By Guest Blogger Tammy Cancela, General Manager, Marketing Executive - Franchise Marketing, Marketing to Women, B:B/B:C
This post originally appeared on LinkedIn.
Dear Short Term Investors,
We worked with an incredibly successful franchise concept for eight years. They sold units and grew revenue before, during and after the Great Recession. It was a perfect concept in a perfect storm and a lot of people made a lot of money. In fact, it’s a large going concern now.
There was just one big fly in the proverbial ointment – the business turned over three times and thus ended up having four owners in six years. A couple of these owners were short term investors who flipped the franchise in short months for quick profits; it’s a highly profitable move when a franchise is selling units quickly.
This would have been OK for the business if the short term investors had kept an eye on the future while making their short term profits through unit growth. While there was little immediate incentive to do so on its face, I think there is a case to be made for short term investors to divert at least some investment into the existing business.
Even if you plan to get in and out for a quick profit, you can build more value for your sale with a few small investments in products/services, training/employee development and brand development. At this point, you might be thinking, “Why bother when new unit growth will drive so much value?”.
- Because even small investments in new products/services or training can contribute to franchisee satisfaction in a major way. And, let’s face it, your franchisees can be your best – or worst - brand ambassadors. Happy franchisees equal happy customers, happy employees and willing new unit buyers who see a positive environment populated by successful current franchisees.
- Because well-trained employees service your customers better and are easier to retain when competition heats up. Employees who have exciting new products or services to sell can contribute to a stable workforce and more satisfied customers. This is particularly true in service businesses, where a stable workforce is definitely worth some value.
- Because strong, growing revenue streams from multiple lines of business (not just new unit sales) will support your ultimate sales valuation.
- And because, even with great planning, it is possible that unit growth could suddenly stop for any number of reasons and you’d be left having to operate the business for longer than you had planned.
Also, you will find supportive franchisees if you start building additional value on the day you close your deal by looking for growth opportunities in your existing customer base:
- Keep your new product/service pipeline pumping out successful offerings on a regular basis to maintain revenue growth in existing units.
- Know where the business sits on its maturity curve and when one target audience has been saturated, help your franchisees expand marketing efforts to additional targets.
- Evaluate the strength of your brand not just among potential franchise buyers, but also among current and potential customers and employees – take steps to ensure your new franchisees will be successful by ensuring your brand is at the top of its game.
- Identify the biggest risk factors for the business before you buy (e.g., skilled workers, competitive alternatives, etc.) and actually address these issues while you are focusing on unit sales.
Because the sad story is that in a short term investment scenario, franchisees, who are generating all the operating income and are building the brand at the street level can be squeezed by new unit sales, competition and even a lack of skilled workers in today’s market. Why?
- Franchises have limited trade zones, especially if the franchisor is still selling units. If they have already saturated the market for, say, hammers, they are going to have to offer something new to their customer base to grow revenue. With a robust set of fellow franchisees squeezing into their trade zones and a limited distance customers are willing to drive for hammers, they have no choice but to offer nails and tool belts or risk stagnating sales.
- Competitors will naturally copy successful concepts and compete for customers.
- Franchisees can begin to experience shortages of skilled labor from competition (both internal – other units - and external).
- Potential buyers for existing units can dry up because they can’t reap the benefits of rapid growth experienced by the early owners.
I’m not asking you to turn your backs on the short term flip or to divert some resources to the existing business because it’s the “right thing to do”. I’m asking you to make the most of your opportunity by growing units and by investing just a little in the early adopter franchisees because they can be your best cheerleaders and brand ambassadors. They can help you drive operating revenue, resell the franchise and mitigate risk.
And let’s face it: the risk factor in a flip can be high, especially after its been done a few times.
After two or three flips, the only equity strategy might be to buy and hold because the last flipper in the bunch will be left holding the bag when he can’t keep the company on the same unit growth curve. The best way for short term investors to mitigate the high risk of depending on unit sales growth is to think just a little more like a long term investor.
I titled this post “The Most Overlooked Profit Source For Franchise Brand Investors”, but it could apply equally well to many business ownership investments. I hope the case has been made, at least in part, that nurturing the value of the existing revenue stream, franchise owners and employee base can be a successful strategy in a short term flip. It will certainly be positive for the future of the business overall.
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The Barber Shop Marketing, winner of the AWM Agency of the Year in 2014, is a full service marketing agency headquartered in Dallas, Texas.