Multi-Unit Franchisee Magazine Issue I, 2013 | Page 66

Know When to Fold ’Em!
“As a franchisor, if I’m convinced the franchisee can’t make
a go of it, I’d rather have it closed than be a [poor] brand
ambassador. It projects the brand in a bad light.” — Russ Umphenour
Our preference is always to help the franchisee get back on
track, and the times it does not work are a big disappointment
to all parties concerned.”
“As a franchisor,” says Umphenour, “if I’m convinced the
franchisee can’t make a go of it and they cut down on labor
and quality, I’d rather have it closed than be a [poor] brand
ambassador. It projects the brand in a bad light.”
If the franchisor is reasonable and the franchisee has done
everything possible to make it successful, then everybody should
agree to close the unit, he says. “If the business is not working,
it ought to be closed.” He emphasizes that this should be a business decision. “There are some franchisors who let their legal or
financial people run the brand. All you do is create animosity.”
“When I think back on which brands acted which way,
it’s about the confidence of the brand,” says Hashim. “Those
who are afraid and don’t get a lot of growth to begin with are
scared of losing any cash flow. I understand that,” he says. “It’s
never an easy solution, but in my opinion you cannot have a
healthy brand if more than a certain percentage (2–3%) are
losing money. In due course you have to deal with all these
negative cash flow units.”
“You need to get rid of the bad apples one way or the other,”
says Thomas. He’s been in situations where it’s the franchisees
who pushed the franchisor to shut down a bad operator to
protect their own investment in the brand. Thomas, who has
been in the Great Clips system for more than 10 years, says
that as president of the brand’s
co-op, he was very outspoken
on this issue.
“We had some stores not
following the system. It’s an
embarrassment to the brand,
hurting the whole brand. You
have to close them or sell
them,” he says. “We found
people who wanted to buy
one of those stores, but the
franchisee didn’t want to sell
it except at a too-high price.
But with pressure from the Darrell Johnson
franchisees, and the franchisor starting to fine him and then threaten to close him down,
he sold.”
Franchisors also are sensitive to the effects closed units have
on their brand in other ways, says Thomas. “Because franchisors get evaluated by closure rates, they would rather stay open
and do $100 a week, even if the franchisee is working three
jobs, to keep the unit open for 5 years.” And if a franchisor is
small or struggling, he says, they “just want to keep collect-

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Multi-Unit Franchisee Is s ue I, 2013

ing money.” Even in those cases, he says, they should get rid
of the bad apples.
In deciding to close a unit nowadays, franchisors also must
consider the larger financial effects on the system, says Darrell
Johnson, president and CEO of FRANdata. “Whatever the
cost was of a closed unit prior to 2008, the cost now is much
higher,” he says. “There is much greater visibility today on
what are considered ‘failed’ units: by the public, by prospective
franchisees misunderstanding
FDDs, by the media who will
attack a brand with a substantial number of failed units,
and most important, by the
financial community.”
The dilemma for the franchisor, he says, is that closing
poorly performing units—even
when it strengthens the overall
system—could affect lenders’
willingness to provide funding to both existing and new
franchisees. Thus, a “spiraling
John Metz
effect” becomes a legitimate
concern for franchisors seeking not only to maintain the morale
of existing franchisees, but also to sell new units, says Johnson.
“The ‘aura’ is there if a lot of units are not performing. There
are lot of brands out there to choose from.”
Nature of zee beast

Franchisees also have their reasons for not wanting to shutter
a poorly performing unit: it’s in their DNA. Entrepreneurial
traits such as optimism, tenacity, and the determination to grow
in the fac