I was recently at a 2-day franchisor retreat. As a franchisor myself, I am around the industry quite a bit. It was one of those retreats that are typical when you think of such events. Yes, it was at the airport (actually, the hotel attached to the airport). Most of the attendees had flown in and being that the airport is 25 miles from downtown, most didn’t leave the vicinity. It was two fun filled days at the Denver International Airport.
The participants were mostly franchisors with a few “strategic vendors” mixed in. Of the group of franchisors, most had less than 20 units. During one exercise, the facilitator asked all of the franchisors to stand. He then asked what their ratio of corporate employees to franchisees was. He started with 10 units for every one employee and half the group sat down. He continued and one by one everyone sat down. At the end of the exercise, he had us raise our hand if we had various “employee types” within our company. While most employees were related to operations, marketing, and development, no one had a financial related employee.
This was not shocking to me. I am aware that most young businesses value growth over anything else. As such, the first hire is often someone involved in sales or marketing. However, as the retreat continued and conversations were had, I realized how desperate most were for some level of strategic financial help.
On the second day, the morning began with breakfast. I was sitting with the owner of a quick-service restaurant concept. From the introductions the day before, she knew that I was a CPA. She began by asking a very mundane question about raising prices in her store and if there was a strategic way to do so. She began asking the questions by saying “Since you’re a CPA and good with numbers, I thought I would ask you….”. From there, we talked for 15 minutes about a range of issues with her business. While we began with pricing, we quickly moved on to costs, explaining the financial model to prospective franchisees, and how to set up her franchisees so they would report to her accurately.
This specific owner knew her business. That was obvious from my observations over the two days. However, she was busy growing her business and had never had time to address certain issues. She knew what the issues were (for the most part), but didn’t have the expertise or time to address them. She mentioned that she had a bookkeeper, but also said that the bookkeeper was great at keeping the books, but didn’t have the knowledge to address many of the questions she had.
This is not uncommon. I have been to many franchise industry events and talked with many consultants in the industry. Franchisors under 20 units (and most under 50 units) struggle with their strategy and financial goals. This isn’t because their concept isn’t sound. Rather, their business pulls them in other directions. Instead of stopping and putting better systems and strategy around the business, they feel the need to scale (don’t get me started on the problems with scaling without systems in place). Therefore, their first, second, and third hires often have to do with growing the number of units.
A franchise sales consultant I work with told me the other day he had been trying to sell the idea of an outsourced CFO to his client for some time. He asked me for a list of benefits that he could go through with this client to try to convince them to make the hire. This got me thinking (and writing) that most franchisors need to understand the benefits of having some sort of financial professional in their corner. Below are just a few of the reasons a franchisor needs to have this resource in place for.
A CFO Will Increase Sales
I have been involved on both sides of the franchise sales process.
Prior to getting into franchising and financial consulting, I explored opening up a franchise of my own. I talked with a few concepts including a coffee shop, quick service restaurant, and home repair service. In my opinion, all three of the experiences left a lot to be desired from the financial discussions we had.
Now involved in sales from the franchisor side, I have worked with a few different sales consultants. I have worked with them in many capacities. I worked with one such consultant on how to explain the financial model of what they were selling.
Most people involved in the sales process from the franchisor’s side struggle to explain the financial model to prospective franchisees. Yes, there are rules in place that restrict what they can say to prospects. Most rely on what is listed in the Franchise Disclosure Document in Item 6 and Item 19.
However, this often does not suffice. This purchase will be most of these franchisees largest they have ever made. At the very least, they are struggling to comprehend how much money they will need to start and the earnings potential of the business. They need someone well versed in both the concept and finance that can sit down and help them figure out on their own how much money they can make. This does not mean giving them the answers (that is illegal in most cases). However, this does mean providing them a path that will enable them to figure this out on their own.
Once prospective franchisees get past the numbers, the sales process is all downhill. The problem most franchisors face today is that they don’t have the background or expertise to get prospective franchisees to that point.
A CFO Will Help Drive Unit Level Economics
Most franchisor’s stories are similar in one sense. Often the franchisor started out as a small business owner. They built their business and now might even have multiple locations. At some point, someone discussed with them franchising their business. As a result, they are now running their stores as well as trying to franchise.
I am not going to get into the strategies around how to balance this scenario. However, those that do find themselves in a similar spot know that in order to franchise, you must have strong unit-level economics. Unit-level economics is how an individual store is performing and how much does it cost to open.
Odds are, most franchisors never contemplated when they opened their store things like value engineering or replicating the model. These are concepts a well versed CFO can handle. They can work with your designer and architect to help you build a model that will be attractive to prospective franchisees.
Company-owned units also need to show strong financials. Working with a CFO, they can help you develop a profit plan for each company-owned store. This includes pricing strategies, a review of costs, and a strict budgeting process.
A CFO Will Be the Strategy Facilitator
One task financial professionals are great at is helping organizations drive strategy. Most franchisors are all over the place…and this makes sense. They are trying to sell and market their franchise, dealing with franchisees, and running their own store.
A seasoned CFO can help implement a strategic planning process to help align the organization’s mission with its’ actions. Often the owner is doing the task that is most prevalent or has the most sirens going off. However, is this really the task that will add the most value to the organization?
There needs to be a purpose for an organization. This purpose is driven by the organization’s mission. Once those are defined, the organization can then prioritize their tasks so they can accomplish their goals. Entrepreneurs are scattered brained, it’s in most of their personalities. Often even the biggest taskmasters get sidetracked as business owners. Using the CFO as the strategic planning part of your organization will help make sure that the mission is being achieved the owner’s goals are being met.
A CFO Will Help Develop Franchisee Processes
Often, franchisors have a lot of help in designing their operational processes for franchisees to use. This is because most consultants they use specialize in the operations of franchises. Further, the business owners themselves are often very comfortable with the operations needed for the business to run smoothly.
However, no one seems to pay attention to the financial systems until they start to breakdown…and they do. Most franchisors get a ways down the road, often 5-10 units, when all of a sudden they realize they have created a monster. One day they realize that franchisees are reporting to them several different ways. One of their franchisees experiences fraud with their deposits which opens up a huge deficiency in controls. Another franchisee is most likely under-reporting revenue (and therefore, underpaying their royalty) but there is no way of proving this.
All of these are issues that should be addressed upfront. A franchisor that does not have systems in place upfront will face huge growing pains as they get larger.
A seasoned CFO or financial professional can help develop these systems. Not only that, but they can help design a reporting process that will enable a franchisor to coach their franchisees better so they can grow their revenue (and their royalty payment).
What Next?
These are just a few of the ways a CFO can help a franchisor. We didn’t even touch on things like business modeling, forecasting, and other skills that a CFO implements for their clients.
The trouble for most franchisors is they don’t have the need for someone full time. While they are often in need of the expertise, hiring a CFO for 6 figures and finding 40 hours of work becomes a deal breaker right away. As a result, they often start to lean on their operational or development consultants, or worse, they look at their bookkeeper for this sort of knowledge. While both of these might be a Band-Aid for the problem, neither comes close to solving it.
A franchisor should look for a financial professional that has experience in franchising. The industry is just odd enough where a franchisor will want someone who has experience dealing with some of these issues first hand. A franchisor should look for a fractional or part-time CFO. Even if this is only for 10-15 hours per month, the expertise will drastically increase the value of their organization. Finding this person upfront will also allow them to scale with their organization.
Hopefully, the reasons above are more than enough to get franchisors to act now. The longer they wait, the more headaches, lost revenue, and increased cost they will have.
Krieger Analytics works with businesses to help them with their profits and grow through accounting, finance, and bookkeeping. We have extensive first-hand experience in franchising (we run a franchising business ourselves). We are not the perfect match for all businesses so we have honest conversations upfront to see if we are a good match for you. Contact us now for a call to learn more about us and have a conversation about your business.