It’s a common practice for franchisors to overlook their CFO’s potential in sales. However, it’s crucial to consider their unique expertise. After all, a franchise’s sales are about articulating value. And who better understands the intricacies of building financial and articulating value in a company than a CFO? Seeking their assistance could be a game-changer for your franchise sales.
In this article, I will discuss some key elements to helping with franchise sales. These elements are the true value of any system, yet many struggle to tell their story.
As an outsourced CFO, I have witnessed several small businesses (not just franchises) that typically do and don’t work in the sales process. More importantly, I have a front-row seat to organizations outpacing others in creating value.
The Item 19 Folly
Nearly 40% of franchise systems do not present an Item 19 (Financial Representations) in their Franchise Disclosure Document (FDD). I have worked with several franchise systems that push forward far too hard to present an Item 19, believing it is vital to their sales process. The belief is that numbers alone are the missing piece to their system growing at previously unseen rates.
This is a misnomer in my opinion. First, financials presented in the Item 19 for most franchises are misleading at best. Even at 20 units, this is not a large enough statistical sample for financial data to be relied upon. Second, most franchisees are reporting data when their locations are 1, 2, or 3 years old. They are hardly mature, and therefore financial metrics will be wildly inconsistent from location to location.
I don’t believe most systems are knowingly trying to mislead sales prospects. In fact, I don’t think most franchisors have the financial background to realize that the financials they are presenting are not a good representation of their brands. Rather, many franchisors don’t adequately know how to sell their brands.
The financial numbers are merely the result of several other factors. Those factors are what should lead the sales process. Knowing your competitors and how your factors differ from them is the fuel to the fire.
Brand Reputation and Awareness
Perhaps there is no more important asset that a franchise owns than their brand and its reputation. Customers tend to visit franchise outlets with strong reputations because they transfer their perceptions of the quality of one outlet to all other outlets of the same brand. As a result, franchises with strong brand reputations attract a larger customer base that supports their success and further growth.
Strong brand reputation is also the result of several important franchisor traits. First, brand strength shows that a franchisor has the knowledge needed to build their brand in new markets. The single most important trait of a franchisor is their ability to drive customers and revenue at the franchisee level. A franchisor with a higher brand reputation and awareness is likelier to do that.
Second, high brand awareness typically shows that a franchisor has a higher level of sales sophistication. Without sales, a business can’t succeed. The number one reason businesses close is that they run out of money. Several strategies deal with cash flow, but the number one remedy is more sales. A business is made from revenue—not expense. No matter how flashy an office or great of employees a business has, if it doesn’t have revenue, it will be short-lived.
How are you demonstrating brand strength and awareness to prospects? Are you properly articulating your strategy around the growth of your brand?
Consider presenting case studies on how you have opened new locations. Present to prospects proven taccs that you help them execute to enhance their prospects of success.
Geographical Reach
Franchisors with more experience and success entering into new regions exhibit a stronger likelihood of success. This is not to say that all businesses must grow to be successful. However, a franchisor that has shown it can successfully expand into new regions represents a higher likelihood of success for a franchisee.
Expanding into a new region is a risky venture. Brand awareness may not be as strong or exist in the new region. New supplies may need to be sourced, pricing methodologies considered, and employee matters worked out. Franchisors that have done this multiple times will typically have more success in the future.
If this your system has done this, then tell people about it. Tell the story of your expansion and why it was a success.
A Commitment to Franchise Unit Sales
In the typical sales process, a franchise prospect rarely asks the franchisor about its growth strategy. However, the quickest way to increase brand awareness is through aggressive unit-level growth. Without unit-level growth, a franchisor faces the costly endeavor of self-financing brand awareness through various marketing channels, which most franchisors don’t have the financial ability to undertake.
Rapid growth means that new franchise systems reach a minimum efficient scale to promote the brand name competitively. Early in a franchise’s existence, it is more important for franchisors to allocate resources to sales than supporting existing franchisees (read that again a few times; it’s important for each party to realize).
Franchisors should discuss in the sales process –
• How quickly are you planning on growth? What is your goal for units in 1, 3, and 5 years?
• Have you met your goals up to this point? What was your growth goal a year ago?
• What strategies are you using to grow the system?
Unique Product, Service, or Systems
For a business to have a chance at being a successful franchise, three elements must exist:
- Unit-level net income margins above 10% after a royalty and recurring brand fee are contemplated.
- A proven system of being able to generate customers, whether through a sales system or brand strength
- A unique product, service, or system that gives the business a competitive advantage.
Too often businesses that choose to franchise only look at the first element above. If they are achieving margins between 20-30%, they believe they have a business that should be franchised. It’s too bad, because a lot of financial resources (both theirs and others) are wasted because the second two elements above aren’t present. We have already discussed the second item regarding branding and sales. The third item is equally important.
Why should a prospect purchase a franchise if a business does not have a unique product, service, or system? Often, when a business has a unique product or service, it will have the financial resources available to expand without franchising. A unique product or service is self-explanatory.
However, a unique system can be just as valuable.
In the crowded marketplace for ice cream, Cold Stone Creamery stands out not merely for its array of ice cream flavors but for its theatrical, personalized preparation method. Picture a customer walking in, greeted by the aroma of waffle cones and the sight of mix-ins galore. They choose a base flavor, and the staff member expertly dances the ice cream and chosen add-ins across a frozen granite stone, folding in everything from brownie bites to gummy bears. This engaging performance, paired with the customization, turns a simple ice cream outing into an experience, providing Cold Stone with a system that delivers a distinctive brand advantage.
A high-profit business that merely offers the same product or service as its competitors but has been able to generate higher profits most likely cannot be replicated. Its great that the current owner has figured out to generate more profits, but they most likely couldn’t tell you why. They will talk about better customer service, more efficient operations, or superior marketing strategies. Yet, without a uniqueness to what they are doing, these factors are difficult to transfer to a franchise model. In many cases, the success hinges on the owner’s personal touch, local market conditions, or a loyal customer base that isn’t guaranteed elsewhere.
Franchisors need to articulate the uniqueness of what makes their brand. They need to do this without talking about customer service or other traits that all of their competitors will talk about.
Conclusion
The role of a CFO in franchise sales is central to showcasing the true value of a franchise. Their financial acumen is crucial in articulating the strategic presentation of brand strengths, such as reputation and unique products. This goes beyond mere financial disclosures, communicating a holistic narrative that resonates with potential franchisees.
Successful franchisors utilize their deep market understanding and the unique positioning of their brand effectively. They leverage financial data to build trust and transparency, making their sales strategies more compelling.
This strategic approach drives growth and ensures the sustainability and scalability of the franchise model in competitive markets. By focusing on these key elements, franchisors can attract and retain franchise partners more successfully.
Krieger Analytics Can Help
Krieger Analytics has several small business owners who rely on them as their outsourced CFO. These businesses range in size ($1M to $15M in sales) and industries. We are an expert in servicing small businesses because we have been entrepreneurs. Our expertise doesn’t just come from theory, it comes from practice.
Contact us now if you want to learn what a CFO can do for your small business. We’d love to see if we are a good fit and can help you accomplish your goals.