Risk management across franchise operations can be incredibly tricky. However, here are some of the best tips and things to remember to ensure you minimise risks across your franchises, no matter where they are.
Identify Franchise Risks
The first thing you need to do is an enterprise risk management analysis, and identify the main risks you will face. While there will be some specific ones depending on the region, here are some of the most common risks franchises will face.
Legal Compliance
Legal compliance simply means your franchises follow the laws of the country in which your franchise operates. This typically relates to health and safety, data privacy, environmental responsibilities, etc.
Operational
Operational risks come from internal issues, such as human error or system failures. These risks relate to the overall function of the franchise; for example, if you own a restaurant chain, one franchise may have employees cooking food incorrectly and not producing the best product they can.
Financial
Financial risks relate to areas such as cash flow, economic uncertainty, or changing market conditions that can affect the stability of your overall business. Financial complications can decimate franchise operations, and therefore, it is typically one of the most critical areas to focus on.
Reputation
Reputational risk is another major issue a franchise operation can face. This risk can range from losing stakeholder trust, to losing customers in general. Reputation damage can be caused by ethical concerns, poor customer service, or general product issues.
Supply Chain
Supply chain risks can easily derail a franchise, and mitigating this risk is a must. For instance, if McDonald’s were hit with a hamburger bun shortage in an area, they wouldn’t be able to sell their main products. Supply chain disruptions are widely known as one of the most important risks to mitigate in business, no matter what you do or sell.
Establish Clear Franchise Agreements
To mitigate franchise risk, you first need to establish clear franchise agreements. This should include defined rules, responsibilities, and standards, both product standards and training standards.
These agreements are the basis for establishing legal compliance and mitigating legal uncertainty, and enforcing consistency across the board.
Standardise Training & Operations
To reduce brand and operational risk, it is vital to standardise training and operations. This can be done through training manuals and videos, and having a standard customer service protocol.
For instance, using McDonald’s as an example again, a Big Mac is made the same way using the same ingredients, whether you are in New York or Tokyo.
Financial Monitoring
Financial monitoring is crucial as it helps identify the early signs of a franchise failing. In simple terms, if you monitor the financials of each individual franchise, you can see which ones are struggling, underselling, underperforming, etc.
Legal Compliance Across Regions
Another risk that a franchise operation can face is changing legal compliance, especially across different regions. This can range from labour laws, to advertising standards, as well as which raw materials or ingredients you can and can’t use.
For McDonald’s, a burger you get in the US will be different to one you get in the UK, as the UK has stricter rules when it comes to which additives, chemicals, etc, you can and can’t add to food.
Supply Chain Diversification
To avoid severe supply chain disruptions, it is essential that you diversify. On overreliance on a single supplier opens you up to catastrophic shortages if that supplier runs short on what you need, can’t deliver fast enough, or, in the worst-case scenario, goes out of business unexpectedly.
However, diversification ensures you are protected against this risk, and when you have clear contracts that specify delivery speed, quality, and quantity, you can plan your supply better and almost completely eliminate the possibility of shortages or a drop in quality.
Maintain Open Communication
It is important to create a culture and standard where franchisees communicate openly and honestly. This can benefit you in multiple ways, ranging from being able to identify problems early, to providing honest feedback, and collaborating on solutions.
Communication is a must, especially in times of trouble and uncertainty, as the last thing you want is for franchises to shut down and feel like they need to handle any problems on their own, without the resources you may be able to provide.
Constant Risk Management Plan Audits & Updates
Finally, no risk management plan is constantly perfect, and therefore, regular audits and updates are needed. This will allow you to adapt to trend changes, technology updates, compliance updates, etc.
A risk management plan that was created five years ago, for example, will almost definitely not be applicable to a business today. A yearly audit or update should be done at the very least, with more regular updates done if there are any major changes or shifts in your industry.
In conclusion, risk is always a concern in any business, but it is an even bigger concern in a franchise operation when you don’t have complete control over every aspect. However, these tips can, at the very least, help you identify risks better, and come up with plans that will help you deal with them quickly and effectively.
Founder Dinis Guarda
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