The competition amongst franchise groups for good franchisees is intensifying, as a growing number of franchise systems are faced with a declining enquiry rate from prospective franchisees.
Australia now has about 150 more franchise groups than it did in 2002*, but full employment, fewer corporate collapses and a decline in redundancy payouts have caused a drop in the number of people searching for franchise opportunities.
Recruitment pressures are therefore greater than they were a few years ago, according to Warren Billett, who is national franchise manager with Cookie Man and a regular participant in franchise industry panels.
“Everyone is under pressure from a board point of view or growth point of view,” Billett says.
As a result, some groups may be recruiting franchisees who do not satisfy all their criteria but who provide an opportunity to expand, he says.
If these franchisees do not work out, the costs can be very high.
Michael Keaney, director of the Franchise Academy, the education arm of the Franchise Council of Australia, says industry estimates put the cost of an unsuccessful franchisee at between $50,000 and $100,000.
This includes factors such as time lost by operations staff, lost customers, brand damage and lost revenue from royalty and marketing contributions.
So how do franchise groups find good candidates in a very tight market?
They should look within their own ranks says Keaney, who recently interviewed entrants for the Franchisee of the Year awards and was struck by the number who had worked as a casual employee in a franchise when they were younger.
“My advice would be to encourage, nurture and develop those outstanding young people who currently work in their franchises, and show them there is an opportunity to develop a career in franchising,” Keaney says.
“There is a huge resource of young people learning their business skills in franchising at the moment, and franchise groups would be mad not to capitalise on this.”
Billett says the health of a franchise group, particularly the satisfaction of its existing franchisees, is a very important factor in a group’s ability to attract new franchisees.
“Do they talk positively about the franchisor or not? I think the way you service your current system will help generate more people wanting to join the system. You can’t be looking for new business at the expense of your current business.”
While industry research shows that between one and four per cent of enquiries generally result in a new franchisee being signed up, Billett says Cookie Man’s conversion rate is currently one in 20 (five per cent).
He attributes this partly to the company’s transparency in its advertising and promotion about the $200,000 cost of starting up a Cookie Man store.
“I don’t think that should be hidden, because if people don’t have the money you’re wasting everyone’s time. I hope it also sends the message that you are not holding things back,” says Billett.
If franchise costs are not disclosed at the outset, Billett believes people can feel let down when they realise the investment is way beyond their means.
He says it’s essential to respond to franchise enquiries within 24 hours. While this is easier for large groups with a dedicated franchise recruitment teams, smaller systems such as Cookie Man where Billett “wears five different hats” must respond quickly.
He is surprised at the number of people enquiring about Cookie Man franchises who have already looked at other franchise groups, but lost interest when no one followed up their enquiry.
*The Franchising Australia 2004 Survey, by Griffith University, shows there was an increase from 700 franchise groups in 2002 to 850 in 2004.
Franchise groups must have a well-structured interview process that is scientific and measurable if they want to reduce their chances of recruitment errors, according to Connie Mason, an associate with the Franchise Relationships Institute (FRI).
“If they haven’t got that, and they’re relying on gut feel, it will increase their chances of making mistakes,” she says.
FRI client feedback shows that recruitment has become “quite a big issue”, particularly as enquiry rates have slowed. But, as most franchisors are acutely aware of the high costs of a failed franchisee, Mason feels poor selection processes are more of a problem than franchisors intentionally allowing inappropriate people into a system.
FRI consults mainly to emerging and mature systems, and its research with more than 30 franchise systems over 15 years has identified 22 attributes that contribute to franchisee success.
These have been grouped into four key areas: business acumen, operational compatibility, relationship skills and entrepreneurial drive.
A good selection process will identify the suitability of personalities and their degree of business acumen, and will clarify the expectations both of the franchisor and the applicant to see if they are a good fit.
A well-designed application form that begins to build up a candidate’s profile is an essential part of this process. Reference checking must be carried out – and not just referees put forward by candidates.
Mason says candidates will usually talk about people they’ve worked with or friends who are in franchising, so a further list of referees can be built up.
“Then you frame a reference checking process in such a away that the referees really understand that they can do the best thing for this applicant by giving really open and honest answers. It’s not like applying for a job – you can’t just resign and walk away, because there’s a financial investment,” she says.
Candidates should visit five franchisees in a system to get feedback from a number of perspectives, and prepare a business and financial plan.
While psychometric testing or personality profiling can be “useful”, it does not measure all attributes and therefore cannot give a good indication of the candidate’s overall suitability, Mason says.
“Some things that are really important in franchising – such as family support, business acumen and having to work long hours in the early days – can’t be assessed through psychometric testing. All of those can cause problems or even failure later on if they’re not right.”
FRI says the conversion rate from enquiries to franchisee sign-up range from less than one per cent to about four per cent, depending on the effectiveness of the recruitment systems.