By Lisa Plonka, Partner, CPA, CFE, Plante Moran
Expanding a franchise’s footprint into a new state or region is always exciting. As the franchise model continues to exceed growth expectations, more franchisors may be contemplating multi-state development.
It’s important to keep in mind, however, that consistency is what drives franchise value. After all, what typically attracts customers to a franchise location is an expectation of product or service uniformity. Yet even thriving franchisors may find it difficult to ensure consistency as they grow. The challenge becomes exponentially larger when franchisors expand across state or regional lines, bringing new oversight and logistical concerns into play.
To increase the odds of a successful expansion, franchisors should conduct thorough due diligence of potential challenges that could be present in new geographies. This is especially important for newer franchisors who may be laying the groundwork for future growth. As business opportunities in new states surface, it is essential to first assess whether the franchise is truly ready for a multi-state presence. State-by-state issues must be evaluated alongside more regional and logistical considerations.
Before crossing state borders, here are top challenges franchisors should prepare for.
Shore up your state-based resources
Many states have unique regulations that impact franchises, including registration requirements, unique tax laws, employment regulations, and more. For example, the rules surrounding the franchise disclosure document (FDD) vary from state to state. Navigating these complexities is always demanding, but compliance becomes more difficult as franchisors add different states under their purview. So, franchisors will want to work closely with their franchise attorneys to understand the regulations and their impacts on the timing of multi-state roll-out initiatives.
Likewise, state-specific employment and tax laws must be understood and supported. Even though compliance with these laws is ultimately the responsibility of each franchisee, franchisors may want to consider ways to offer resources franchisees can consult. Franchisors can strengthen franchisee relationships by transparently discussing the resources they provide, as well as those legal and regulatory issues that franchisees are expected to handle on their own. There may also be tax filing requirements for the franchisor as a result of having an operating franchisee in a particular state.
Evaluate your regional oversight capabilities
Assisting franchisees with legal and regulatory hurdles may be more straightforward, in some respects, than some of the operational challenges posed by multi-state expansion. Frequently, the success of a multi-state expansion hinges on operational oversight and compliance with brand standards, as these elements directly influence the consistency of products and services delivered to customers.
Based on a franchisee’s distance from the “home base,” franchisors will likely need to tailor how they monitor and oversee many logistical aspects of the business. To expand successfully, franchisors will need processes in place to:
- establish franchisees’ access to the distribution network. Retail or food-based franchisors must think through their distribution networks. In such situations, a consistent customer experience is essential and depends on consistent product accessibility. Questions to address include:
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- Can our existing production and distribution network reach the new territory and ensure quality?
- Do we need to hire a third party to duplicate our current production and distribution network?
- Do we have close relationships with suppliers in the new area?
- Do we have “boots on the ground” to monitor the regional supply chain?
- ensure franchisees’ compliance with brand standards. It’s easy for franchisors to hear about good—or not-so-good—customer experiences in their local communities. The further away a franchisee is located, the harder it is to keep an ear to the ground and know whether the location upholds the brand standards that drive value for franchisor and franchisee alike. To help ensure customers receive the brand experience they expect, franchisors may need to implement more formal monitoring strategies, such as regularly hiring “secret shoppers” or supporting regional representatives.
- monitor franchisees’ financial stability. Every franchisor should monitor their franchisees’ financial status and stand ready to advise. If possible, check daily or weekly sales data and other key performance indicators. It’s an excellent way to gauge potential issues and intervene quickly when necessary. However, as franchise locations spread across wider geographic territories, franchisors should be prepared to deliver more virtual financial coaching and training resources. Although in-person financial workshops and resources may still prove valuable in certain circumstances, franchisors must evaluate their value against the higher costs, planning effort and time commitment associated with in-person gatherings.
- support franchisees with ongoing training. Training is typically a key focus for franchisors, regardless of whether locations are consolidated or disparate. As a franchise moves into new states, evaluating whether virtual or on-demand training can be effective or whether in-person training centers are necessary to maintain efficacy becomes essential. If the latter, think about whether it is more cost-effective to consolidate training at one central facility or use several regional training sites.
Cultivate long-term success
Addressing regulatory and oversight matters helps launch a multi-state presence, but to enable long-term prosperity, don’t underestimate the importance of building an inclusive “community” culture. How will you ensure your new franchisees feel a sense of belonging and engagement in the brand and their local community?
Fostering an inclusive culture often starts with facilitating upward communication from franchisees and allowing them to feel heard. In addition, franchisors can encourage shared learning and a sense of community by:
- hosting in-person annual meetings where franchisees can socialize and receive training.
- forming franchise councils that give franchisees opportunities to learn from each other.
- making useful resources and key financial data available to franchisees.
Any time expansion into a new state fails to take hold, it represents a lost opportunity for the franchisor and franchisee. By strengthening brand culture, providing regulatory support, and enhancing regional oversight, franchisors can increase the odds of successful multi-state growth.
About Lisa Plonka
Lisa Plonka, CPA, CFE, leads the franchise and consumer goods and services practice at Plante Moran, one of the nation’s largest accounting, tax, consulting, and wealth management firms. She is a Certified Franchise Executive and a member of the International Franchise Association (IFA), the AICPA, and the MICPA. She continually educates herself on issues impacting the franchise industry, then transfers that expertise along with creative strategies to help power clients’ growth.
Reach Lisa at lisa.plonka@plantemoran.com or visit https://www.plantemoran.com/get-to-know/people/lisa-plonka