Are Hidden Flaws In Your Business Preventing Your Success?
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Are Hidden Flaws In Your Business Preventing Your Success?
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The franchiser led the partners to believe that all was rosy with the original business that spawned the franchising. Although the potential business owners didn't know it at the time, this was not the case. The original business and the first franchise were actually operating at a deficit and were being propped up by continued investments of personal funds by the owners. The original owner was far more interested in selling franchises than in giving a realistic view of expected results. The business model had some flaws that made it difficult to do well in this business even though the service was a very valuable one to the target market.
Flaw #1--Slim Margins make Slim Pickin's.
As I mentioned before, every dollar in sales cost 65 cents in payroll and insurances. An additional 3-7% (depending on the price structure they chose in buying the franchise) went for royalties. Once you subtract out rent, utilities, office supplies, and so forth, there was little if any left over for advertising and marketing. And the owners were left without a paycheck most weeks.
Flaw #2--Built in Cash Flow Issues.
Employees were paid every two weeks for work performed. Customers were billed every two weeks for services already rendered. So the cash leaves the bank account before it is received. Naturally the customers often took 30 days to pay so the cash flow for every transaction ran as much as six weeks behind the expenditure for payroll for the work performed.
Flaw #3--Pricing Inflexibility.
Franchisees could not lower or increase their pricing based on the market they were serving. In the State of Maine, where this business is headquartered (and this is true of most areas of our country), there is a wide disparity of resources. The southern part of the state has higher income levels than the northern part of the state. The seacoast tends to have higher income levels than the western mountains. Depending on where your franchise is located you could find yourself priced out of the market.
Flaw #4--No Name Recognition.
When you think fast food, you think McDonald's. When you think McDonald's you picture the golden arches. You have an expectation of what you will get--the restaurant will look a certain way, the food will be universally awful. You know exactly what to expect. The same is true of every other successful franchise--Dunkin' Donuts, Olive Garden, Hardee's, H&R Block, etc. With the business my clients entered, there were no strongly defined franchises so the expectation had not yet been created. This means they had to explain what the business was all about. It wasn't a case of being able to say, "I own an H&R Block franchise" and everyone knows what you are talking about. This makes it an uphill battle.
Flaw #5--No Strong Marketing Program to Build Name Recognition.
Part of the responsibility of the franchiser organization is to do the legwork to build name recognition. The franchiser did some local advertising through events and radio advertisements which was a good start. I have to say, though, that if I am going to consider buying a franchise I want to see some serious commitment to building name recognition before I sign on the dotted line. When you mention the name of the franchise, I want to be able to immediately know exactly what you are talking about. That kind of familiarity takes a very concerted, and usually expensive, effort on the part of the franchiser.
Flaw #6--Where Are My Step by Step Business Building Techniques?
The glory of a franchise is that for any task or challenge I can simply flip open the operations manual and see step by step exactly what to do. With this franchise, the most important piece was missing...How do I build the business? What specific steps do I take to create buzz before the grand opening? What steps do I take to attract the attention of my target market? How do I get the business to a point where I can make a living?
In addressing these issues with the franchiser, it became increasingly apparent to my clients that their grand dream of making minimum wage for themselves was far off in the distant (and very uncertain) future, hence their decision to sell.
Regardless of whether your business is a franchise or a stand alone entity, hidden flaws in your business model can create any number of obstacles and pitfalls for your business. A carefully thought out and well executed business model is a critical success factor for every business large or small. By rooting out the flaws in your business model, you increase your odds for building a business that is both sustainable and sustaining.
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Page 2
The franchiser led the partners to believe that all was rosy with the original business that spawned the franchising. Although the potential business owners didn't know it at the time, this was not the case. The original business and the first franchise were actually operating at a deficit and were being propped up by continued investments of personal funds by the owners. The original owner was far more interested in selling franchises than in giving a realistic view of expected results. The business model had some flaws that made it difficult to do well in this business even though the service was a very valuable one to the target market.
Flaw #1--Slim Margins make Slim Pickin's.
As I mentioned before, every dollar in sales cost 65 cents in payroll and insurances. An additional 3-7% (depending on the price structure they chose in buying the franchise) went for royalties. Once you subtract out rent, utilities, office supplies, and so forth, there was little if any left over for advertising and marketing. And the owners were left without a paycheck most weeks.
Flaw #2--Built in Cash Flow Issues.
Employees were paid every two weeks for work performed. Customers were billed every two weeks for services already rendered. So the cash leaves the bank account before it is received. Naturally the customers often took 30 days to pay so the cash flow for every transaction ran as much as six weeks behind the expenditure for payroll for the work performed.
Flaw #3--Pricing Inflexibility.
Franchisees could not lower or increase their pricing based on the market they were serving. In the State of Maine, where this business is headquartered (and this is true of most areas of our country), there is a wide disparity of resources. The southern part of the state has higher income levels than the northern part of the state. The seacoast tends to have higher income levels than the western mountains. Depending on where your franchise is located you could find yourself priced out of the market.
Flaw #4--No Name Recognition.
When you think fast food, you think McDonald's. When you think McDonald's you picture the golden arches. You have an expectation of what you will get--the restaurant will look a certain way, the food will be universally awful. You know exactly what to expect. The same is true of every other successful franchise--Dunkin' Donuts, Olive Garden, Hardee's, H&R Block, etc. With the business my clients entered, there were no strongly defined franchises so the expectation had not yet been created. This means they had to explain what the business was all about. It wasn't a case of being able to say, "I own an H&R Block franchise" and everyone knows what you are talking about. This makes it an uphill battle.
Flaw #5--No Strong Marketing Program to Build Name Recognition.
Part of the responsibility of the franchiser organization is to do the legwork to build name recognition. The franchiser did some local advertising through events and radio advertisements which was a good start. I have to say, though, that if I am going to consider buying a franchise I want to see some serious commitment to building name recognition before I sign on the dotted line. When you mention the name of the franchise, I want to be able to immediately know exactly what you are talking about. That kind of familiarity takes a very concerted, and usually expensive, effort on the part of the franchiser.
Flaw #6--Where Are My Step by Step Business Building Techniques?
The glory of a franchise is that for any task or challenge I can simply flip open the operations manual and see step by step exactly what to do. With this franchise, the most important piece was missing...How do I build the business? What specific steps do I take to create buzz before the grand opening? What steps do I take to attract the attention of my target market? How do I get the business to a point where I can make a living?
In addressing these issues with the franchiser, it became increasingly apparent to my clients that their grand dream of making minimum wage for themselves was far off in the distant (and very uncertain) future, hence their decision to sell.
Regardless of whether your business is a franchise or a stand alone entity, hidden flaws in your business model can create any number of obstacles and pitfalls for your business. A carefully thought out and well executed business model is a critical success factor for every business large or small. By rooting out the flaws in your business model, you increase your odds for building a business that is both sustainable and sustaining.
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Caroline Jordan, MBA, is a veteran small business owner, accountant, consultant, trainer, and author. She is the owner of The Jordan Result, a company specializing in developing real world, practical resources to help small business owners improve cash flow and business operations. She is the author of Stop the Cash Flow Roller Coaster, I Want to Get Off! and Strength in Numbers. For more tips and articles to help your business succeed visit www.CashFlowRollerCoaster.com.
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