Guest Blogger: Chad Haldeman is a Business Advisor with Resultants For Business, and a 20+ year sales and management professional. Chad’s expertise is in revenue development, strategic planning and execution, organizational leadership, structural innovation and the creation of high performing teams.
What do these well-known brands have in common?
These brands make up the top six global franchise operations in the world and are all scalable, systemized, formula-driven businesses that bring with them a greater operational efficiency and often greater profitability than your average small business. We can look for evidence of this inside the recent spike in small business transactions in the United States, up nearly 50% over the last four years. Franchise operations account for almost 10% of those transactions, which is no surprise knowing what an attractive acquisition target they can be.
So what is it that makes a franchise such an attractive target for buyers? Franchises most often have a proven business model including a strong operating model that can deliver a more predictable and reliable future cash flow. This is ultimately what any buyer is looking to acquire when they buy a business, and explains why a franchise often commands a premium sale price, including a recurring stream of royalty payments to the parent franchisor.
Our businesses may not be franchises but we can make them more “franchise-like”. As previously mentioned, it is most often a proven business model that is so attractive to a buyer. Peter Drucker, one of the leading business thought leaders and authors of the last century, defines this very well when he poses the question:
“Who is the customer, what does the customer value, and how does the company make money delivering value to the customer in the form of a product or service?”
Once an organization identifies, clarifies and strategizes the answer to this multi-pronged question, it has its foundational business model in place. If you would like more information about business modeling and how to map out your answers to these questions, Business Model Generation by Alexander Osterwalder and Yves Pigneur is a good reference.
At the Heart is the Operating Model
Inside of that business model exists an operating model. A great description and simple comparative comes from Harvard Business Review, which stated, “an operating model is the engine at the heart of the business model…”.
The operating model is designed to drive your business. It can measure how effective and efficient you are with your business model including your internal systems such as people, production, sales, financial and many more…all of which an organization must align under the umbrella of the overall business model.
With these definitions in mind (and knowing what we know about franchise operations) we can learn some valuable lessons from how franchises leverage the scalability of their systems for any business entity. What franchises do well is develop and refine their operating models in preparation for growth…not after the growth has happened. As Michael Gerber, author of The E-Myth Revisited, puts it, “the Franchise Prototype is also the place where all assumptions are put to the test to see how well they work before becoming operational in the business.”
Franchises excel at building out internal systems that are scalable, repeatable, streamlined, documented and practiced. From this, they are able to leverage those practices to the hilt. They scale out the inefficiencies, reduce start-up time and investment resources and improve production speeds. The resulting combination influences operational efficiency and profitability.
Examples of Operating Models
There are plenty of operating models out there that have been put to the test by business owners. Verne Harnish’s book, The Rockefeller Habits is one of the more well- known models targeting entrepreneurs today. This system is based on the business practices of John D. Rockefeller and the three pillars to those habits; priorities, data and rhythm.
Michael Gerber is known worldwide for his E-Myth series. Targeting small business owners who want to grow their business, he encourages owners to operationally develop seven disciplines for building value.
The EOS® model (Entrepreneurial Operating System) was made famous with the book, Traction by Gino Wickman. This model consists of six key components, each of which has two tools associated with it. The focus of EOS® is simplicity and clarity for the leadership team in order to execute at a higher level of efficiency and effectiveness. The EOS® model was been built on timeless business concepts from Jim Collins, author of Built to Last and Good to Great, Patrick Lencioni, author of The 5 Dysfunctions of a Team, Vern Harnish, author of Rockefeller Habits and the Gallup organization. Thousands of business owners have utilized EOS®, a proven process, to help them scale and grow.
One Language, One System
Every business consists of different functional areas led by individuals who come from varying backgrounds. Often these specialized business managers have been exposed to different operating models and are still using pieces in their current role.
In many ways, an operating model becomes the language of the business.
If one department speaks Greek and the other Latin, you will have a problem. If one department uses their own operating system and another department uses something completely different, you will have a problem. Confusion, complexity, conflict and lack of efficiency results. Like a franchise operation, it is critical for the business to adopt one operating model and execute!
So why use an operating model? When we focus on our operating model, we are focused on creating a more valuable business. We want a business that creates a healthy, thriving organization and provides a great quality of life and job security for employees but also creates options for owners. Whether you are an owner that wants to sell or “die with your boots on”, building a more valuable company simply provides us with more options…options that bring freedom. Like a franchise prototype, an operating model is a proven process for the business to adopt, leveraging a common language and foundation for growth, and if executed well, a more valuable business.