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Seven critical steps that franchisors must follow to successfully revitalize their companies.
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Words by Robert Stidham, founder and CEO of Summa Franchise Consulting and founder of Franchise Dynamics; and Kevin P. Hein, attorney and senior partner at Alexius
The COVID-19 crisis has revealed the interconnected and complex impact that a single disruptive force can have across geographies, industries, and supply chains. Franchisors globally must rethink their business strategies in order to emerge from the coronavirus crisis with the strength and agility to prosper long-term. It is important to think of how to succeed in the “new normal” as well as the “next normal” because of the very unpredictable environment. The COVID-19 crisis has been incredibly difficult and disruptive for businesses across every industry, category, and size. Fortunately, there are steps that franchisors can take to survive and be in a position to bounce back.
The keys to successfully revitalizing your company include these critical steps:
1. Strategic planning:
Take advantage of this opportunity to re-envision your business. Some important questions include the following: Where does the business need to be in order to keep moving forward? Where should the business and its brand be positioned? Which new products or services will differentiate the business and brand? What resources and logistics would be needed to execute?
2. Stakeholder engagement:
Franchisors must engage stakeholders as quickly as possible in order to successfully make needed changes to keep moving forward. Examples include board members, franchisees, lenders/creditors, landlords, and vendors. Franchisors should openly educate stakeholders about what is happening with the business and what the stakeholders can do to help.
3. Franchisee engagement:
Franchisees are especially important stakeholders of a franchise. Franchisors must be engaged, direct, and honest with franchisees about the status and operations of the business, and what is confidential information that cannot be shared outside the franchise family. Hopefully, the existing franchisor/franchisee relationship already is good; if not, franchisors must make the extra effort to heal rifts. Franchisors who present a reasoned and analytic strategic plan and discuss its execution will provide confidence and comfort to the franchisees about their investments, their leadership, and the company as a whole.
4. Employee engagement:
Franchisors must engage their corporate employees as well as their franchisees’ employees, albeit to different degrees. Franchisors must be engaged, direct, and honest with employees about the status and operations of the business, especially likely employment status, and what is confidential information that cannot be shared outside the franchise family. Hopefully, the existing franchisor/employee relationships already are good; if not, franchisors must make the extra effort to heal rifts.
5. Cost-cutting is not re-organization:
Cost-cutting in and of itself is not strategic. Rather, it is a financial tactic to create a specific short-term result. Even worse, sometimes a company’s executives cut costs based on fear or anger, which almost always leads to disastrous long-term results.
6. Execute with excellence:
Franchisors must consider every practical option to successfully execute the strategic plan. It is helpful to think of what must be done daily, weekly, and monthly to move forward the business and the plan. Corporate “sacred cows” should not be protected from the analysis. The “next normal” means that what was done in the past is likely to be irrelevant to present survival and future success.
Franchisors may need to consider either a voluntary reorganization or even a formal Chapter 11 bankruptcy. In many cases, franchisees and/or stakeholders who either litigate or refuse to help the company spur such reorganization. It is important to note that in franchising, the threat of bankruptcy often drives away the existing corporate staff because they may perceive future FDD disclosure requirements as adversely impacting their careers.
“Cost-cutting in and of itself is not strategic”
Voluntary reorganization occurs when a company brings in a chief restructuring officer (CRO), who is an outside expert, to assume operational control. The CRO typically is not a lawyer. Usually, the company grants the CRO broad powers to renegotiate or restructure all aspects of the company’s operations and finances, perhaps with an eye towards bankruptcy and reorganization.
In many cases, the CRO brings credibility and impartiality to discussions with the franchisees and other stakeholders.
In some cases, the CRO will bring a “Managed Services” team to either supplement or replace corporate staff. This team will assume the company’s needed operational roles. Usually the CRO and the “Managed Services” team will have successfully worked together before.
Typically, the CRO reports to the board of directors and works closely with either the company’s general counsel or outside counsel to execute the voluntary reorganization plan. The CRO exits the company upon the plan’s successful completion or the sale of the company.
“Franchisors must engage stakeholders as quickly as possible in order to successfully make needed changes to keep moving forward”
We recommend that companies that are considering a Chapter 11 bankruptcy and reorganization, or the equivalent in a foreign jurisdiction, first should try to do a voluntary reorganization. If the voluntary reorganization fails, at least the company will have the CRO, operational team, and experienced counsel already in place. Moreover, bankruptcy, while providing renegotiation of agreements and liabilities, can cost brand and equity value, make future operations difficult, and subject the company and its future to the bankruptcy court and/ or trustee.
Remember, however bad the situation may be right now, things will get better. Our team of seasoned experts works alongside management to solve complex cash flow issues, operational challenges, and other business crises.
In addition, our experts have access to a global network for specific expertise. Summa Franchise Consulting and Alexius provide the best solutions to maximize value for all constituents. If you feel like your business may be in trouble, we welcome the opportunity to support you through this very challenging time.
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