accomplish through franchising.  Often, business owners get so wound up in the day-to-day operations of the business, that they fail to realize that the business is there to serve their needs - no the other way around.  So we encourage business owners to take a step back and ask themselves where they want to be at some point in the future.  Do you want to sell the business or pass it on to your heirs?  If you want to hold on to it, do you want to achieve some specific financial goals, and if so, when?  If you want to sell it, when, and for how much?  And it is important to point out here, that we do not want the franchisor to tell us how much they think the business will be worth, but instead to tell us how much money they want to put into their pocket at the end of the day.   

Let´s say you want to sell your company in five years and you know the price.  Start by subtracting an estimate of the current value of your existing business from your desired selling price, and that will tell you the growth in valuation that you need to achieve your ultimate goal.

Armed with this information, the new franchisor can then work backwards into a game plan.  To do this, you divide your required growth in valuation by an assumed multiple of earnings (based on the selling price of "comparable" businesses) to learn the earnings your business will need to generate to achieve that goal.  Then, based on a variety of factors, you would make assumptions relative to overall profitability to provide you with an indication of what revenue level will allow you to achieve that selling price.  Then look at estimated unit level performance, back out an estimated royalty, and divide royalties per unit into that revenue level to achieve a rough approximation of the number of franchises that will need to be operating to achieve your goals. 

You then develop a game plan based on staging that number of franchise sales over your five year planning horizon.  And voila!  Everything starts to fall into place.  Once you know how many franchises you need to sell each year, you can set your marketing budget based on an assumed marketing cost per franchise sale.  You can develop a hiring plan based on staffing ratios relative to franchise salesperson effectiveness, field support ratios, and other measures of an efficiently run franchise organization.  In fact, this process will tell you virtually everything you need to know in order to develop a successful franchise development program. 

Of course, the process outlined above has been vastly oversimplified for this article.  We have not made provisions to account for franchise fees, product sales, and other sources of revenue.  We have not discussed the complexities of properly establishing an earnings multiple or estimating franchisor profitability.  The truth of the matter is that this process, in practice, requires a substantial amount of forethought, planning, and financial analysis - and often in numerous iterations - before a reasonable game plan can be established.  But in every instance, it starts with goals and ends with strategy and tactics.

And while goals should drive strategy and strategy should drive tactics, there are some rules of thumb that apply to virtually all new franchisors. 

 

Don´t Try to Eat the Entire Cow with One Bite

At the iFranchise Group, we have had a number of clients who have achieved meteoric growth over the years.  But despite these mega-growth success stories, our advice for the vast majority of our new clients remains the same.  For most new franchisors, that advice is to grow slowly at first. 

A new franchisor is generally well advised to get their feet under them as a franchisor before stomping down on the accelerator.  The problem is that many people get into franchising in the first place as a means of leveraging their assets.  They do not have the people or the capital to develop company-owned units as fast as they would otherwise like, and so franchising provides the magic pill for low cost growth. 

Unfortunately, one of the biggest advantages of franchising - the relatively "unfettered" nature of the franchise growth process itself - can be one of its biggest problems.  Without capital constraints, a franchisor can literally sell itself into a position in which it cannot provide adequate support to its new franchisees.  This can lead to franchisees who fail, franchisees who do not open, or franchisees who feel disaffected - and since all of these franchisees will be listed in the franchisor´s Offering Circular, this initial burst of speed can ultimately be responsible for locking up the brakes a year or two down the road.

Our advice: Don´t grow faster than your ability to support your franchisees.  And until you know just how much and what type of support they will need based on practical experience, you should err on the side of conservatism. 

Over-support your initial franchisees.  Make sure your first franchises are wildly successful, even at the expense of more rapid growth, because franchise marketing is driven by word of mouth.  Remember: If your franchisees fail, you fail.  But nothing drives franchise sales as well as wildly successful franchisees.  Nothing. 


Stay Close to Home

A corollary to this first rule is that the new franchisor should stay as close to home as possible.  Getting back to our previous rule urging you to over-support your initial franchisees, we advocate initial marketing efforts that will limit franchise growth to within about a three-hour drive time of the franchisor´s headquarters.  That way, if an initial franchisee is in need of assistance, the franchisor (or his staff) can get up in the morning, be at the franchisee´s operation by the start of business, and still be home in time to sleep in their own bed. 

But more importantly, it means that the franchisor can respond instantly to a franchisee´s problems or requests.  They do not need to book a flight and a hotel room - and will never have to wait two weeks to get an advance booking discount with an airline. 

This local approach will provide the franchisor with economies when it comes to the franchise side of the business.  Franchise marketing can be done more effectively.  Rather than relying on national publications that may be too expensive for the new franchisor, the franchisor can focus on less costly local media.  And support will not only be easier to provide, but it can be provided more economically - not only from a transportation perspective, but from a staffing perspective as well.  Clustered support allows fewer field support staff to handle more units - thus reduced cost combined with more "face time" with your franchisees.

Likewise, this more local approach offers the new franchisor a number of advantages with their consumers.  Consumer advertising can be clustered, as can the operations themselves, leading to a bigger brand presence.  A franchisor with 25 units spread across the United States can never obtain any brand dominance, whereas a franchisor with 25 units in Chicago will have a significant footprint, and will be able to achieve economies of scale in both purchasing and in advertising.  And since the franchisor is likely to have already built a reputation locally, their franchisees will be better able to take advantage of their existing goodwill.

 
Rules, Like Thumbs, are Meant to be Broken

Ultimately, however, all of the decisions relative to a "best practices" growth plan relate back to goals and the marketplace in which you are operating.  Conservative growth carries its own risk - the risk that perhaps while you are growing slow and steady, you are losing the race to a more aggressive competitor. 

And thus, while the easiest and most reliable growth plans will be conservative and local, risk tolerance and an assessment of your market´s direction must also play a role in the assessment of the most appropriate growth strategy.

Ultimately, it is a balancing act.  Franchisors need to provide adequate support to their franchisees to help ensure their success.  But the faster they intend to grow, the more people they will need to hire in anticipation of providing that support.  This leads us back, ultimately, to the basic risk-reward equation.  And it will be the franchisors who best manage this equation that will ultimately enjoy the greatest success.