I frequently think about a particular interview when I was asked my opinion about why some Private Equity firms fail in their efforts at operating what was originally considered a successful franchise system, while others take the system to even higher levels of success…
As you’ll see by my response below, I actually started at the end and worked backwards. But in the end, there is a common theme and it’s built around relationships, or lack thereof. Certainly, systems play a big part in the success equation but losing sight of “people” is a sure way to create a disconnect, even within the most perfect systems. My response and theory may be too simple for many to agree, but I do feel it lends towards the foundation of any successful business in one way, shape, fashion or form.
All too often you hear about founders buying out the Private Equity firm. I personally, know of two that have done so recently, and for different reasons. And even though only one was a franchise company, there was a common denominator in the circumstances that had developed within the organizations that led to the founders deciding to buyout the PEs… the “parent” company lost sight of its relationship with its “employees & franchisees” and the end-users, “clients & customers”.
My opinion is that “true” mom & pop operations are typically built upon the foundation of relationships, and it’s the strength of those relationships that build the foundation of a strong organization complete with common beliefs, values and mission. It definitely becomes an interdependent relationship. I have rarely seen that occur when PEs get involved where it’s more numbers, numbers, numbers. Don’t get me wrong, numbers are important. But it’s the lack of balance between driving towards making the numbers and building relationships that is often missing. Ultimately causing rifts in the organization with the customer or client feeling the lingering effect of diminishing service levels.
Let’s look at a similar situation that occurs all too often in a very typical mom and pop setting even without the inclusion of a PE in the equation. Mom and Pop have run a very successful business for 25 years. They have done quite well over the years, building the business very methodically, never taking on too much debt at any one time – but still progressive in growing to meet customer demands. Sure, their product or service stands out as excellent. But it’s the relationships they have fostered over the years that have truly made the business successful.
Looking ahead, Mom and Pop have structured a very strong succession plan. Junior has gotten his MBA and is primed to take over the business. In fact, Pop has insisted that Junior also work five or so years out in the corporate world so he can gain some hands-on experience, and mature. Mom and Pop have met with their attorney and CPA and have everything in place for Junior to take over the family business. What’s next is a situation that occurs all too often when Mom and Pop are no longer in the picture.
Junior, complete with new ideas, a wealth of education, and some successful business experience, begins operating the business. He introduces new technology, replacing the antiquated systems that had been in place since day one. Junior streamlined operations, improved inventory control, and basically tweaked here and there to the point that the business appeared to be transformed to a business that appeared bigger than it was – almost like it was a part of a national chain.
Initially, customers loved the transformation and the buzz within town was full of praise and admiration for the family. But what transpires over the next few years as things begin to change as the business becomes less personal and more structured is actually the beginning of the end.
Strict policies have been put in place for both customers and employees. Product and service lines have become more defined, but at the expense of some customer favorites being eliminated. Customer service, having become more automated has reduced the necessity of a large staff. In-store signage has taken over where courteous employees once stood. Well, the list goes on… to the point of the business losing sight of people and relationships. Employee turnover continues to increase. Customers’ faces are no longer familiar. And, when a true national chain opens on the edge of town, foot-traffic starts to diminish.
You see, with all the great succession planning that Mom and Pop painstakingly put into place, they missed a key component to the success of the business. And when Junior transformed the business, he also lost sight of that key component. It basically comes down to WWPD… “What Would Pop Do?”
WWPD is basically the relationship part of the business. To put it simply, Pop knew when to put his arm around an employee. Pop knew when to come out from behind the counter. Pop knew how to make a customer feel special. Pop knew to carry certain items that some of his “regulars” loved. And, again, the list goes on… Pop knew, but Junior didn’t. It’s the classic example of the disconnect between WWPD and MBA, and it’s a similar disconnect between a founder-run business and a PE-operated business.
Now, I’m not saying that it can’t be done, or shouldn’t be done… meaning the sale of a successful business to a PE. Absolutely, it’s the American Way! Instead, along with the financial and legal succession plan needs to be a visionary succession plan that basically outlines and teaches, “What Would Pop Do?”
So, in addressing the original question, let’s just insert Mom and Pop for the franchise, the employees and customers for the franchisees, and Junior for the PE… and the scenario fittingly plays out.