“ When Is It Time To Change Management? ”		«BACK
	by G. Thomas MacIntosh II and Ryan R. Palmer
	from Krass Monroe, PA
	download.pdf

Without exception, the success of any company, including a franchise company, is directly related to its leadership.  Conversely, the root cause of a failed enterprise is without question the product of the decisions (and non-decisions) of its leader.  Obviously then, determining when to replace the leader or the management team of a company will likely play a key role in determining the future of the enterprise. 

Like all companies, franchise companies operate under a variety of management structures, which could include a Board of Directors (or Governors), a management team (usually the executive officers), an empowered “committee,” a chief executive officer (“CEO”), or some combination of these elements.  The most successful enterprises in America have one leader—a CEO—who determines how to implement and execute the company’s strategic plan, and consequently, this article will focus on when it is time for the enterprise to replace the person at the top. 

I.            Lifecycle of the Enterprise

Before discussing the signs that a company needs a new CEO, it is important to examine the lifecycle of a company and the characteristics critical to a business and its CEO during each stage of its existence.  This article will discuss the lifecycle of a franchise company by breaking it down into three distinct stages:  the Entrepreneurial Stage, the Growth Stage and the Dominant Stage. 

a.           Stage I:  The Entrepreneurial Stage

In most cases, a franchise enterprise in its early stages will be managed by a hands-on, non-delegating, “I run every facet of the business,” entrepreneur/CEO, who is also the majority owner of the enterprise.  This person will have likely determined who will serve on the company’s Board and will have appointed him or herself the CEO.  This is the Entrepreneurial Stage of the lifecycle, and most new franchisors find themselves in this stage.  During this stage, the company will usually have anywhere from 10 to 20 company-owned and franchised units, and revenues will likely be under $10 million annually.  Generally, the enterprise will not a have a formal business plan, and budgeting, if done at all, will be rudimentary.  The “business plan” in many cases will change daily and will depend on the CEO’s current vision (the “vision of the day”) and other economic considerations.  An entrepreneur/CEO is primarily concerned with operating the business on a day-to-day basis and makes business decisions with insufficient information or knowledge to anticipate the long-term results of his or her actions.  The results are sometimes costly but usually not disastrous.  The real problem is the stagnation of the business’s growth caused by a CEO who is not accountable to an independent Board, and it’s for this reason that the entrepreneur/CEO must recognize that his or her enterprise will be doomed to mediocrity (or perhaps failure) without professional management. 

b.           Stage II:  The Growth Stage

Many franchise enterprises have successfully moved from the Entrepreneurial Stage to the second stage in their lifecycle, the Growth Stage.  In this stage, the enterprise will have professional management and the business plan will focus on unit growth and same-store sales.  Indeed, in many cases, the enterprise will have an insatiable appetite for growth capital.  Enterprises in the Growth Stage have fewer than 100 company-owed and franchised units, and sales for the enterprise will be in the $10 million to $75 million range.  Generally, when an enterprise is in this stage, it will be understood that the company needs to move beyond the entrepreneur/CEO, but the exact profile of the ideal CEO may not be altogether clear.  Usually, the Board will hire someone in the same or a related industry who is either the CEO or second-in-command of another company.  Every franchise enterprise in the Growth Stage needs to determine the specific needs of the enterprise so that it can pair itself with a CEO who has the talents needed to take the enterprise to the next stage.  For example, a retail franchise selling women’s accessories will most likely need a CEO who understands fashion, retail pricing and wholesale purchasing.  On the other hand, a restaurant franchise developing both company and franchised units where the enterprise owns the real estate for the units will need a CEO with a strong financial, real estate and restaurant operations background.  The point is simple but important:  one CEO may possess certain faculties that serve one organization well, but that same CEO may not be suited to take the helm of a different company.

c.           Stage III:  The Dominant Stage

The Dominant Stage is marked by a company’s excellent market share and its strategic growth.  The ultimate goal in this stage is market domination, and it is often attained through mergers and acquisitions with existing companies in any stage of development.  A franchise company in Stage III has annual revenues of over $75 million, and has more than 100 company-owned and franchised units.  It is often a publicly held company, is owned by a private equity fund, or is otherwise well capitalized.  The most successful Stage III companies are ranked at or near the top in their category for sales, number of operating units and market share.  They may also have multiple brands.  In this stage, the enterprise is highly structured, and the head of each department (e.g., operations, real estate, construction, franchise sales, finance and purchasing) reports to the CEO.  This enterprise requires a unique and experienced CEO with multiple talents, including the ability to empower the executive management team to execute the strategic plan and to hold them accountable for results.   This is perhaps the most important characteristic of a Stage III CEO for a franchise company.

II.           Measuring the CEO’s Performance

Having laid out the three stages of a franchise company’s lifecycle, it’s now appropriate to study the criteria that can be used to determine whether a management change is needed.  One of the most important signals is the failure of the company to attain the financial objectives of the enterprise.  Adverse financial indicators include a steady decline in sales and profits, failure to attain growth objectives, unexplained cost increases and loss of market share.  Similar information can be attained by studying ratios such as return on investment, return on sales, costs to sales and cost per employee.  Measuring the economic accomplishments of a company at any point in time is as simple as running the financials for the enterprise and comparing the results with prior periods. 

If the enterprise is meeting or exceeding its financial goals, the CEO will likely receive the Board’s stamp of approval.  But the Board’s analysis of the CEO’s performance should include additional factors, such as the growth of, or the ability of the CEO to grow, the franchise company, which is the single most important factor in evaluating a CEO’s effectiveness, even if the company is meeting its financial goals.  The overall importance of this factor can result in a difficult question:  What happens when a company meets its financial goals but fails to meet the unit growth goals?  Another related, and also difficult, question arises when growth sacrifices financial performance:  What if the company meets the unit growth goals and not the financial performance goals?    

In answering these questions, Board members and outside business consultants earn their keep.  These are the people who must advise the entrepreneur/CEO in a politically correct fashion that “it’s time to consider a professional manager to serve as CEO.”  This will not be an easy process because many entrepreneurs do not readily delegate or accept advice.  It will be even more complicated if the Board is forced to inform the entrepreneur/CEO that his or her child is not a qualified successor.  It may be painful, but having the conversation may well be the key to taking the franchise entity to the next stage.  In those instances where the CEO/entrepreneur rejects the Board’s recommendation to hire professional management, there is a high probability that the enterprise’s business will stagnate.  Competition devours stagnated businesses. 

As the name implies, unit growth is particularly important in the Growth Stage.  An enterprise must continue to develop or franchise new units in order to compete effectively and maintain economic viability.  The Board will establish objective benchmarks and, in this stage unless there are special circumstances, failure to attain both the growth and economic objectives for the enterprise is unacceptable.  Without sustained growth, the enterprise will be unable to compete for management talent, capital, real estate, new franchisees, and most importantly, customers.  Consequently, when the CEO of the Growth Stage enterprise fails to meet the Board’s financial and growth objectives, the Board should consider a new CEO who it believes can and will attain the published objectives.

The “X Factor”

Financial performance and growth are important factors in evaluating a CEO’s effectiveness, but they still don’t provide the full picture.  At the end of the day, the Board will (and should) always ask “Is the CEO doing the job?”  This is the “X Factor.”  Beyond this, the definition of the X Factor does not exist, and it changes minute by minute for each enterprise.

What if the enterprise failed to meet its goals because of a downturn in the economy?  The CEO is not able to control all of the forces outside of the enterprise, such as supply price increases, the bankruptcy of a major supplier or customer, hurricanes and other acts of God, and consumer spending.  Some of these events can and should be anticipated by an astute CEO, and a well-qualified board will surely consider whether the CEO adequately prepared the company for such events, rather than judging the CEO purely on the company’s financial and growth performance. 

Decision Time

Very likely, the X Factor will play a negligible role when the empirical growth and financial data establish the CEO’s inability to meet basic attainable goals.  However, in all other circumstances the X Factor should determine the fate of the CEO. 

Clearly, a CEO who fails to meet financial and growth objectives jeopardizes the ultimate survival of the enterprise.  But even if these objectives are met, a Board must ask questions regarding a CEO’s vision for the enterprise, focus on the core business of the enterprise, demands for operational excellence, communication and implementation of the strategic plan, ability to make timely decisions and appropriate delegation of authority.   Failing to study the X Factor could stall the progress of the enterprise and not allow it to effectively compete in the marketplace.

Deciding when it is time to change an enterprise’s management requires identifying the stage in which the business finds itself and mapping out the key characteristics required of a CEO to bring the company to the next stage of development.  Determining the key characteristics of a CEO is vitally important, and the list should be drawn from the general needs of a company in Stages I, II or III, and from the specific needs of the company based on its industry focus.  Regardless of its stage of development, a company’s performance must be analyzed using empirical growth and financial data, and the CEO must be evaluated by studying the X Factor and asking questions about the CEO’s leadership abilities.  Ensuring a franchise company has the best CEO is an ongoing process, and the answer usually changes with time.  As a result, identifying the most effective CEO for a franchise enterprise is a complicated, time-consuming and sometimes painful task, but installing the right CEO is the only way to push the company to the next stage.

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