Common challenges when growing a franchise business


24th November, 2021

Current and future challenges to growing a franchise business

Most challenges franchisors face when growing a franchise can be countered with good planning. Find out about these and other environmental challenges here.Many franchisors fall short of their recruitment growth targets for two reasons.

First, the growth target was unrealistic to start with due to an inadequate assessment of the market for potential franchisees at the outset. This indicates a potential lack of market research before committing to franchising, or that more realistic growth objectives need to be set.

Second, the franchisor was not able to sustain the growth it could achieve because it reached the limit of its resources to support existing franchisees while simultaneously looking for new ones. This is best illustrated by the term “building the plane as you fly it” and indicates a lack of detail in the preparation stage of the franchise.

Compounding both of these factors is the franchisor’s inexperience in franchise recruitment, which can lead to poor recruitment decisions based on candidates who have the money and an interest in the brand, rather than those who have a broader range of attributes necessary to be successful business owners.

Inexperience can lead to other mistakes (aside from a lack of proper franchisee selection criteria), such as underdeveloped value propositions for new franchisees, mixed or misleading recruitment messages, recruitment advertising overspending, and even leaping into often unnecessary master franchise arrangements.

Luckily, solving each of these three, common challenges to growth is fairly straightforward. But there may still be environmental challenges or other issues more specific to your business that will need to be faced.

First, let’s talk about how you can work out the basics before beginning to look at the road ahead.

How to grow a franchise with good planning

Put simply, if a franchisor expects to recruit 10 new franchisees in the year ahead, and past experience tells them it costs about $5,000 in recruitment marketing expenses (which is quite low, by the way) to ultimately sign one franchisee, then the franchisor should allocate a recruitment marketing budget of $50,000 to achieve its target of 10 franchisees.

Unfortunately, many franchisors set recruitment targets without due consideration for the acquisition cost per franchisee, which typically results in the franchisor failing to achieve its target.

READ: 5 stages of franchise development

Still other franchisors have no recruitment marketing budget at all, yet somehow expect ad hoc marketing to draw potential franchisees to them, notwithstanding all the other brands competing for the attention of those same potential franchisees at the same time.

For those franchisors who proactively determine a franchise marketing budget, there should be a high level of analysis around the effectiveness of the marketing investment for the level of inquiry received.

If this isn’t done properly, franchisors could find themselves spending lots of money on recruitment activities that generate zero interest among potential franchisees.

Similarly, franchisors should take care to design budgets to be flexible enough to recalibrate recruitment activities as the situation changes.

Ideally, this will involve a customer relationship management (CRM) system in which potential franchisees are tracked throughout their recruitment journey, and which also integrates with the franchisor’s accounting system to monitor performance against budget.

And even if a franchise owner has all of their strategic planning sewn up, there can be other environmental challenges to overcome, like limits to the number of available franchisees.

Environmental challenges to growing a franchise remain

A major challenge that holds franchisors back from achieving their growth targets is the availability of suitable franchise candidates.

The franchising model requires potential franchisees to be able to adequately fund themselves, so the question of finding enough franchisees can hinge upon what’s going on in the economy.

Prior to the outbreak of the pandemic, the economies of both Australia and New Zealand were performing well, unemployment levels were low. Consequently, in a tight labour market, wages tend to be high. This means people who might otherwise be interested in buying a franchise could be less inclined to do so, as it would mean giving up a high and reliable income.

But when the pandemic first hit, unemployment levels in both countries soared.

When unemployment has soared previously — as it did in the recession of the early 1990s when unemployment levels in both countries exceeded 10 percent — there was typically a groundswell of interest in franchising from people who no longer had jobs and viewed franchising as a way of replacing their former incomes.

The same can’t be said as a result of the pandemic.

While franchisors overall experienced an increase in inquiry from potential franchisees, and particularly in sectors that were able to remain open during various lockdowns, it was not as great a surge as the early 1990s.

This could also be influenced by the following three factors:

1. People are bullish about our economic rebound

After the initial shock at the commencement of the pandemic, the management of coronavirus in Australia and New Zealand has been sufficiently effective that most people expect the economy to return to normal and fulfil the “V-shaped” recovery predicted by some economists.

2. The cost of living

Unlike in the early 1990s, when Australians and New Zealanders had low mortgages and high levels of savings, today is the opposite. Potential franchisees with big mortgages will be less likely to have the additional borrowing capacity to raise funds to buy a franchise, and even if they did, they may not be able to easily cut back on their living costs to a level that can be sustained by modest returns in the early months or years of running a business.

3. The rise of the gig economy

Although gig economy work is primarily conducted by a younger generation of workers, many of whom may also be from overseas on student visas, the flexibility of gig work and the almost zero entry cost could be a factor in deflecting some interest from franchises which require a sizeable investment and are considerably less flexible for those who want to work whenever it pleases them.

Overcoming future challenges to franchise growth

Looking ahead, younger generations (for whom gig work has become the new normal) are likely to be ill-prepared and reluctant to replace the retiring franchisees of tomorrow, making franchise recruitment even more challenging than it is today.

Despite these challenges, there will always be interest for franchises in strong brands with a track record of franchisees being profitable, engaged and satisfied.

So regardless of current and future challenges in franchise recruitment, if franchisors can ensure their franchisees are making money, remain fulfilled by their businesses and feel valued by their franchisor, then recruitment will often take care of itself.

Franchisors who have visibility over franchise profitability, proactively engage with their franchisees, and whose business models consistently provide franchisees with satisfaction over time, are best positioned to attract new franchisees.

Discover how MYOB is helping more franchise operators maintain and grow their offerings across Australia and New Zealand.