HOW EMERGING FRANCHISES GROW (AND WHY THEY DON’T)

This goes without saying, but I’m going to say it anyway… If you want to multiply your franchise’s growth, then you’re not going to do so without some challenges. So, let’s start by taking a look at the biggest challenge first.

Growth Challenges

Challenge #1: Winning the attention and trust of top franchisee candidates

The Problem

When there are 300 new brands flooding the market every year, and there are already thousands of established franchise brands, how do emerging franchisors stand out from the crowd to attract exceptional franchisees?

According to Fran Connect’s 2020 franchise development report, only 26.4% of leads go to emerging and micro-emerging franchise brands COMBINED. In general, franchisee candidates are more interested in partnering with established brands who have a history of success than they are getting in on the ground floor of a Next Big Thing franchise.

There are 4000 franchisors in the United States alone. You’re not only just another small fish in a giant sea of franchisors, but you’re also the new kid in town. That means that you’re going to have to figure out how to win the trust of candidates. What do you need to do to show franchisee candidates that you have the right team, experience, capital, resources, and support to actually put them in a better position to succeed than if they went with a more established competitor?

The Solution

So, here’s how you win the attention and trust of top franchisee candidates:

1. Have an outstanding franchise opportunity. The right people will recognize the value of what’s presented to them if it truly is great. This is why it’s important to Franchise FastLane that you actually have something special about your brand. There are simply no substitutions for having an outstanding selling proposition to offer people.
2. Focus on securing the happiness and profitability of your current franchisees. When your franchisees are loving life and making money, then everything else seems to fall into place. Your franchisees will become evangelists for the brand, and franchisee candidates will look at their lives and say, “I want that too.”

Challenge #2: Helping quality franchise candidates find you, and recruiting the right ones.

There are many things to consider when you think about how you are going to attract franchisees. Should you build an internal sales team, or you could outsource it? Should you market organically, or should you use franchise brokers? Is it better to grow regionally or nationally first?

Let’s take a look at some of the big questions you’ll have to think through.

Q1 – Should you build an internal sales team or outsource it?

A – There is no right or wrong answer to this, but I think it comes down to a few things.

• Is your brand attractive enough where you don’t need help gaining franchisee interest?

• Are you willing to invest the time and money to build a world-class franchise development team, message, and process?

When you look at the chart above you can compare how Franchise FastLane manages the development process to how many franchisors manage it. We believe that a franchise development process is 10x stronger when managed by several people in specialized roles, rather than by one overextended superstar.

A couple of centuries ago, one person would grow crops, harvest them, package them, and then try to sell them. Well, since then we’ve learned that we can feed more people if one person takes on one specialized role in the supply chain and that is why today you buy your food from a grocery store. Franchise development is no different. If you ask one person to do everything, then you’re not going to grow with nearly as much strength and speed.

Let’s compare what the development process of a franchisor who has insufficient vs. sufficient resources looks like based on our experience…

Insufficient Resources:

Sufficient Resources:

Franchise FastLane uses an eight-step process over six weeks.

• This is the front end of the funnel, and it begins immediately after an organic lead enters the CRM software. As we mentioned before, this stage requires speed and discipline.
  
  
• You need to contact each lead within the first 4 hours, and your lead qualifiers need to have set standards for outbound calls that they meet every day.
  
  
• When you get a hold of the candidate, your goal is to make sure they meet your minimum financial requirements, and if so, schedule them for their next call/meeting right then and there. DO NOT risk them scheduling the next call on their own by sending them an email or calendar link.
  
  
• At Franchise FastLane we have a 25-day sprint method to get in contact with each candidate, which combines phone calls, text messages, and emails. If we can’t reach them at all within the first 25 days, then we move them into a retargeting campaign to try and get them back on board.

2. Introduction Call

• This is the first time your Franchise Development Director has an opportunity to speak to the candidate. This call is traditionally a live presentation you go through with the candidate.
  
  
• At this stage, you have three general goals…
  • Learn about what the candidate is looking for in a franchise.
  • Ask questions to figure out if they are a good culture fit for your brand (this is incredibly important by the way).

3. Unit Economics

• The Unit Economics call is a review of Item 7, Item 19, fees, and other relevant financial information the candidate should know about.
  
  
• You want to provide the candidate with as much financial information as you’re able to help them make an informed decision. BUT, be careful. Candidates will ask a lot of financial questions and you are only allowed to share what is in the FDD.
  
  
• If a candidate has financial questions you can’t answer because it’s not in the FDD, then you should suggest that they ask those questions during validation calls, where franchisees can share freely.

4. Validation

• Validation is the stage where a candidate speaks to existing franchisees and the franchisor's leadership to ask questions and validate what they’re learning about the business. It’s no surprise that a candidate will value the word of a franchisee over the word of someone working at the franchisor level, simply because the franchisee gains/loses nothing from their transparency.
  
  
• Offer the candidate plenty of opportunities to speak to franchisees, and do what you can to have a variety of franchisees on validation calls. You could try bringing different types of franchisees onto the calls. For example, owner-operators, semi-absentee owners, large market, small market, new, old, successful, and non-successful.
  
  
• This is probably the most important stage in the process for the candidate, so they need to hear from a variety of perspectives in order to frame an accurate picture of what their situation might be like.

5. FDD Review

• The FDD review is just like it sounds. This is where you will walk a candidate through the FDD and signature requirements. Some brands may want to combine the FDD Review and Territory Review calls into one 60-minute call.
  
  
• When reviewing the FDD you typically want to take a 30,000-foot view, pointing out what each item in the FDD represents, outlining the responsibilities of the franchisee vs. the franchisor, and other high-level information specific to your brand. It’s best to refer candidates to a franchise attorney rather than getting into the details of legal interpretation or explanation.
  
  
• A word of wisdom: Inform candidates that the legal review is recommended so that they can understand their responsibilities as outlined in the FDD, NOT so they can make change requests and submit them to the franchisor for approval. The FDD is already crafted in a way that protects the best interests of both the franchisee and franchisor. It would not be prudent to make FDD changes for some candidates without making those changes for others.

6. Territory Definition

• If you’re like most franchisors, then your franchisees are obtaining the rights to do business within specified territory when they sign the franchise agreement. So, on the territory calls, you should explain to the candidate how you’ve defined your territories and target market.
  
  
• To build their confidence, use mapping tools that clearly show the candidate why you defined territories the way that you have. For example, if you need 20,000 homes with household incomes of $80,000, then use a mapping tool to show the candidate that the territory they’re considering possesses those demographics and metrics.

• Confirmation Day Prep is not about just trying to get a candidate to attend Confirmation Day. It’s also about setting the expectation that they should already be 90% sure they want to move forward with this brand before they attend.
  
  
• I would encourage you to make sure the candidate pays something out of pocket to attend because they’ll come more committed and prepared if they’re already financially invested at some level. At the same time, I would encourage you to offer a financial incentive for the candidates who travel in for your Confirmation Day. This will show you are confident in your Confirmation Day experience and you value the importance of them experiencing your business in person.
  
  
• Prior to Confirmation Day, distribute a packet to your leadership team, organized with relevant information about the candidates, along with a photo of each. Your leadership team should study the packet before candidates arrive, so they can understand the motivations and concerns of the candidate, along with the reason why the development director believes they would be a good fit for the brand.

8. Confirmation Day

• The candidate has probably spent years dreaming and planning for the day they would become a business owner and your team has already spent weeks or months investing in this person. Now is the time to put your best foot forward to prove to the candidate exactly why this is the franchise they should partner with. Of course, the franchisor is also evaluating the candidates, to see if they are the right fit for your brand.
  
  
• There are many things that can be done to make their Confirmation Day experience phenomenal. No matter how you decide to host it, make sure that you deliver a WOW experience for each candidate.

Franchise Agreement Signing

This is the big day everybody has been waiting for. This is where everything becomes official. The best way to manage franchise agreement signings is through DocuSign or a similar tool. The days of shipping out multiple copies of a 300+ page document are over. Set up a video conference call, have your team on the line ready to walk them through how to sign electronically, and explain how they should wire the funds within 24 hours (or whatever time frame you agree upon). Once the formalities are done, celebrate and congratulate them for changing their life through entrepreneurship. This will be the biggest moment of many peoples’ lives, and you just got to be part of it!

Authors note: The list above is far from a comprehensive list detailing all of the best practices that go into a world-class franchise discovery process. This list was intended to give you a general outline of what the process looks like. If you are interested in working with Franchise FastLane, your brand will benefit from a team that has hosted thousands of franchise candidates on Confirmation Days and an 80+ page manual on best practices throughout a streamlined process.

Q2 - What are the financial risks involved with an internal vs. an outsourced sales team?

Interestingly enough when franchisors are looking at outsourcing franchise sales, often the first thing they consider is the financial risk. And while most consider the cost of outsourcing franchise development, very few evaluate the financial risk of NOT outsourcing franchise development.

If you build your own development team, you’re going to have to compensate those employees, spend on marketing, broker attention, and technology. And if your system isn’t streamlined or you’re under-resourced, then you will certainly miss out on a significant volume of candidate deals.

Of course, if you outsource your development you’re going to have to spend for that service. But if you partner with somebody like Franchise FastLane, then you’re going to save on opportunity cost, time, and superfluous expenses that come with the learning process.

While there is no way to know precisely what building an internal team may cost there are some assumptions that can be made.

This image assumes that you are building a three-person team and equipping them with the necessary tools for a world-class process. It shows you’ve hired an experienced Vice President of Franchise Development with 5-7 years of experience (through national research shows wages, commission, bonus, and benefits to cost between $175k - $400k for this position alone). And of course, the VP won’t be able to manage everything on their own, so they’ll need to hire a team to help. Let’s say they can make it work with only 2 employees on their team, each receiving $50k in annual salary. Next, you’ll need to license software tools that help you throughout the process. You might select HubSpot for franchise candidate management, DocuSign for FDD and Franchise Agreement management, Zoom for video conference calls, Text Us for text messaging, and Monday.com to manage Confirmation Day information. The financial risk displayed here is somewhere between $297,560 - $522,560 annually – and this is before any lead generation expenses! And then what happens if you’re spending this much money every year, but you don’t achieve the results that you need to justify the cost? You cannot get that time or money back.

With Franchise Sales Organizations (FSO), you are going to pay less on the front end but will pay a commission on the back end for results achieved after you have the franchise fee in hand. It suffices to say that this is a decision you need to really think through because this decision can either catapult or cripple your growth.

If you hire the right FSO, then your non-marketing, monthly financial risk should be limited. Any good FSO will know how to do their due diligence on your franchise to determine whether or not they can successfully find franchisees for you. If an FSO is confident in their ability to find you franchisees, then your monthly costs shouldn’t be that high.

Q3 – Should you market organically, use brokers, or some combination of the two?

There are some strong feelings in franchising about how to go about finding franchisees. There is no doubt that a shift is happening in franchising where franchisors are moving from 100% organic campaigns to utilizing brokers, and I personally feel that this is the right move. Too often people within franchising want to paint franchise development with an all-or-nothing brush, but that’s not how it should be! Like anything in life, you should understand all of your options, get some experience with those options, and then choose which is best for you. Let’s take a look at some of the pros and cons of organic campaigns vs. utilizing brokers.

Organic Strategy:

Pros

• You keep 100% of the franchise fee.
• There may be less pressure to approve a candidate without a broker’s commission on the line.
• Avoid the membership costs of the broker groups.
• Can re-target the candidate over time.

Cons

• Your marketing dollars are at risk.
• Unqualified leads in your pipeline. Most of the leads you generate through organic marketing are un-qualified. According to Fran Connect organic leads convert at a .05% rate (1 out of every 200).

Using broker groups:

Pros

• You build brand awareness and a reputation within those groups. As you prove you have a solid brand and build relational equity with brokers over time, then they will send you more candidates. This will give you a lasting effect on your membership and conference expenses.
• The leads sent your way are pre-qualified. Brokers will do the heavy lifting on the front end of the process to identify leads that are financially qualified and ready to become franchisees. You should see at least an 8% conversion rate from your broker leads as opposed to the .05% from organic leads.
• You have someone working alongside you, educating the leads about franchising, funding, legal, and more.
• You become part of a network of peers who share best practices and guidance.

Cons

• You may be a small fish in a big pond. Some broker groups represent hundreds of brands.
• It could take you a long time to establish the reputation needed to get quality leads. This at times feels counterintuitive. If you’re paying them commission, shouldn’t they want to automatically bring you leads? The short answer is no. Brokers have a responsibility to their leads to only show them the brands that are going to be a fit for them and manage a professional discovery process. You will need to put in the work to build the trust of the brokers.

• Not all but some brokers may apply pressure to sign “non-fit” candidates. Be sure you have your criteria set and hold your standards when approving candidates. It may be difficult at the moment, but over time brokers will respect you for that, and will send you leads they know you’re looking for.

Again, I am a believer in using both organic campaigns and broker groups in your franchise recruitment efforts. It could be a good idea to start working with the less expensive broker groups while you learn the ropes. Once you feel like you know how to work with brokers and broker leads, then you can move into some of the more expensive and effective groups that come with a higher price tag.

Q4 - Should you grow regionally or nationally?

The first thing to consider is whether or not your product/service will be in demand in all parts of the country or within smaller regions. If you are a food concept, do your recipes fit better within the taste preferences of one region over another region? Are you a snow removal service? If so, your product won’t be necessary for certain climate zones.

The second thing to consider is whether or not your resources will allow you to support franchisees all over the country. You can leverage technology to train and communicate nationwide, but I’m talking about something much bigger than that. You need to think about your supply chain, area competitors, marketing costs, traffic patterns, and anything else that directly affects the success of your business.   Typically, it is best to move into a region with one new franchisee to test your capabilities in supporting their success. If you find that you’re capable with that first franchisee, then slowly expand your reach into other areas.

So, you’ve determined your goals, evaluated the challenges ahead, and now you’re ready to build your plan. Part of your plan should include ensuring that the proper resources are in place to buoy your company in the event that your first franchisees underperform or even fail. There are 2 keys to creating a great plan:

1. Make your plan flexible
2. Leverage the experience of others

Here’s what I mean by that.

Make Your Plan Flexible

If you start growing with too rigid of a plan, you’ll quickly find that certain events you anticipated happening won’t happen anything like you imagined. If your plan isn’t flexible enough to accommodate the entirety of the spectrum between the worst-case and best-case scenarios, then you might find yourself frustrated. So, craft a plan that can evolve over time as you respond to new headwinds and tailwinds.

Leverage the Experience of Others

Experience is the best teacher. Don’t fall into the trap of thinking that you don’t need to or can’t learn from other brands who have gone before you. I would encourage you to make good relationships with people in your industry, learning as much as you can from those who have gone before you. I can guarantee you one thing – you have not thought through everything, and you do not know what’s ahead. Be humble enough to learn and leverage the experience of others.

The FDD

Not all FDD’s are created equal. Do you know who your perfect franchisee is and what lens they’ll be reading your FDD through? If you are looking for franchisees that are interested in long-term returns, they may be more interested in the agreement length, additional territories opportunities, renewal fees, etc. However, if you are looking for first-time business owners seeking a part-time, low-cost opportunity, then they will be more interested in your Item 7, royalty deferment periods, fees and startup costs.

Read over your FDD and look at it from the candidate’s perspective. When your attorney was drafting the document, they were focusing on protecting you, the franchisor. But a great FDD also protects the franchisee AND tells a story around the attractiveness of the business opportunity being presented. Make sure you’re working with an excellent attorney who can think through the franchisee’s perspective along with you. Key areas that candidates focus on are financial performance disclosures, startup costs, fees, required royalties, development schedules, protected territories, training and support, default damages, and more.

Working Capital

As mentioned earlier, the amount of working capital you need will depend on how quickly you expect royalties to start coming in, and how much of a support team you will need to put in place. If you don’t award territories as quickly as you anticipated, can you afford to maintain a support team for only a small number of franchisees? Or, what if you award territories much quicker than you anticipated? Can you afford to bring on the additional staff and resources you need to support your franchisees?

When forecasting your working capital needs, I would suggest securing enough capital to sustain you well past your first growth phase, and into your future growth phases. Most franchisors do not become “royalty sufficient” within the timeframe they expected.

Lead Recruitment and Management

As discussed in detail previously, you need to decide whether or not you are going to hire an internal franchise sales team or outsource to an FSO. Additionally, you’ll need to decide if you want to rely on organic lead recruitment, work with a broker group, or do some combination of the two.

There are many ways to peel this orange, and every franchisor is unique. Whatever you decide, make sure that you do so with a high level of confidence that you’re putting yourself in the best position to grow.

I hope you’ve benefitted from this document, and I want to leave you with this. Being a franchisor is more of an art than it is a science. At Franchise FastLane we love working with franchisors who are very well prepared - the ones who are eager to invest properly into people, technology, training, equipment, facilities, etc. We like working with franchisors who understand that the real value in franchising is creating happy and profitable franchisees, not avoiding temporary costs just to save a buck. If you want to learn more about partnering with Franchise FastLane to help you become a Next Big Thing franchise, then email us at: fastleads@franchisefastlane.com I look forward to hearing from you!