This figure really shocked and surprised me when I first saw it in a set of statistics from Griffith University. The median number of franchisees for Australian franchise groups is just 19 franchisees!
Now the reason this shocked me was that from my experience most franchise groups need a critical mass number of more like 30 – 50 franchisees. Critical mass meaning that you are now receiving enough royalties to cover your costs as a franchisor without HAVING to sell franchises in a year to just cover your expenses, let alone make profit. A nice place to reach as a franchisor for sure!
So when I saw this figure of less than 19 franchisees, that to me immediately said there is a whole lot of franchisors in the same serious pain and frustration out there.
By the time you have about 10 franchisees, you have enough franchisees to keep you busy – plus give you lots of challenges – but not enough cashflow to make it all feel worthwhile or be profitable!
Now I’m a person who likes to solve problems rather than dwell on them. To me, this is a major problem for franchisors and although just going out and getting lots more franchisees seems like the logical answer to your problem, that is not necessarily the case.
If you go out today and get 10 or 20 more franchisees that may solve one problem, but it will absolutely create another 3 or 4 new problems in the process.
I think of it much like our bodies. I’ve been working with an integrative GP on my health. What is an integrative GP? Well, totally like a normal General Practitioner Doctor, but when you have a problem with your health, they look to the entire body as a complete system rather than just a narrow focus on the problem that you have presented with.
As an example, I’ve had a type of brain tumour for some years (I’m all ok!). My specialist just focused on the tumour, but didn’t look (in fact, they ignored) that this tumour was also causing issues with my liver, thyroid and adrenals. They didn’t look to the whole system. So even though I don’t have an issue with the tumour anymore, I do have some issues with the system that it was a part of.
Why did I share this little story with you?
Because I think this is what happens for many franchisors. They focus on just how they will get new franchisees. How can we increase our numbers? Now, just like my tumour, you have to have focus on this. You absolutely need to solve this problem, but at the same time, you need to look at the entire system to ensure that you are not creating more problems down the road.
The biggest problem that occurs is that as franchisor you bring on lots of new franchisees in the hope that more numbers will solve your problem, but in fact it creates more. The biggest challenge is franchisees that are not profitable.
If you have currently got 10 franchisees on your books, but only 1 or 2 of them are profitable, this will not be solved with more franchise numbers. If you go out and get another 10 franchisees, the numbers will not average out. You will not find that those new 10 will magically be profitable. So instead of having 8 or 9 franchisees in pain and not making money, you will double this issue to 16 to 18 franchisees in pain and not making profit.
What this does then is it creates a virus in your franchise group because the best thing about a franchise is that all the franchisees can talk to each other, but that means the worst thing about a franchise is that all the franchisees can talk to each other!
In reality, the franchisees will see that you are selling more franchises – which they will assume is 100% profit to you by the way – so you are making money, but they are not. They then get bitter, disgruntled and sour. You do not want this!
So, just like our bodies, you have to look to the entire system to make sure you are not solving one issue, but creating another.
What can you do?
You need to split your time between supporting those franchisees that you already have on board and help them to become profitable and happy. This has a benefit because if they are profitable and happy, when you are in the sales process with prospective franchisees they will be talking to your existing franchisees.
It is much easier to sell a franchise when your current franchisees are raving about the business!
You then also need to make sure you are putting the systems in place to train, educate and help your new franchisees to become profitable as fast as possible.
The challenge with this is that most franchisors do not have the skills required to help franchisees grow.
I’ve been working with franchises for more than a decade (and you’ve probably never even heard of me because my business has been basically referral only for years). The number one thing I hear from franchisors is ‘But I never did that. I just got in there and made it happen. I need to find more franchisees like me’. This is the biggest mistake a franchisor can make (well, one of them).
The majority of franchisors started their franchise after realising their successful business could be franchised. What a great way to start their franchise! The challenge here comes in two parts.
1. You do not want franchisees that are like you! If they were like you they would just go start their own business – or franchise – not join you. People buying a franchise are very different to those that start a franchise. They are not like you!
2. You may have the technical skills of running your business, but your franchise business is not the same as the business of your franchisees. You are no longer ‘doing the work’ of the franchise, you are a franchisor. You are now the leader and your job is to develop your franchisees to run successful businesses.
I’ve found many franchisors get so focused on just bringing on more franchisees and training them in the technical skills of the business, they forget to help them learn how to run and build their business and then they also forget to learn how to support these franchisees in a way that leads the franchisees to a successful business.
In my opinion, this is why franchises don’t grow to more than 19 franchisees.
The first 10 franchisees in your business are very different to the 10 you bring on that are numbers 40 to 50. To be in the first round of franchisees in a franchise business, they are more likely risk takers and a bit more entrepreneurial. They are taking a chance. There are only so many of them out there willing to take a chance but also join a franchise – it is a rare combination. They know that you don’t have it all worked out just yet, but still want a system and support.
When you get to around 10 franchisees, new franchisees will be looking a little more closely at what they are getting when they purchase a franchise in your system. If they find that only 8 out of your 10 franchisees are profitable, it will be like a big red flag and they will go elsewhere. They will not take the risk, because basically, it is showing that your franchise business is not viable. Simple as that.
To be honest, when you get to critical mass in your franchise and the majority of your franchisees are profitable, franchises start almost selling themselves. You need to get to critical mass – but you need to get there with profitable franchisees, otherwise you will crumble under the pressure of franchisees that are stressed and complaining because their business is not profitable and they will all say – it is all your fault!
Is this making sense to you?
The other issue I see is that most franchisors are supremely optimistic – almost to a fault. The payoff is always so easy to justify. “If I do this marketing strategy, then I only need to sell one 
franchise to pay it back.” But, as I’ve seen all too often, the strategy produces no franchise sales so it is just sucking your cashflow. The pay off in franchising is so large that it stops franchisors from really looking at what they are doing in a logical manner. Making one sale seems so easy. But if you looked at a strategy and said you needed to make 10 sales from it, would you do it?
Maybe it is time to slow down to speed up?
I often suggest that you stop and look at what you are doing. Reassess what is working and what isn’t. Are your franchisees profitable? What can we do to increase their profitability? How are we training and getting our franchisees started? Are we using the best sales process to lead our prospects through? Am I being a franchisor, rather than still thinking like the owner of a business that is the same as the franchisees?
Being at less than 19 franchisees is EXTREMELY painful for franchisors and stopping to look at how you can get to your critical mass number, as fast as possible, but also as smooth and strong as possible (eg. profitable franchisees) will make all the difference.
Look at your system, not just at how to find new franchisees, but think of it as how can we find new franchisees, train and start them up best and get them profitable and keep them happy long term, that is a great place to start. Even if you reach critical mass in numbers of franchisees but they are not profitable and happy, you now have 30 to 50 people unhappy – at YOU – rather than just 10 and trust me, that would be a nightmare for anyone!
If you have enjoyed this article, then you might be interested in attending my workshop on
Growth and Expansion of your Franchise Brand for Franchisors in February 2016.