The road to growth – Franchising

Franchising involves selling the rights to implement a core set of brand values and products (that you have created) to a third party. The third party does not own your brand values or products. However, he or she will replicate your brand identity to such an extent that from the perspective of the customer, the franchise-holder’s outlet is your business.

It doesn’t take a master of business strategy to see that in this simple formula, a host of problems could occur. For example –

• How will you ensure that the franchise holder does indeed replicate your brand values and products accurately?

• How will you implement visual brand guidelines to make the customer’s experience align with all his or her expectations around your brand?

• How will you keep a check on the standards being implemented, which, if unsatisfactory, can easily defame your brand and do irreparable harm?

• Do you currently have a way of systematizing and cataloguing your brand values and product offers so that they can be passed on in a manageable and comprehensive way?

All of these factors have tried and tested remedies, but the ‘bottom line’ is that your business may not have the right resources, the level of development or skillsets to implement them. Moreover, consider these two statistics from the International Franchise Association –

• About 30 per cent of would-be franchisors haven’t found a single buyer for their franchise model after two years of trying.

• Each month, worldwide, about 35 major franchise operations go into bankruptcy. These are all mature businesses that at one stage or another showed every sign of solid success and grew to have more than 25 outlets. So, would you be smarter at surviving than them?

The fact remains, though, that for the right company, franchising can be a powerful and proven route to dynamic growth. The difficulties tend to be most pronounced in the early stages of getting the franchise off the ground, and then at the more advanced level of taking the franchise into a new overseas market – but there can be considerable sums of money to be made for those with the right perseverance and patience. Remember too that right from the outset you will be asked to make decisions that can affect your business for years to come, and there will be some tricky legal issues – and a significant raft of paperwork – to navigate through.

Here is our action guide to the key steps that you’ll need to take if you’re planning to become a new franchisor. Each of these will help you mitigate the risks and use precious resources in a wise and constructive way.

Is your business ready?

The first issue to tackle is the fact that not every business will suit a franchise model. There’s much more to this than whether you have a good track record of turnover and profitability. For example, you might be good at what you do, but do you actually have a strong USP that would roll out as the backbone of the franchise proposition? Is there something unique and memorable? It will pay to consider the following –

• The strength of your concept. Most successful franchises offer something that in essence is quite normal, but perhaps packaged in a memorable way, or with new elements that add a certain ‘twist’. Example – US pizza chain, Pizza Fusion, which offers pizzas with all-organic ingredients, while take-aways are delivered in hybrid electric cars. Remember too that the concept has to appeal both to consumers and to prospective franchisees. There should be an expectation that more units will create economies of scale and increase profits. Additionally, the business needs to be something that can be rolled out remotely and systematically, not something that needs your own personal touch throughout (because you won’t be able to give it).

• Realistically appraise your market position. How successful is your business, really? Most successful franchises take a business that’s already profitable and try to replicate that success in other locations. That doesn’t mean, though, that if you have one successful site you are automatically ready to franchise the business model. Statistics show that the core business needs to have at least two or more successful sites in order to generate the right levels of perceived credibility, or to understand what’s required in order to systematize and generate a stable franchise template.

• Do proper market research. Too many would-be franchisors are basically acting on instinct or the assumption that their business model is replicable and portable. It will pay to commission some detailed and objective economic market research – don’t base your decision on anything else.

Define your business model

This is the ‘gritty’ stage where you need to make hard and fast decisions about the shape and finances of your business. The critical points to consider include:

• Franchise fees and royalty percentages

• The term of the franchise agreement

• The size of territory to be awarded to each franchisee

• What geographic area you are willing to offer franchises within

• The type and length of training programme you will offer

• Whether franchisees have to buy products from your company

• The entry-level for business experience and net worth that franchisees will need

• How you plan to market the franchises

• The management template: an owner-operator for each unit or a chain of master franchisees who will each develop multiple units?

Decisions on this list can have a massive impact on the future of your business. For example, although the difference between a five per cent or six per cent royalty doesn’t sound like much, consider the ramifications five years down the line, when you have 100 franchises sold, and they each make US$700,000 per year. The difference is US$7 million annually! The reality is, you can easily make an error of judgement that’s probably compounded by the fact you’ve signed a 10-year contract.

Complete necessary paperwork – and register as a Franchisor

Once you’ve made the important decisions that shape how your franchise will operate, you’re ready to complete your legal paperwork. When you submit it, be prepared for the municipality or government agency to review the document and possibly demand additional disclosures before they approve your application.

It’s a good idea to work at this stage with a specialist legal firm who are expert in completing and filing the right paperwork. This can save considerable time that might easily be lost resubmitting inaccurate documents or omitting necessary elements of the paper chain.

Start your recruitment drive

The shape of your business operation is about to change. As you prepare to become a franchisor, you will usually need to add several staff members who will focus solely on developing the franchise operation itself, including liaison with suppliers, developing the raft of collaterals and helping franchisees. Typically, you might need to recuit –

• A trainer

• A creative director

• A marketing assistant

• A franchise IT manager to adapt and implement franchise-wide company software and systems

On this recruitment drive, it’s important not to penny-pinch. You will be dealing with considerable financial values and you will most definitely need people who are used to this scale of operation, not out of their depth. This new team will be crucial in securing your wealth-to-be.

Green light – now sell franchises!

Now that you’re in business as a franchisor, one of your most pressing activities will be to find potential franchisees and convince them to buy your concept. Remember, selling franchises is intrinsically difficult because you are asking people to give you a good deal of money, leave their job, come to an untried business with no security or tangible benefits – and then do things your way!

All of which means that you need a full-time team working on selling your franchise offer. In fact, that sales drive is almost a business in itself, and you will need high-quality salespeople who instill trust and totally understand the ‘leap of faith’ that you are asking potential franchisees to take. Ensure that –

• All marketing collaterals and sales materials are ready

• If you are selling a physical product, you will need a training centre to show franchisee teams how it works

• You have earnings projections and business templates for demonstrations to key prospects

• Your sales team are out and about in the communities where you want to sell franchises, and are knowledgeable about these environments and their challenges and opportunities

• Your sales team have 4G connectivity and can access all relevant information on their mobile devices while ‘out in the field’ and in front of the prospect. Screen replicability with head office is essential.

If all of this sounds like a lot of work and expense, you’re quite right – it is. Yet compare it to the costs and resources involved in trying to grow a conventional business, and you can see immediately that the same scale might otherwise take decades to achieve. Is franchising for you? It ultimately depends on whether you are interested in the mechanics of business and rewards as such, or if you want to retain a sense of identity and ownership with a product you are passionately attached to. If the former, franchising can indeed be the road to the rich and resounding success that you are searching for.