What key things can a new franchisee do or establish to ensure profitability?
There’s no one silver bullet to ensure new franchisee profitability but there are a number of factors that need to be considered that will assist all franchisees with ensuring that they run their businesses profitably.
Like any relationship, it starts with romance: many people fall in love at first sight when it comes to buying a business. Like many first dates everyone is typically on their best behaviour and we may not see the reality.
Too often aspiring business owners are mesmerised or smitten by a concept because they like the product or the person that is presenting them the option, but just like a love affair, when the gloss disappears, it’s the substance of the person/brand that determines the success of the relationship.
So, my number one tip for aspiring franchise business owners is to experience the courtship/discovery process by removing the ‘rose-coloured glasses’ and processing the opportunity objectively.
To do this, the prospective franchisee should speak to many existing and former franchisees of the brands they are considering to see what the opportunity is like when the cosmetic enhancements are removed. Most importantly, franchise buyers need to discover if the model is profitable and what a franchisee experience is like.
You need to ask question your own expectations in relation to profitability and whether the opportunity that you’re considering can achieve the returns required to live the life you want. You have to ensure that your expectations are realistic and any good franchisor will ask you these questions itself.
Once you’ve completed your due diligence and you are comfortable that the business model has demonstrated profitability there are some basic business principles that apply to all businesses but especially a franchise business. Even though the business model may work, you have a role to play in ensuring that it achieves the goals; the franchisor has developed the system and proven the profitability but it is the franchisee that has to realise the profit.
Six key areas for new franchisees to focus on
1. Hire the right people
The franchisee has to recruit people that embody the brand and the values of yourself and the brand. As the saying goes, “you can train skills but you can’t train attitude”. Any good franchise system has great procedures and training programs so you can teach the most novice technician how to do the role but it’s really hard to alter mindset and attitude.
So, hire the best people, train them using the franchisor’s systems and don’t cut corners. You have to invest in your people and recognise performance excellence and do it regularly.
No matter what products or services sector you invest in, you will be in a people business. The products and services are the tools of the trade but it is people that are the key to your success.
2. Plan and budget for your franchise
Every business needs to have an overall business strategy and part of this should be a financial plan with a well thought out budget. You have to know your targets, actuals and differences – knowing your numbers is essential to running a profitable business.
3. Set up and monitor KPIs
Clearly established Key Performance Indicators will measure your performance against agreed minimum standards that are aligned to your financial budget. Business owners need to monitor and renew these as often as is required but as a minimum every week. If you’re not monitoring key indicators regularly profitability can slip away from you.
4. Take advantage of benchmarking
The business owner needs to know how he or she is performing against the industry to understand what best practice is. The beauty of a franchise system is that good franchisors benchmark performance internally and externally and will share these performance measures with their franchisees.
5. Understand the breakeven of your franchise
Calculate what your profitability breakeven point is so that you know what your minimum performance level is before you start to make a profit. Once you have calculated this you can then determine what your contribution margin is (this is the dollar amount that drops straight to the bottom line because every business has fixed costs like rent and these costs don’t change). Knowing this is very motivational, so you know for every extra dollar in sales, you know what your percentage profit is that drops to the bottom line.
6. Calculate percentage costs but focus on banking dollars
Know your percentages, wages, rent, cost of goods are the big three expenses, so knowing what industry standards are is critical.
From time to time you have to adjust pricing or offer sales incentives and this can play havoc with your standard percentages. I often see business owners get hung on up on percentages, don’t get me wrong they are very important, but you don’t bank percentages, you bank dollars and cents.
The key to this is you can run a higher percentage cost if the sale you generate is an incremental sale (which is a sale you would not have ordinarily had).
A great example of this in the food sector is Uber Eats which takes a 35 per cent margin to deliver the products.
This obviously effects your profitability and margins but the sale is a sale that you would not have had without this ordering platform, so it generates additional dollars – but at a much higher cost as a percentage of sales. At the end of the day you are depositing more money into your bank account.
The key to ensuring business success and profitable operations is discipline, be disciplined by having systems and processes established from the beginning, set a goal and measure your performance against the market and your goals, and remember you achieve profit through the people you engage with – both customers and team members.