Maxime is the co-founder of RELE-Rouen, a franchise language school under RELE at Rouen, France. The business took a downturn during the economic crisis from 2009 to 2011 and it has been losing money for three consecutive years. The franchise contract with RELE is due for renewal in two month. At this time, Maxime is presented with three options:
1. Renew franchise contract with RELE
2. Switch to OILT programs
3. Sell the building to EFEL
This report first explored the constrains that Maxime faces in this decision making process. And then the three options are analyzed and compared in details by using a set of criteria, including financial return, franchise models comparison, and other business strategy related considerations, i.e. customers, company, distribution channels and market outlook. The people perspective in this decision making process is also being examined.
Based on the findings, RELE-Roune will face another year of loss if RELE does not allow Maxime and Beatrice to run their weekend programs anymore in 2012. OILT is only more profitable if they can sell at a much higher quantity than they do now. And the 1.5m offer from EFEL is much below the valuation of the building and their business.
Therefore, it is vitally important that Maxime first determine RELE’s willingness to grant Roune more freedom in program offering in the future. If RELE refuses to, Maxime and Beatrice has to choose between OILT and selling at a loss to EFEL. Maxime and Beatrice should also look for an OILT franchisee that is in a similar geographical location, i.e. a rural area in close proximity to a metropolitan city, to understand their marketing strategy and the new company identity in order to estimate their required initial investment and future business potential if they are to switch to OILT.
RELE’s centrally controlled sales activities and program offerings are largely the reason why Maxime and Beatrice can do very little to revive their business in times of crisis. It will continue to be a constrain in their future with RELE. Maxime and Beatrice’s financial situation can also restrict their decision-making. The current asset RELE-Rouen held as of 31 December 2011 is just enough to cover its current liability. Any new investment can create a considerably cash flow problem for the company. Maxime has already guaranteed a loan of €800,000 personally. It can be difficult for them to source for new loan or cash investment given the uncertainty of their business future. The building, which Maxime and Beatrice used to run RELE-Rouen, is jointly owned by the five siblings. It is a family heritage. Any decision made related to the use of this building will have to be in all siblings’ best interest.
The three options are being evaluated based on the following criteria: Economics, Business Strategy and People.
This section details the financial analysis of the three options1. For RELE, three business scenarios are constructed and evaluated. An estimate of financial returns from OILT, assuming the same level of sales, is also calculated and compared with RELE’s. Lastly, an estimate for the valuation of the building and business provides an insight to EFEL’s offer.
Option 1 – Renew franchise contract with RELE
Scenario 1: RELE-Rouen offers only weekday programs. It is deduced from the case that Fabienne, the CEO, chose not to object to RELE-Rouen’s new weekend program because of the understanding that time was difficult. When the economy starts to recover, Fabienne may not allow this program to be offered anymore. It is estimated that RELE-Rouen will face a loss of close to €82,000. Scenario 2: RELE-Rouen continues its current offerings. Based on their own estimation, RELE-Rouen will have a profit of close to €30,000. Scenario 3: RELE-Rouen is allowed to offer both four-weekend and English program. This is the best-case scenario for RELE-Rouen. It is not clear why RELE rejected Maxime and Beatrice’s proposal to offer English program in 2011.
One of the possible reasons can be that RELE wanted to avoid new investment in selling to a new segment during crisis while their main focus was to maintain profitability of their own center. It is reasonable to assume that Maxime and Beatrice have a stronger bargaining power now given the fact that they have been approached by OILT and the economy will recover more in 2012. It is estimated that RELE-Rouen will take a profit of close to €91,000. From the calculation, it is clear to see that the profitability of RELE-Rouen is directly affected by the types of programs they can offer. If RELE put a stop to their weekend program, they will have another year of loss.
Option 2 – Switch to OILT programs
It is assumed that they will be offering both French and English classes during weekday and weekend with OILT. But without a clear understanding of the new targeted market, it is difficult to estimate a sales number. In this calculation, instead of looking at the profit based on an assumed number of sales, the profitability of the OILT programs is evaluated using the same level of sales as proposed in Scenario 3 with RELE. The comparison of the profitability can reveal the different franchise fee structure and its impact on profitability. It is also expected that certain amount of initial investments is required when switching to OILT. But at this stage, there is not sufficient information yet.
The calculation simply assumed a similar cost structure as RELE, and did not include any additional investment. Based on the calculation, they will face a loss of close to €36,000. Compare this calculation with Scenario 3 at RELE, it can be concluded that by selling the same amount of classes, the RELE model is more profitable. Another calculation is done to prove the hypotheses that the OILT model is more profitable selling by quantity. By increasing the number of classes sold by 10% (which is still within their current capacity, therefore the same fixed cost applied), the profit almost doubled.
Option 3 – Sell the building to EFEL
The valuation of the building and the valuation of the business is, in total, around €2.6m. Details of the calculation can be found in Exhibit 3.
Based on the calculation for the three options, it can be concluded that the €1.5m offered by EFEL is definitely not an attractive offer. Even if Maxime and Beatrice do not want to continue with their business, they should negotiate another deal with EFEL.
Since RELE’s only customer base is executive and it is assumed that the weekday programs are mainly sponsored by corporate, maintaining long-term corporate relationships would be RELE’s primary marketing focus. It also gives RELE reasons to centrally control their marketing effort because it is costly both in terms of time and money to build and maintain relationships with corporations and any mishandling of this relationship can adversely affect RELE’s image. The advantage of a centrally controlled sales operation reduces the franchisee’s cost in business development.
The disadvantage is, RELE may not have the local knowledge to develop marketing strategy specific to the franchisees’ region and during economy downturn, franchisees have little to no freedom to recoup demand on their own. OILT on the other hand, is targeting at the mass individual consumers. It hardly controls any aspects of its franchisees’ operations. It also means that franchisees will have to decide every aspect of their growth strategy themselves.
As discussed earlier, RELE program is for executives while OILT program is for all adults, especially international tourists. A company’s customer base determines the identify of a company. If Maxime and Beatrice want to take up the OILT program, they may have to offer different type of food, different methods of teaching, different ways to promote their programs, different incentives to attract repeat customers and may be even different styles of decorations in the building.
Maxime is a CEO of their family business apart from running RELE-Rouen with Beatrice. Even though they have been offering the RELE programs for 9 years now but because of the franchise policy, they have only been engaged in academic, administrative and hospitality related operations. Also due to the single type of customers, i.e. executives, they may not have the knowledge and skills in managing mass market. The professors working at RELE-Rouen have an average age of 52. They may not adapt to new teaching methods of using multimedia very quickly.
Currently RELE-Rouen is enjoying a relatively low competition in the region. But OILT and EFEL are targeting at the same type of customers and both of them are interested in entering the region. If Maxime and Beatrice are to take up franchisee from OILT, EFEL is a competitor.
According to the financial estimate for the OILT model, it was concluded that in order to make a better profit, they have to sell a better quantity than they have now. Beatrice has little experience in sales and OILT franchise model requires an international sales coverage. OILT offers 10,000 international agents. Choosing the right agents and exploring alternative sales channel would directly determine the success of their business with OILT. Paco Valls, the OILT franchisee in Barcelona may not be a good reference to forecast Rouen’s business potential because of their different geographical location. In Barcelona, Paco Valls has direct access to both a large pool of tourists and the local residents, which Rouen does not provide.
As the economy starts to recover, Maxime and Beatrice should start to see a pick up in demand both in corporate spending and tourism. The potential of growth of the market also makes EFEL’s 1.5mn look less attractive. If Maxime and Beatrice is to switch to OILT, it is a good time to make the investment as well so that their new business will be up and running when the demand is back in full swing.
Maxime is 62 years old and will retire in 3 years. He may not want to engage in a new adventure and would prefer a stable income from a stable business. Beatrice’s only source of income is from their language school. And further losses can adversely affect her financial security. Their other siblings and the three teachers who have been working with them for close to a decade will also be affected if they decided to sell the school and the building.
After examining the three options Maxime has, it can be concluded that they will face another year of loss if RELE does not allow them to run their weekend program anymore. OILT is only more profitable if they can sell at a much higher quantity than they have now. And the 1.5m offer from EFEL is much below the valuation of the building and their business.
In view of the various potential and risks in their current business and their future alternatives, Maxime have to get an understanding with RELE if they can continue with their weekend programs in 2012 as soon as he can and if possible, he should make sure the contract reflects this provision. Maxime should also start negotiating with RELE on allowing them to offer English courses. At the same time, Maxime and Beatrice should also start doing market research in order to better understand the potential demand for OILT model in Rouen, such as the amount of tourists in the region, they can also look for OILT franchisees that are in similar geographical locations and learn from their experience and also help them estimate their financial future with OILT.