You have multiple company-owned locations showing that your concept could be successfully replicated in additional locations or territories, and you have your franchise disclosure document (FDD) and financing in place. What do you need now? Franchisees, of course!
While recruiting franchisees is important to growth, it is also important to note that the offer and sale of franchises is highly regulated. You should consult with your franchise attorney as you design your sales process, including, among other things, how you will handle franchise validation (in which prospects ask franchisees about their experience), your review of the prospects’ business plans, and other critical aspects of the sales process. The key is to understand the legal do’s and don’ts of franchise sales, as you want to ensure that, while your process enables prospects to gain the information they need, they gain it in a way that complies with legal requirements. I highly encourage that you make every effort to have a robust Item 19 in your FDD, as this has helped us tremendously in the processes that we have built, because we already legally share so much financial performance information with prospective franchisees. In addition, you should have everyone involved in the franchise sales process—including senior management who may be involved in Join-the-Team Day (discussed later in this chapter)—attend franchise sales compliance training, especially the IFA’s FranGuard program.
I struggled with which chapter should come first: the one on lead generation or the one on sales process—the chicken, as the proverb goes, or the egg? It doesn’t do any good to get leads and then have a bad sales process. Conversely, it doesn’t do any good to have a great sales process and inadequate leads. In both the design of the sales process and the generation of leads, the consideration of the target franchisee (one who would find value in your business and has the qualities that you believe are necessary to succeed in your business) is critical. (We will discuss the profile of your ideal franchisee in the beginning of chapter 7.) In the end I chose to begin with discussing how to design a great sales process and incorporating into that discussion a few important subtopics: (1) utilizing experts and technology for optimal solutions; (2) mapping the sales process; (3) leveraging sales personnel (including the number of salespeople needed based on your lead flow as well as the benefits of a sales qualifier); and (4) evaluating key franchise sales metrics to assess how the process is performing.
Throughout this chapter and the next one, I use terms commonly heard within the industry. We use Process Peak, a technology platform, for our franchise sales process. This system refers to potential franchisees seeking information about our organization before we qualify them as a “suspect.” Those who complete our longer confidential questionnaire (CQ) are referred to as a “lead.” In the industry, however, both would be referred to as leads. The differentiation, however, is crucial for evaluating key metrics.
Therefore, to avoid confusion, I will use the following three categories when referring to those individuals who are evaluating our opportunity:
- suspects for everyone, regardless of qualification
- CQleadfor all those interested in our concept who have completed our confidential questionnaire and are therefore a qualified lead
- completionfor all closed sales
Candidates and prospects are used interchangeably to refer to someone considering a franchise opportunity. Once they sign a franchise agreement, they are referred to as a franchisee.
Utilize Experts and Technology
We were fortunate to select 175 franchisees and to sign over 250 franchise agreements (we have more franchise agreements than franchisees, as our multi-unit franchisees sign agreements for the second or third locations). As you look at setting your own goals for franchise sales, you will want to understand how what you require of your franchisees impacts the number of potential prospects who will meet your criteria. The number of prospects that you may receive typically will decline as your requirements increase in each of the following areas: investment range, liquidity, net worth, credit score, and experience.
We have an investment in the over-$100,000 category. Our required minimum liquidity is $100,000 (according to what franchisees disclose on a financial statement, including cash and stocks). We will count 401(k) if the prospect will be accessing it as a funding source. We require minimum net worth of $500,000 (or $400,000 and a working spouse to cover household expenses) and a minimum credit score of 685 (increased from 600 as we saw bank requirements tighten in 2009).
In 2005–2007, when it was easier to access capital, particularly home equity loans, the net worth requirement was only $250,000, but we increased the amount with the credit access crisis, recognizing that banks required more collateral and significantly discount home equity. Franchise sales are tougher as the investment range of a franchise concept increases because there is a smaller pool of candidates; a candidate for a concept above $100,000, for instance, is much harder to find than one for concepts with a $50,000 to $100,000 investment. The requirements set for net worth, liquidity, and credit score for prospects narrows the funnel further. As you evaluate what your initial investment will be and the total amount of working capital a franchisee needs until the business reaches cash flow, you need to think about the access to capital environment and what banks will require to finance your franchisee. I recommend setting your internal criteria at or higher than the banks’ requirements and within the bounds of three primary considerations that include the following: (1) investment level, (2) the skills and background needed of the franchisee, and (3) the defined culture. The higher the investment level, the greater the required skill, and the more protective you are of your culture, the fewer available candidates you will have.
Many lenders prefer a franchisee to have experience in the industry; a franchisor who does not require such experience of its franchisees will have to demonstrate to the lenders a level of support that overcomes the franchisee’s inexperience. Culture, on the other hand, does not have to be a limiting factor, as you can use culture to attract and emotionally engage the right candidate.
I can’t stress enough how much a great sales process influences great results. We have had help developing and then enhancing our process repeatedly. Having an outside advisor or consultant review your process for missing pieces is incredibly helpful. We found, for example, that we knew our “story” so well that we were leaving out important passages that a prospect would want and need to know.
We have had great success in developing and/or enhancing our sales process working with two consultants, Joe Mathews and Kurt Landwehr.
We also have had each of them manage our department and/or sell directly for us when we really needed an outside perspective to create our next breakthrough of performance by coaching the team, improving our processes, and increasing our lead flow. A big boost to the sales department came when we moved our sales process to Process Peak, an amazing technology platform, after three years of successfully selling franchises. It allowed us to automate the manual process of sending a binder of information to prospects, drastically reducing our printing and postage costs and eliminating worry about delays in the mail.
With their expertise in blueprinting sales processes, Process Peak personnel combed through our process, pointing out missing information. We were then able to cover this information up front, so that prospects felt better about the process and knew that we were not trying to hide anything. Our close rates nearly doubled within four months of deploying Process Peak. The results and ROI thus speak for themselves.
In addition, the technology platform that the Process Peak system is written on aligns with our technology strategy, because we are building on SharePoint and .net platforms to offer our franchisees and ourselves increased workflow automation, dashboards, and business intelligence tools. This will be—or should be—the direction best-in-class companies are headed toward in the future.
Map the Sales Process
As mentioned in the opening, careful consideration of the franchisee you want to attract is a critical component both in defining the right sales process to engage prospects and in determining the right lead-generation tactics to find them. I will refer to selling a lot throughout this section, but I want to emphasize that, although we call it selling, we have a strong philosophy and practice of selecting franchisees who also believe we are the right fit for them. The decision to do so is a mutual one. We do not bring just anyone into our family: We require much more than financial qualification in our selection of franchisees. Who you allow into your system will play the largest factor in your success or failure as a franchisor.
AVOID THIS PITFALL:
The mistake that many franchisors make in the early years is to sell franchises to almost anyone who is willing to sign the franchise agreement and pay the initial franchise fee.
That approach will hurt you in the long run.
Our system for handling initial contact with a prospect provides an immediate e-mail response when an online request for information is received. Our sales qualifier, a position dedicated to contacting and qualifying prospects and then assigning the qualified prospects to one of our salespeople, then attempts three phone calls and three or four e-mail messages spread out over up to 10 days, with the first contact attempt within four business hours. If she can’t reach the prospect, the lead is closed out, and we try to reengage the prospect in an e-mail campaign later.
For those we do contact and who meet our criteria, we provide access to our online virtual brochure, through Process Peak. Prospects are encouraged to go through the first section of information before their initial call with our salesperson. We recognize that buyers are busy and may want to review some information on their own before they are ready to engage in a two-way process (think about the way home buyers look online first to evaluate the homes they are interested in before ever seeking out a real estate agent to set appointments to see these homes). All other steps of the sales process are based upon a mutual give-and-take and engagement on both sides in the process; as such, the other sections of our virtual brochure are password-protected and require our salesperson to be part of the prospect’s experience.
BRIGHT IDEA:
We designed homework for the prospect at each stage in our virtual brochure prospect experience and use this to help us determine if the prospect will follow a process.
We also use multiple content formats, including videos, audio, franchisee testimonials, and downloads of information to demonstrate our credibility, including marketing materials, job descriptions, etc.
An ideal process will simultaneously impress and inform a prospect as well as qualify him. Buying a franchise and succeeding at it requires that the franchisee follow the model—including all systems and processes—to reach the desired results. It always shocks me that some franchisees refuse to follow the model. Why in the world invest in a franchise, spend the money, and then not follow the model? Well, for whatever reason, some franchisees do just that. If they won’t follow the sales process before they write a check, they most certainly won’t follow our business processes after they write the check and join our family. It’s better for everyone involved to identify this before they join.
AVOID THIS PITFALL:
Remember: The wrong franchisee is expensive—not only in terms of dollars to support and lost royalty opportunity, but also in terms of the emotional toll and distraction.
So invest your time deeply into getting this process right.
Before jumping into the specific steps of the process, let’s review what the process is designed to do. You need to understand why buyers buy businesses so that you can position your business model and establish clearly the value proposition. A buyer needs to feel a “fit” in one or more of three areas with the business she will invest in. First, the buyer will evaluate the concept logically, so the business model needs to make sense (you will need to deliver data, industry level information, unit level economics, ROI, and return on life information to meet this need, all in accordance with the applicable legal requirements, including the Item 19 rules I have referenced previously). Second, the buyer will evaluate the concept in terms of whether she trusts you. The person she will do business with must be credible. Start-up franchisors are marketing the vision of the founder; therefore, the founder must be a big part of the process early on to be credible. As the data you have to share increases, you will need a credible and likable salesperson to tell the franchisor’s story. Third, there must be an emotional connection to what the franchisee will be doing. As an example, BrightStar offers an opportunity for a franchisee to make money by making a difference in the lives of families.
The Five-Step Process
How long should your sales process last? It varies, but in general it is fair to say that most buyers who buy businesses, regardless of the level of the franchise investment, do so over a 60- to 90-day period. It is definitely true that time kills deals. To accommodate the five steps in our process, we set an agreed-upon date during a five-to-seven-week time frame for the prospect to decide if he wants to commit to working with us and vice versa.
The steps may vary for you, depending on your concept’s level of complexity, and it may change over time—as the model changes or as you improve your processes—as ours has. For our virtual brochure, we break the process into the following five steps: (1) The Opportunity, (2) Competitive Advantages, (3) Training and Support, (4) Validation, and (5) Join-the-Team Day.
Step One: the OpportunIty
The Opportunity is an introductory section that suspects can access in our virtual brochure prior to their conversation with a salesperson. It does not contain any proprietary information. At the conclusion of this section, the prospect fills out our long CQ so we can evaluate the prospect’s fit for our system before we continue.
Prospects at this stage are introduced to the topic of territory selection. Since we are growing fast, we try to have the prospect think about her top three territory choices (rather than just focusing on only one territory) in case her first preference isn’t available by the time she reaches the end of the sales process. Once a prospect has submitted her three choices for territory on her CQ, we share the demographic details with her of the three choices as a precursor to step 2. We have our territory availability pre-mapped on MapPoint, and access to it is available to the whole sales team so they know in real time what is available. Our director of contract administration maintains it as new territories are sold. I recommend investing in pre-mapping the United States, using the demographic criteria that are appropriate for your model, and importing this information into MapPoint.
Step Two: Competitive Advantages
The Competitive Advantages section provides an in-depth look at our differentiators in terms of our breadth of revenue sources, our recruiting and retention strategy, and our technology. Prospects have an incentive to complete the CQ in order to gain access to this section, which contains proprietary information.
At this stage we engage the prospect in a discussion about what she is looking for in a business and mutually evaluate with her whether our business can help her meet her goals. A thorough interview (and active listening) is critical for both the prospect and the franchisor, as it is the best way to ensure that this business is capable of meeting the prospect’s financial, lifestyle, and emotional goals and can justify her investment in it. The full sales process takes weeks for both you and the prospect, so devoting a thorough 45 minutes to this interview is worth the effort; it ensures that you both see the possibility of a fit before continuing for weeks and weeks through the rest of the process. For a list of suggested questions to ask of a prospective franchisee, visit www.growsmartriskless.com.
This first call is probably between 60 and 90 minutes, of which 45 minutes are dedicated to the interview and the remainder walks through the information in this section of the virtual brochure. You will deliver enough information for the prospect to evaluate initially if you meet her logical, emotional, and trust parameters. The prospect needs to be able to understand how you will deliver value to her, as opposed to other franchisors, by emphasizing how you are better than her other business choices.
We moved up the introduction to accessing financing sources to step 2 from step 5 in 2010, once we had financing options available and after recognizing that prospects had become apprehensive about their ability to access capital and about the delays associated with accessing capital. As was discussed in chapter 5, we spent a lot of time in 2009 and 2010 building lending and 401(k) rollover relationships and have the tools and contacts available as part of our sales process. We were also successful in 2010 in securing a credit facility that provides SBA loans according to preestablished criteria.
Preparing a pro-forma income statement and cash flow statement is part of a prospect’s responsibility at the conclusion of step 2. We provide a blank template with the row headings that correspond with the disclosures in the FDD to assist a prospect in preparing a pro-forma as a component of accessing financing. Also at the end of step 2, the prospect gains access to our FDD, which contains a robust Item 19 regarding historical financial performance results, as well as the cost (of initial and ongoing investments) assumptions and many of the revenue and cost-of-goods-sold assumptions based on what our franchisees have experienced. We want her to prepare her assumptions for this pro-forma so she can ask franchisees questions to validate those assumptions. We are very clear and strict in telling all prospects that we are unable to discuss or review their pro-forma. Be sure to tell every prospect this; potential legal issues could arise otherwise. As I have mentioned earlier, the franchise laws regulate the offer and sales process. It is important for you to understand what you can do during the process and what actions or statements can get you into legal trouble. This is particularly true if you do not provide a detailed Item 19 in your FDD.
The prospect is given access to download our FDD and to listen to an audio presentation covering the highlights of the FDD, the franchise agreement, and the area development agreement. At this point we also need to know if there are any areas that the prospect sees as “deal killers,” so that we can work through them. This doesn’t mean we negotiate and modify our franchise agreement, because we don’t, but getting our director of contract administration or our attorney on the phone to explain the intention of a particular section often can move us forward. You will need to evaluate the appropriate stage in your process to deliver the FDD, especially if you do not have an Item 19 financial performance representation.
Lastly, we grant access to a weekly senior leadership call hosted by either our president or me. We introduce this at the end of step 2 to better inform the prospect about the highlights of the system and our strategic priorities. The call format is one hour, 40 minutes of which is devoted to a PowerPoint presentation and the remaining time to open questions.
Step Three: Training and Support
The Training and Support section is an in-depth review of the resources we provide to franchisees from (1) signing to opening, (2) immediately following opening, and (3) then on an ongoing basis. Some concepts may also incorporate site visits to allow the prospect to experience firsthand a day in the life of a franchisee. This step may be helpful if a prospect needs it to alleviate fear, but it can create issues because it may introduce a lot of variables that you cannot control.
At this stage, we invite the prospect and any spouse or partner that will be actively involved in the business to complete an online profile assessment. The profile assessment that we use looks at values, motives, leadership style, and competencies. We have moved this up earlier in the process, from step 5 to step 3, so that we can focus our sales team on working with prospects who could ultimately be the right fit for us and where we can be the right fit for them. We have developed a“top performer” profile by reviewing our top performing franchisees and surveying them to find common characteristics. Using these tools improves our odds of having high-performing franchisees.
Step Pour: Validation
Step 4 in our process is Validation. Providing access for a prospect to talk to franchisees is an important part of the process through which the prospect can validate what she heard during the sales process. Our validation actually begins at the end of step 3 with an invitation to attend weekly franchisee-hosted group validation calls. On advice from our attorneys, we do not attend these hosted validation calls, nor do we handpick only top performers to host the calls, as the host may be at any level within the bell-shaped curve of performance in the system. As in every other aspect of your franchise sales process, make sure you understand the legal aspects of validation, as there are practices that are acceptable and other practices that can be problematic. For example, a franchisor who does not include any financial performance information in Item 19 of its FDD and steers candidates only to its top performers as part of validation not only may have legal issues but also is creating a situation in which the candidate may not have a realistic expectation of the franchise opportunity.
Our purpose for the validation step is to provide candidates with additional perspective of what BrightStar is all about—the good and the not so good. It is important to not stage or improperly influence the process. We emphasize access to information so that a candidate can make an informed decision on whether we might be the right fit for what she is seeking in a franchise opportunity.
It is absolutely critical in the validation process that the salesperson never set up an expectation of Utopia in what the prospect will hear. Rather, the salesperson explains for the prospect what the key performance indicators are for the system (for us, that may be sales call activity, dollars spent on advertising and recruiting, recruiting activity, call conversion, and net promoter score). The prospect should then be encouraged to ask how the franchisee is performing on these key performance indicators. Ultimately, the prospect wants to learn what to replicate from strong performers, what to avoid from weak performers, and what the franchisees she encounters would do again or would have done differently. This helps to frame the feedback and also provides valuable information for the prospect, if she becomes a franchisee, to focus on the right things to improve results.
We have also worked with our attorneys to provide, through our sales process, some suggested questions that a candidate may want to consider asking our franchisees as part of the validation step and some key tips in terms of being respectful of a franchisee’s time. (We advise the prospect that if she joins the BrightStar system she may be receiving these calls in the future.) Of course, the candidate is free to ask whatever questions she wants. We just want to make sure she is asking some of the critical questions, so that she can better understand the BrightStar business she is considering. We also spend time educating our franchisees on the important role they play in validation and thanking them for taking the time to help prospects decide if we are the right opportunity for them and helping us decide if the prospect is right for us. We encourage our franchisees to provide feedback to the sales team if they have questions about the fit of a prospect. A word of caution is necessary in this regard: Ensure that a franchisee’s negative feedback about a given prospect isn’t proffered because the franchisee doesn’t want a neighboring territory sold that he himself may be selling into. On the other hand, if the complaint is related to a market halfway across the country, it probably should be taken very seriously.
Step Five: Join-the-team Day
The final step includes checking all the remaining boxes to ensure that the prospect is ready to attend our Join-the-Team Day (JTTD) and then does, indeed, attend. If the prospect indicates at any point during the sales process that she will have an attorney review the documents, encourage her to have that done prior to Join-the-Team Day; don’t delay this step until after that celebratory event (franchisees will never be as high emotionally prior to joining the family as they are on Join-the-Team Day). We do not discourage prospects from consulting with a lawyer as part of their due diligence. In fact, if they do, we like to see a prospect use an attorney with franchise experience. As part of our final set of steps to ensure that a prospect is ready for JTTD, we process a background and credit check. A prospect must have a clean background check because our business entails taking care of families. We also want to ensure that the prospect has a high enough credit score to obtain financing. This is a critical step and only because of the cost do we wait until near the end of the process. That said, as part of the access to financing review, we do make it clear that a minimum credit score of 685 is needed to participate in our credit facility.
Once we verify acceptable background and credit checks, the prospect is scheduled for an interview with our brand president to ensure that the prospect fits our values, is willing to put in the effort to succeed, is able to follow the model, and has the experience and attitude we seek. On this call the brand president approves or denies each prospect to attend JTTD and discusses the profile results with the prospect so the prospect knows where she fits well and what areas will need to be focused on. Occasionally, a prospect with a successful corporate track record but poorly matched profile result is conditionally approved for JTTD to give us an opportunity to evaluate the prospect in person and to consider having the prospect retake the profile. (As we will discuss in the next chapter, a profile test can sometimes have inaccurate results if a candidate is experiencing significant trauma and/or change in her life.) If a prospect is denied for attending JTTD, the brand president goes back to the salesperson to coach him or her as to why the candidate is not approved to move forward.
Our JTTD begins on a Thursday evening, when two or three of our senior leadership team members have dinner with all of the prospects. We particularly enjoy this social time over dinner to get to know one another better and to observe how the prospects interact with one another and with the wait staff. Franchisees will need to inspire a diverse workforce, and we need to see that they appreciate all people, not just those in a suit and tie. It is also amazing what you hear when folks drop their guard. On a few occasions I’ve had a private conversation with a prospect following dinner and offered to pay travel costs (which we do not do otherwise) because during dinner it became clear that the prospect was not the right fit for BrightStar. These are delicate situations, but they reinforce with the group the next day at our home offices that we really “select” our franchisees rather than “sell” franchises.
We spend about seven hours on Friday with a combination of presentation/Q&A sessions and individual rotations with key team members. We limit attendance to no more than six prospects (if each brought a spouse that could be a total of 12 people) so that we have ample time to get to know one another. We meet as a leadership team afterward and approve or deny by committee, and then our head of franchise sales informs the sales team of the results and the prospects are notified. We ask for a decision from an approved prospect within one week of granting approval; she is told that the territory is available for sale to others until she signs a franchise agreement. Unless there are extraordinary circumstances, after one week we close out a prospect who has not signed a franchise agreement. For those who do sign our franchise agreement, we have our preopening concierge make contact the same day and begin orienting them as to the resources available and scheduling them for training.
You will hear most franchisors refer to their final step in the process as “Discovery Day.” We changed the name from Discovery Day, which is a common term in franchising, to Join-the-Team Day, to ensure that we were setting the right expectations for this step in the process. Some franchisors use the visit as an opportunity to share key information to help prospects decide whether or not to move forward in the process. For our Join-the-Team Day, however, we set the expectation that there is nothing to “discover” but rather an opportunity to validate what they have heard. We see the JTTD as a mutual opportunity to assess our values and culture “fit.”
Sales Personnel
A great sales process guides good prospects through to the point of joining the system while it simultaneously weeds out those incapable of following a process and identifies those who are simply not a good fit for us, and vice versa. The highest cost of the franchise sales process isn’t the money to get the leads; rather, it’s the compensation of your personnel. Be sure you set up your technology and design your process in a way that ensures that your salespeople spend their time with the right prospects.
Number of Sales Personnel Needed
It is necessary to define how many prospects a salesperson can effectively handle. Generally, 25 to 35 active prospects (i.e., qualified leads with CQ) in the pipeline would be the right volume, regardless of the salesperson’s skill level and capacity. Each prospect typically should be given about an hour of attention per week during your process (generally, the process is five to seven weeks), and you’ll hope to have five to 10 new prospects weekly that will each need an introductory call. If you have a sales team of more than one salesperson and each salesperson has fewer than 25 active prospects, then you need to either increase leads or consider a reduction in the team. Conversely, if all of your salespeople are each handling close to 35 active qualified leads, then it is time to consider adding another salesperson to the team, because 35 active qualified leads represents about a 50-hour workweek and that is about as much as any salesperson can effectively handle.
Each salesperson hired must understand that she is expected to work nights and weekends, when people are free to have relaxed and confidential conversations about what they want their lives to look like. Night and weekend calls are also important to ensure that both spouses or partners are engaged in the process. Working only with the husband or wife for weeks and then expecting the spouse or partner to buy in from only attending JTTD is unrealistic.
Outsourcing Sales
It is becoming more common for start-up franchisors to outsource their franchise sales function. Companies such as Franchise Performance Group, Kiekenapp and Associates, and Brand One have a solid reputation for getting deals done. Hiring them can be a good option for adding franchisees, especially because such companies normally charge a flat fee or a percentage of the franchise fee when a deal closes, so you only pay out of the money collected from your new franchisee and you don’t have fixed overhead costs.
We have used an outsourced option for a portion of our deals when we needed additional sales support but didn’t quite need another full-time salesperson. We successfully negotiated the contract to allow us, for a set fee, to bring the consultant on as an employee. Four months into the contract we triggered this clause and hired this individual as the third salesperson on our team.
We never chose to outsource all franchise sales. Although to do so would have conserved cash flow in the first year or two, we wanted to develop a culture based on selecting the right franchisees ourselves. The very real possibility that the relationship with one of these outsourced groups would become strained concerned me, for if we turned down a prospect they sent to participate in Join-the-Team Day they would not get a fee. My employees get a base salary to screen and filter prospects, and we share in the success of selecting the right franchisee through awarding a franchise—franchise fees for the company and commissions for our salespeople.
That said, and depending on your capitalization level when you launch your franchise system, outsourcing your sales team could be a viable option for you to consider. Screen companies to determine whether they are aligned with you as to the qualities you are seeking in a franchisee. Ensure that the outsource group is committed to approving only franchisees that meet your criteria. Insist on interviewing the franchisee recruiter (franchise salesperson) running point on your account. If you wouldn’t hire that person if given the chance, if he isn’t a fit for your company, and if you wouldn’t personally make an investment in him if you were the prospect, take a pass. A word of caution in the way you structure compensation for an outsourced sales resource (or in how you will compensate franchise brokers, discussed in detail in chapter 7): some outsourced sales resources and/or franchise brokers will attempt to negotiate for a percentage of your ongoing royalty that you will receive from a franchisee that they helped to place with you, for a fixed period of time or in perpetuity. I strongly advise against ever giving away a portion of your royalties. You do not know yet what your cost of supporting the franchisee will be, and an agreement like this may leave you with inadequate net royalties to provide the proper level of support. Negotiate a fixed amount for each franchisee you approve or a variable percentage of the amount of initial franchise fees you collect.
Benefits of a Sales Qualifier
Hiring a sales qualifier was one of our best investments. Notice I used the term investment, not cost.
BRIGHT IDEA:
The use of a great sales qualifier adds to our ability to increase deals and to maximize our sales team’s time.
Our sales qualifier makes a great first impression and allows us to be available when a prospect calls in. Most prospects communicate online, but the phone number is on the website and occasionally we receive calls. Since the sales team are on the phone all day, having a sales qualifier available to take an inbound call creates a better experience than having the call go to voicemail.
We wanted someone with a high level of passion and energy, and our sales qualifier has that. In fact, our sales qualifier is so good that BrightStar took the first place Star Award for Best Telephone Prospect Follow-Up at the 2010 Franchise Update Media Group’s Leadership & Development Conference. In addition to the first impression she makes, our energetic and impassioned sales qualifier provides some initial information to the prospect while assessing the prospect’s fit by extracting the following information: (1) the financial match to our investment level and net worth criteria; (2) the timing match for making a decision within the next three months; (3) the geography match for territory we have available with a willingness on their part to consider alternatives; and (4) the skills-and-experience match. Any prospect that does not meet our first three matches is ruled out. When a prospect aligns on the first three, our sales qualifier delivers the information the salesperson needs about the prospect’s background, skills, and experience and schedules a call between the prospect and the salesperson.
We took an unconventional route in filling the sales qualifier position by looking for an employee’s spouse who could work from home. As we grow, we will look to this type of source again. Our employees are passionate about BrightStar, and they discuss with their families the story we are writing together. What better way to keep the family involved than to have the husband and wife both working at BrightStar? While you have to ensure that spouses are in different roles and not reporting to one another, we have had great success with couples in our workplace.
Key Franchise Sales Metrics
Being a CPA, I tend to watch the numbers—particularly key metrics—probably more than most CEOs. Numbers don’t intrigue everyone equally, but before you doze off, make a note to yourself to discuss this section with your numbers person and your head of franchise sales. It’s important that the three of you are watching and measuring the same things.
Though many companies watch the metrics discussed here, I am surprised by how many do not. It’s evident from the responses to industry surveys that a fairly significant percentage of companies do not know their cost per sale or their cost per lead or the sources of their deals. By knowing what metrics to watch, what goals to set for your team, and how to prioritize your efforts (the topics covered in the following sections), you will be well prepared to ensure that you optimize your efficiency and maximize your organization’s ROI for your franchise sales activity.
Setting Goals for Spending and Deals
To set goals, it is critical to understand the relationship between what you spend on lead generation, what lead sources you use, and the skills of the sales team to achieve higher close rates (defined below) and the number of new franchisees you are likely to be able to add. I am often surprised that some franchisors do not connect these dots and do not leverage as many lead sources as possible to improve results. To illustrate the interrelationship, let me share a conversation that I frequently have at franchise industry networking events. When I am talking with a franchise sales manager, and she says that her company doesn’t use brokers (third-party lead sources that identify, qualify, and introduce prospects to your concept, discussed more fully in chapter 7), I ask her how many new franchisees they plan to add in the following year. When she says 30, I then ask what their lead generation budget is, and she says it was cut to $100,000. Those numbers imply that this company hopes to achieve a cost per completion of a little more than $3,000 (calculated by using the $100,000 budget divided by the 30 expected new deals for the budget to generate).
Industry surveys and my own recent experience put the cost per completion, for most concepts with an investment above $50,000, in the $7,000 to $9,000 range. The franchise sales manager’s company already has the cards stacked against it. Based on these more accurate ($7,000 to $9,000) numbers, the company will need a budget of $210,000 to $270,000 to close 30 new franchisees. Moreover, if they’ve targeted 30 deals and have a one percent close rate (which is really good, and means that one out of 100 of the suspects that look at your brand buy your franchise), they would need at least 3,000 leads. With an average cost per suspect of $50 to $70, they would need a budget of $150,000 to $210,000—and that is only if they can maintain an overall close rate of 1 percent of all non-broker suspects. A 1 percent close rate would be very high for portals (Internet-based lead generation sites; see chapter 7). This means that the franchise sales manager had better know her numbers (the cost per close, the cost per suspect, and the close rate, which varies by concept and their investment range) and industry information to benchmark before signing off on goals, because the number of deals and the budget to get them must be linked.
I recommend that your senior leadership team (most important, the CEO, the CFO, and the head of franchise sales) be aligned on the answers to the following questions and understand that the answers complement one another: (1) What is my franchise sales lead generation budget? (2) How many franchisees should that budget produce? (3) How many new franchisees are budgeted? and (4) Where will my deals be coming from? That is, what percentage will come from brokers (not included in question 1, but should be budgeted in the financials—usually as a separate account called “broker fees”) and what percentage will come from non-brokers?
The real issue arises when questions 2 and 3 fall out of alignment because the franchise sales lead generation budget is inadequate to produce the results required.
Let’s look at a common situation in which this can occur:
- Franchise sales lead generation budget: $200,000
- Assumptions: one-half (0.5) percent close rate on non-broker leads and cost per suspect is $50
- CEO signs off on adding 40 new franchisees, 30 of which will be from non-broker sources and 10 will be from brokers.
The answer to question 1 above is $200,000. Using a 0.5 percent close rate to answer question 2, we need 6,000 leads (calculated using the 30 non-broker deals divided by the 0.5 percent close rate) to achieve 30 non-broker completions, and at $50 per suspect, the budget needed is $300,000 (calculated by multiplying the 6,000 suspects needed by the $50 cost per suspect). The budget of $200,000 will produce only 20 non-broker deals (calculated by dividing the $200,000 by $50 to determine the number of suspects that budget can generate, or 4,000 suspects, and then multiplying this by the 0.005 close rate). The answer to question 3, however, is that the CEO is expecting 30 non-broker deals and 10 broker deals for a total of 40 new franchisees. So 2 and 3 are out of alignment.
To resolve the discrepancy, either the non-broker goal needs to be reduced to 20 or the available lead generation budget needs to be increased. Likewise, the percentage of deals coming through brokers may need to be increased to achieve the goals, and new strategies may need to be developed to increase the number of broker deals. This could be a long shot, depending on past broker results, and this will impact the net deal income (franchise fees received less broker fees paid out) and the expectations that will need to be discussed.
I also recommend that your head of operations be consulted on the number of new franchisees planned for the year. This will assure you that the infrastructure is already in place, or that the company has planned for additional resources, to support the new franchisees while honoring commitments to your existing franchisees.
You may now be asking how you can determine the number of suspects you need. You can make some assumptions based on the number of non-broker deals you plan to close and conservatively assume you will need to generate 200 suspects (a 0.5 percent suspect-to-completion ratio) for every deal you want to close. Some systems are very successful with website leads, referrals, and public relations and therefore skew their suspect-to-completion ratio to 1 percent or 2 percent to offset the lower percentage that portals normally achieve. It is better to plan conservatively than to (1) wind up with idle salespeople who do not have enough suspects to have 25 to 35 active leads (CQ qualified) in their pipeline consistently; (2) fail to meet your growth goals that were communicated to your bank; or (3) fail to leverage the infrastructure put in place ahead of the planned growth.
Evaluating the Cost to Generate Leads
Most discussions about this topic focus only on two data points: the cost per suspect, which the industry refers to as the “cost per lead,” and the cost per completion, which the industry refers to as the “cost per sale.” For me, it’s important to evaluate lead sources and their ROI based on the following calculations:
- Cost per suspect (or industry denoted “cost per lead”)
- Cost per CQ (or qualified lead)
- Cost per completion (or closed sale)
Cost per suspect is a metric to assess the return on producing a certain quantity of suspects. For portals that cost a similar flat fee per month, the cost per suspect is better based on a higher quantity of suspects. The more meaningful review comes from knowing what sources are producing the highest quality leads. Cost per CQ allows you to evaluate lead-source quality that can be masked by a poor cost per completion because cost per completion factors in the salesperson’s ability andthe quality of the lead.
For example, one source from which we get an average of 35 suspects monthly costs $30 per suspect. A little less than 5 percent of them convert from a suspect to a CQ, so the cost per CQ is approximately $600 (calculated by dividing the $30 by 0.05) and the cost per completion is approximately $6,400. It took 427 suspects to get merely two completions (slightly lower than a 0.5 percent suspect-to-completion ratio), but for us this is an acceptable cost per completion. (I have coached franchisors who have cancelled contracts because they considered 427 suspects to get two completions to be ineffective and they did not know their cost per completion before making the decision.) This is why it is important to know your numbers and be able to evaluate each lead source.
You may wonder how hard it is to do this type of review and how often you should do it. It took me less than five minutes to review the previous example. Most of the inputs were easily displayed within Process Peak on one screen, and the system allows me to review the inputs by lead source in seconds each. (This is another example of how technology can work for you.) Build the discipline to perform this analysis per lead source prior to renewing a contract to see if the contract should be renewed or allowed to cancel, or if the amount allocated for spending should actually be increased. For sources that are perpetual, such as pay-per-click, this analysis should be done monthly. I recommend reviewing the year-to-date information and analyzing the month-to-month trend, because looking at the information in a one-month vacuum can be misleading.
We see our cost per suspect ranging from $30 to $150, depending on which portal or pay-per-click method they are coming from. Our cost per CQ ranges from $90 to $900. Our cost per close has increased from $7,000 in 2008 to $9,000 in 2009; it was back down to about $8,500 in 2010. I make decisions on what to renew, what to cancel, and where to allocate more dollars based upon the cost per completion and cost per CQ because those are ROI measurements based upon lead quality—generating a lot of leads, and having a low-cost per suspect, is a measurement of quantity, not quality and not ROI.
Evaluating Salespeople
Every industry is different, and the size of the investment will impact the number of deals a company may be able to close in a given year. Also, whether a salesperson is handling broker or Internet leads will significantly impact his ratios. Given that a completed confidential questionnaire amounts to a tentative commitment, I have found that once we look at the ratios of CQs to completed deals, there is no material correlation with the source of the suspect (broker or Internet). There isa significant disparity in the suspect-to-completion ratios because Internet suspects are generally far less qualified than broker suspects; broker leads have been contacted and have been prequalified as a potential fit. Many Internet leads will not even respond to phone or e-mail contact.
When evaluating salespeople, it is typical to focus on the number of deals closed. I agree that this is important, but I care even more about what their CQ-to-completed-deal ratio is because that shows me how many more deals we could close if we increased the ratios of our weaker salespeople to average or to high-level performance ratios. (We bring the team together three or four times per year and invest in sharing best practices, role playing, and bringing in third parties—such as Sandler Sales Training—who can help our sales staff improve skills to achieve higher completion ratios.)
The salesperson’s CQ-to-completed-deal ratio also highlights whether I need to make changes in the department. The last thing you want is to have a salesperson on your staff who is unable to maximize the potential of moving a qualified lead to completion.
Ensuring the highest completion ratios is important in terms of profitability when it comes to non-broker completions, but it can have an even greater impact for broker completions. Franchisors with a reputation for high completion ratios get more broker leads—it is just a fact. Brokers want to place prospects with the right concept for a good match, but they also need to place them where the deal will get closed. Otherwise, the broker will not earn a commission.
Certainly completion ratios vary by industry and by salesperson, but I’ve found that looking at completion ratios is the best way to factor out the impact of a recession. Suspects are certainly down for most companies and most industries, but generally the completion ratios are not that different. The broker networks look for a close ratio of 10 percent. Though I would love to achieve that ratio consistently across my team, I look for an 8 to 10 percent close ratio on broker leads (the CQ-to-completion ratio is similar for non-broker leads too). I look for a base level of performance for new salespeople of at least a 5 percent close ratio on broker leads and at least 12 to 15 completions in their first year (based upon driving a minimum of 300 CQ’s per salesperson per year). As a salesperson’s performance increases to 18 to 22 completions per year, her base compensation increases by nearly 50 percent. A salesperson with annual completions at or above 24 has a base salary double that of the salesperson with 12 to 15 annual completions. In a results-oriented culture, we reward performance both in commission (each deal receives a commission) and in terms of base pay and the number of stock options for our high performers.
Evaluating the Process
Another way to consistently improve performance is to evaluate your process monthly. Each month we spend time with our representative from Process Peak to review his insights and, in particular, to evaluate any changes in the progression of candidates from one stage to the next. As an example, you may see attrition among those expected to move from the validation stage (in which they get feedback from current franchisees) to the Join-the-Team-Day stage, which can be an early indication that your franchisees are not validating well. For a variety of reasons, this would be valuable to know immediately so you can improve franchisee satisfaction
without waiting until your next franchisee survey and so you don’t lose potential deals due to poor validation.
In addition, you need to know the trend of the conversion ratios overall by suspect-to-CQ, CQ-to-completion, and suspect-to-completion. This information will signal changes that may need to be investigated. High-level ratios, when compared to the year-to-date numbers in the prior month, can indicate that a lead source has fallen off in quantity or quality or both, or that a particular salesperson’s numbers are down.
In my opinion, every CEO should receive reporting from the head of franchise sales on the above numbers and be able to explain any negative change and come up with an action plan to address it. At one time I delegated all reporting to my head of franchise sales, but after seeing early warning indicators and digging in, I realized that we had lost nearly six months on Internet lead flow from a change in our website that no one had caught, and we had lost nearly a year on broker lead flow. I then mandated the review of these key statistics, so now our senior leadership team reviews the statistics weekly (to varying degrees in a one-hour meeting) and monthly (as part of a five-hour meeting). I now am comfortable knowing that everyone is looking at and owning the numbers. If they’re not, at least I won’t lose more than 30 days in discovering it and ensuring that an action plan is in place to address it.
Closing Thoughts
A sales process is the key to optimizing results and scaling in the number of new franchisees added. We reviewed technology and processes to assist you with designing an effective sales process from day one. Keep in mind that a defined sales process that fits you and your system will enable you to simultaneously evaluate whether a prospect is right for you while the prospect decides whether your concept is right for him. That prospect’s positive decision depends on how forthright and organized you are in delivering pertinent information to and for him. In addition, you have learned the most critical metrics to watch to ensure, as we dive into the sources of generating suspects in the next chapter, that you will spend your money wisely and know what levers to pull to get a different result. No sales process is perfect. Not every franchisee who joins the system will succeed, but a good sales process will improve the likelihood that you and your candidates will decide that the fit is right to move forward with the opportunity.
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Now that you have a handle on the sales process, let’s create a plan to generate leads so you can maximize your results.
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