What you need to look for when picking a franchise investor
Tuesday September 12, 2017,
7 min Read
With new brands entering the Indian F&B landscape, it is important to know what it takes for a company to choose a particular person as a franchisee, or investor of an outlet.
When we talk about investors in companies, there are seed funds, private equity or a venture capitalist, who may be a ‘sleeping investor’ or a ‘mentor investor’. They do not get involved in day-to-day operations and rely on promoters to achieve business targets. They review the success of the business they have invested in from time to time. Thus, the fate of business does not heavily depend on the investor's execution or operation capabilities.
However, for franchising investing has a whole new meaning. I am eager to share my experiences with franchise investors. These investors are also operators of their businesses and the ROI for their business depends on their execution and operational capabilities.
Their execution also affects the overall brand equity and goodwill. Franchise investors hence work with more enthusiasm towards recovering the returns on their investments. Their behaviour affects the overall brand performance and other franchise investors. In a business like hospitality, there is a need to carefully choose the franchise as they form an integral part of the company’s vision. Every year, more than 10,000 franchise investors sign franchises in India, and 30-35 percent are within F&B industry.
In the last decade, in every industry, more than 75 percent companies have grown by 100 percent in year-on-year store openings under the aegis of the franchise investor.
So what are the traits, qualities, and capabilities that one should seek for while choosing an investor or, shall I say, ‘franchisee’?
Character synergies for sustainable growth
Coming together is the beginning, keep ing together is progress, working together is success. We firmly believe in this old adage. But there is a lot more required for the sustainable growth of a franchise.
The main task is to spot investors who synergise with the franchise’s characteristics and have a special aptitude for the brand. Knowing that investors are in complete sync with the brand is a prerequisite. It is something that assures one that this will go a long way.
Let me corroborate this fact with an example. For instance, we have a young brand called ‘Dhaddom’ which is a fun, comic-themed brand. This brand requires a young modern mindset to be operated. If we have relatively older investors interested in taking the franchise, we discourage it as, in all likelihood, the investor will stop understanding certain processes of brands, small touch points, like how things are served, the brand communications etc. This will lead to his dissatisfaction and, consequently, loss of enthusiasm.
Hence, it is very important for the investor to be able to relate to the brand he is investing in. After all, it is going to be his daily go-to place for the next few years. He should be looking forward to visiting the store every morning when he gets up, and that can only happen if he relates to that brand.
Accountability is a necessity
As a franchisor, we can provide know-how, training, support and feedback to the franchise. We can guide them and make them understand the business and various tactics of the business. We also offer backend support, marketing and brand building support. However, the investor can reap returns of his investments only by taking ownership of the business on his own. The success or failure of any franchise depends on the accountability he has towards the store.
The franchise has to wear both hats in proper proportions: the hat of an investor and that of an operator. He has to understand that he is accountable for running the store as per set standards. He can leverage franchisor knowledge and support, but cannot rely on them.
For example, the franchisor periodically gives training to the franchise and its employees. However, in case of iteration, the franchise owner has to be self-equipped to be able to train the new recruited staff.
There is no substitute for skill and hardwork
A franchisee is not a typical investment model, where the investor is not expected to operate. The franchise investor should be actively involved in the running of the store. For that, he or she must treat this business as a full-time business and not as a part-time income source.
Restaurant business requires your own time and involvement, at least till the time the store has reached optimum sales and efficiencies. Also till it has started acquiring customers who want to visit the restaurant again . There is a lot of hard work that goes into it and we only prefer investors who are willing to put that kind of dedication into the store. Our first question to them during their interview with us is , “Who is going to operate the business full time?”
It goes without saying that they must be wildly passionate about their franchisee and eager to work to their full potential to make the franchise a success.
Mutual understanding strengthens our relationship
Like every relationship, it is imperative that the franchisee-franchisor relationship is respected. The franchisee must follow set norms and standard operating procedures (SOPs) set by the franchisor and not bypass them.
Many a times, franchise owners tend to deviate from the SOPs, which adversely affects business.
That’s why we test the franchise on his flexibility to amend his learnings and adapt to brand’s standards. We partner with investors who add value in terms of their ideas for the brand, but we hesitate to partner with investors who give us the feeling that they will bypass the brand rules and start dictating their own. This results in inconsistency, which affects the overall brand name.
During the initial discussions, watch out when the potential franchises passes comments like, “I went to your store but I did not like the furniture. Can we change the seating?” Or, “I tried the pizza with your sauce, and I think the sauce can be spicier.” Or, “I have a vendor who can supply spicy sauce and we are planning to buy from them.” Such statements are red signals.
The franchisee should be well-capitalised. The investor must bring the required investment capital and working capital to the table as there should be sufficient funds to acquire assets and run the day-to-day business without having to cut corners.
Apart from that, they must also ensure that there is adequate money to put in negative cash flow, required to sustain the business.
We check the investor's mindset of ‘holding’ on to a project and their financial strength to be able to support the project in case it does not pick up as expected. If the investors say things like, “If the business doesn’t pick up in the first month, can we reduce the staff?” or “In case of less business, can you waive off royalty?”, we understand that they may possibly cut corners, which will not only affect their own store but also tarnish the brand name.
Patience is a virtue
Rome wasn’t built in a day! Every business or project requires a gestation period. And a franchisee must always take into account the fact that there may be teething issues. During this period, the investors are expected to follow prescribed standards consistently. With time, their hard work will pay off and they will not just break even, but achieve all the targets they had set.
A franchisee investor is a very interesting type of investor. He is accountable for his own returns. It turns out to be a wonderful work with investors who invest in the store to grow a brand and also provide their valuable human resource towards the overall development of the brand.
Educating the franchise investors on the franchisor-franchisee relationships and importance of adhering to brand standards is pivotal. However, the first and most important step is choosing the right investor to partner with.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)