Adding value and building sustainability through a franchising model
Kate Lester’s dalmatian, contentedly snoozing on a chair in her office after a long walk, seems the antithesis of his energetic owner, who works fifteen-hour days, driven by “a power greater than I am” in pursuit of a goal to quadruple turnover.
And, in an industry that is a “tank full of sharks”, Diamond Logistics is a business whose time has come because of its values, believes founder and MD Lester.
“Logistics is very old school – there are a lot of companies that still have 1990s business values: capital based, old school in terms of profit margins, and offering nil customer service. But the zeitgeist has changed; it’s more about values, such as making your couriers and fulfilment centres the most important people after the clients. You can have efficient finance and good systems and the right earnings ratio but in the end, if you’re unpleasant you will get found out. When companies fall down it’s often because of their lack of ethics. So values are not tokenism. If you come from a position of good intent, people will want to work with you.”
Lester’s values include that of ‘shared success’, meaning she strives to create symbiotic relationships that lead to mutual benefit. Her aim is that the company is good to work with and belong to, as opposed to work for. Each franchisee has to agree to contribute to a local charity, for example. “Everyone wins, or it doesn’t work,” she says.
She sees Diamond as being a Waitrose in its field, adding value in terms of service and systems. “We position ourselves as being advisers; it’s based on mutual success. I believe in profit, but we pay fair wages and offer great career progression. There’s a place for low-cost providers – such as Ryanair in the travel market and Aldi and Lidl in retail. But all they have is being cheap. If you’re looking at adding value and building sustainability you have to have margins, and our target EBITDA is ten per cent – it doesn’t have to be a low margin industry.”
In the beginning
Lester started the business in 1992 and during the first 20 years grew it organically to a “stable” £1million turnover. But in 2013, once her children had left home, she was able to “really put my foot down” to achieve more rapid growth.
“It was timing,” she says. “I’m a slow learner but I had naked ambition; I always wanted a business of scale but I just didn’t know how to do it. But by then I knew enough to get it together. There was an opportunity to diversify geographically and I thought if I don’t do it now, I never will and I will never forgive myself.”
Building sustainability through franchise
She sold her house (and has only just bought another, after four years of “living out of a suitcase”) and did not take a salary for three years to fund growth and has managed to grow revenue to £10million through launching a franchising model.
Growing the business
That rate of growth put the company on the Fast Track list in 2016 but Lester confesses it has been hard work. “Not many businesses make it past £1million and those that do don’t recognise their own business when it gets to 10million. It’s ten-fold graft and can be horrible– that’s why so many people don’t do it.”
She explains: “Scaling takes longer than you think and takes more money than you think. You have to have all your processes, training, employment, monitoring, all nailed. It’s not as straightforward as you think, either. The plan was that with one depot, I had £1million turnover; I wanted £40million so needed 40 depots. It was really straightforward. But I forgot there would be depots that wouldn’t work and that the growth curve wouldn’t be the same for them all. And it’s easy to run one site and have good-quality service but running 20 sites is more difficult. So we’re only on half the revenue I forecast five years ago; we will get there, but 18 months later.
“Rapid growth can also mean having to replace team members who have been used to a slower pace of life. Sometimes, to get the business where you want it to be, you have to change the people.
“Some early team members that I knew had to go had contributed to where the business was. Sometimes the people you think are key are actually people protecting their position and blocking progress.”
Her goal is to double revenue in 2018 and the year after that, to get to £40million. And that is for starters. “A business plan doesn’t have to be complicated. Each depot will turn over £5million and there will be more than 40 depots. And that’s just the UK; we’re looking at sites in Europe and even India.”
It is all achievable, she says. “I am determined to under-promise and over-deliver. So many people have great marketing but no substance.”
However, the growth rate – anything between 36% and 89% over the past few years – has fallen back in the past year – though it is still in double digits. That has frustrated Lester. “It’s the things you had not even contemplated that knock you for six and keep you awake at 3am. Who saw Brexit coming? Nobody thought it was conceivable.”
Brexit has brought forward her plans to open in Europe but, says Lester, it has “screwed up” other things, putting her plans back by three years. “A business owner is like a farmer: you can choose the land, the seeds, the equipment, but you can’t choose the political climate, the temperature of the global economy. Because of the lack of clarity we have to budget for the worst-case scenario, which is pretty grim. Unless the politicians negotiating Brexit get the trade deals right I’m worried about what will happen.”
Lester introduced the franchising model in 2013, although finding the right franchisees has been a challenge. “I’m so enthusiastic and before I know it I’ve hypnotised people and they get carried away and we’ve start out very excited by the starry vision. Our first six franchisees are no longer with us; that’s a huge attrition rate, though it was the usual people issues – divorce, illness, birth, death, marriage – rather than business issues. I’m glad to say attrition rates now are under 10%”.
Lester reflects that the ideal franchisee is someone who can “lift the business rather than expecting to be carried”. She says: “I always believe people are as ambitious and dedicated as I am but now I make people jump through hoops and make them pitch to me to prove it. It’s a job application process rather than a sales process. Do I think they reflect our values, do I like them? Then I want to know about them as business people and what questions they have. It’s them doing the talking.”
The franchisee recruitment process
It takes at least three months, including evaluation of the applicant’s business plan and various psychometric, literacy and numeracy tests.
Ultimately, business success is down to the people in it, Lester believes. “It’s a given that you treat people well, they’re effectively your family. Conversely, new people have to fit into the family so we vet them to make sure they will.”
Outside the day job, Lester is a mentor and consultant to SMEs and regards being able to help other business people as one of her KPIs. She reads out with pleasure a text message she just received from a woman she helped who is now doing well in a new business venture. “I get a thank you like that every week,” she says. “It’s a privilege to be able to support people and being a ‘mum’ to clever young people is incredibly rewarding. I love it.”
Lester thinks business ownership should be presented more to young people as a career option. “It’s very liberating and opens up a world of opportunities and I think we’re doing young people an injustice in not suggesting it as a route to social mobility. Education seems to be about creating factory fodder and keeping people down. Business studies syllabuses, even at MBA level, are boring, irrelevant and out of date and the idea of entrepreneurialism, as in the Dragons’ Den concept is deemed to be middle class. They all raised their first funds from family and friends; I couldn’t have raised funds from mine as they didn’t have five quid to rub together; I started with nothing.”
Lester herself benefits from doing mentoring. “While helping to turn other businesses around, I could see other people’s problems and I cherry picked from what I learned and found my own way of doing things.”
Having been through the pain of growth, she says she would encourage other SMEs to scale if they can. “It’s far harder running a small business. Every bad review is awful and if you lose a client you think it’s game over. Scaling is not as frightening as you think it is going to be, and your skill sets are better than you think they are.”
What other lessons has she learned about running a successful business?
“Don’t take so much rubbish from people,” offers Lester, who is writing a book called The Manicured Fist. “I’m fundamentally too soft; I was an appeaser and empathiser and I’ve sucked up so much nonsense over the past 25 years; it’s only in the past five years I’ve developed the balls to start kicking back.”
In particular, Lester advises business people not to be afraid of banks. “They are service providers; so are landlords and anyone else you pay money to. They should be treated with respect but not fear.”
She feels that the conservative attitude of British banks can limit business growth. “There’s a story about Joel Perlman, who went on to co-found OakNorth bank, asked a UK bank for finance and they offered him £100,000 with a personal guarantee. Then he went to a US bank and they offered £10millon with no guarantee. UK banks are very limited and old-fashioned so we have to look at different funding avenues for pipeline businesses that have the ability to scale.”
Lester says she has become more assertive as she has got older. “I have changed the way I ask people to do things. I’ve learned to say not ‘please can you do’ but ‘I need you to do this by…’ That sentence has changed everything.”
Women in business
Women tend to be conflict averse, she muses. “You need to get used to positive conflict; having difficult conversations that lead to positive outcomes, even if you don’t quite know what those outcomes will be. I always tried to manage the outcome but if you do that you can cut off the business’s nose to spite its face. A lot of business owners – not just women – are apologetic about asking people to do 100% of a job they are paying 100% of a salary for, but if someone is not performing you need to hold them accountable. People might not like you, but that’s down to them. You will know you have done what’s best for you and best for the business. I once had to speak to one franchisee to tell her something wasn’t working. By the time I left she looked like she was sucking a lemon, but she’s now one of our top performers.”
Lester often ponders why more women don’t run businesses and she believes it’s not that there’s an ‘old boys’ club’ keeping them out; it’s more to do with their desire for work-life balance.
“I think it was Oprah Winfrey who said you can have anything you want but you can’t have it all at once. Women are very good at balancing home, family, hobbies and social obligations but you have to be obsessed to go for gold in business. I’d like to think there’s life outside business but business for me is just so fascinating. None of the businesswomen I know ever felt limited in terms of what they could achieve, but the price has been having less time for relationships and hobbies. A lot of women choose a more rounded, balanced life and the price for that is not achieving what they wanted in their careers.”
Would she sell the business?
“I did once think about selling it to clear the mortgage but it wasn’t worth enough at the time; no-one’s interested in buying a one-site business. I have increased the value ten-fold in six years so I’ll exit at some point but I would want an amount that reflects the work I’ve put in. I’ve never had more than two weeks off, so maybe I’d take a round the world trip. But I’ll need to make myself redundant first.”
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