Every franchise owner must manage elements that are not completely under their control: the economy, rent, franchisee fees, the weather. One thing you can control is how you compensate your team. Even more to the point, you must align your financial goals to your team's compensation. Although it might be tempting to pay as little as you need to, many get this part of wealth creation wrong.
Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.
Why overpay your employees, you ask? The main reason to own a franchise company is to get wealthy while others do most of the work. The real key to becoming wealthy through owning franchises is by building a company rather than just buying a job. You open one or two locations, then reinvest the profits from those into more businesses, and then reinvest some more until you've built a company with 10 to 20 locations, providing you with what amounts to semi-passive income. You're not cooking the food in your restaurants or cleaning the floors in your salons , you're providing training, marketing, real estate and other services to the managers who hire and oversee the employees.
A case in point is Rick Fisher, an IT sales executive who sought passive income and wealth through franchising. With no restaurant experience, he invested in Five Guys Burger & Fries in its early days, growing it to 10 locations while keeping his day job, and then leaving to focus on franchising full time. Today he owns 20-plus Five Guys and Popeye's locations without running any restaurant shifts.
You need to get, keep and grow great people and align their compensation with your goals.
To do this, you need to get, keep and grow great people, and align their compensation with your goals. That means paying them well — overpaying them — so they will stay, be happy, grow their own expertise, take better care of your customers and make your stores or restaurants more profitable.
You can't do that by paying minimum wage. The surprising thing is, you will make more money doing it. Salon franchise GLO30, for example, pays its staff anywhere from 10 percent to 20 percent over prevailing wage, offering full benefits and even a 401(K) for every employee, and still has a 40 percent profit margin and nearly a 100 percent ROI — even after overpaying.
Related: This Company Promised to Transform Drive-Thrus With AI — But the Secret Powering Its Tech? Humans.
People stay at jobs where they are valued, and salary is a big part of that. Pay them the bare minimum and you're guaranteeing high turnover, which is a fast way to lose profit. You won't even know that your unhappy employees are leaving — or even thinking about it — until they have another job, and by then it's too late. It doesn't make sense to let great people leave your business for 10 percent more money when the cost is 10 times that to your business when they leave.
Losing employees costs you in many ways, including time to find, hire and train that new employee. It causes brain drain, as your managers must pick up the slack while they're hiring, and they know that the labor problems will only continue because that new hire will eventually leave for more lucrative pastures.
It doesn't make sense to let great people leave your business for 10 percent more money when the cost is 10 times that to your business when they leave.
Then consider what I call "the silent cost of turnover" — a decline in customer experience. Imagine being one or two people down during a busy peak mealtime at your restaurant, with customers lined up out the door waiting, maybe not too patiently. What sort of guest experience is that? How will they review your business or recommend it to their friends? Even if they don't complain, they probably won't come back. That lost employee results in lost customers, even when you're back to full staff.
So, turnover results in unhappy customers, unhappy employees and unhappy management, and you never grow your business. You bought a business to grow it, and you'll never hit the targets you set for yourself and your business if you have high turnover.
Now consider what you have with well-paid employees who stick around. You will be properly staffed —maybe even slightly overstaffed — with a team of fully trained, engaged and happy employees. How will your guest experience be? How are those reviews? How likely are those customers to return and refer their friends? How much higher are your sales and profits? How happy are you making your manager, who is running a highly successful business you don't need to micromanage?
Related: Start Your Own Business or Buy a Franchise: Which Is Right For You?
On the non-franchise side, Costco has long been known in the United States to pay its in-store employees well. According to The Motley Fool service Ascent, the typical Costco employee in the U.S. earns nearly $26 an hour, more than three times the federally mandated $7.25 per hour, and is eligible for a solid healthcare plan, overtime, paid holidays, a 401(k) contribution and an employee stock purchase plan. An average associate may not get rich, but they can pay their bills, have opportunities for advancement — and can afford to shop the store they work at (at special employee-only hours, no less).
The result is that Costco's employees are highly motivated and are some of the most productive in the business, generating triple the revenue per person compared with rivals Walmart and Target, per Investopedia. And the annual turnover rate is just 6% after one year's employment, when the retail industry average is somewhere around 60%, according to McKinsey.
Overpaying is the only way forward when building a new company — it creates loyalty.
With the right, happy, well-paid team, you have a healthier business, higher profits, a business that runs itself and compounding returns. You also will have a stronger exit strategy when you try to sell your business. Buyers will pay more for a strong team they can continue to build the business on and less for a shaky team.
Overpaying is the only way forward when building a new company — it creates loyalty, which will be rewarded as the employee and the business continue to succeed and grow. It's also a great way to assess if a particular franchise concept is right for you. Will that franchise allow you to overpay your staff and still have a high ROI? If not, think twice.
For 20+ years, Dan Rowe has grown emerging franchise brands at Fransmart like Five Guys and The Halal Guys to international sensations through franchising. Fransmart's current portfolio of franchise brands includes fast-growing concepts like PayMore Electronics, GLO30 Skincare, JARS Sweets and Things by Fabio Viviani, Taffer's Tavern by Jon Taffer, Cilantro Taco Grill, The Halal Guys and more.
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