You’ve got a great concept that is trading well and you are considering expansion as a franchise business. But are you ready for the transition? Is the business model right for franchising? The journey to franchising a business is reasonably straightforward, but for greatest chance of success it has to be done correctly and must comply with the Franchising Code of Conduct. The new financial penalties introduced into the Code from January 1st 2015 are an even bigger reason to get it right. So how do you know if your business is ready to franchise?
At Franchise Systems Group we employ a simple but successful philosophy to establish whether a business is ready for franchising, it comprises the four essentials and three imperatives of franchising.
The four essentials
1. The business concept should be profitable and capable of replication Nobody will be interested in buying a business if it does not show a reasonable level of profitability. The franchisee will be looking to get a reasonable wage out of the business, will be expecting to have paid off any loans within the first term of the agreement and will expect to get a rate of return on his investment that is better than employing funds in other types of investment. In addition, he will be looking to have a business that increases in value over time, so that when the time comes to sell he will be able to make a profit on the sale. The first step in considering franchising is to ascertain the profitability and returns for future franchisees, as well as for the future franchisor. The business must have a style and ambience that can be replicated easily and with the minimum of cost. It should allow the new franchisees to be trained to clone the standards of operation, the appropriate levels of customer service and run the business efficiently.
2. The franchise system must be fair and equitable for both parties The attitude of the prospective franchisor is a much under-rated aspect of franchising. We have seen too many examples of situations where a possible franchisor is only interested in selling off underperforming outlets and keeping the best ones for themselves. This would make for discontented franchisees and could make that business vulnerable to legal issues. On the other hand we are delighted to hear of the enlightened franchisors who want to see their franchisees make money and are happy to help them achieve that. This fairness is also recognised by the level of fees in the franchise system and whether the franchisor is seen to be taking an unfair advantage over franchisees in the various sources of income that a franchisor can enjoy.
3. The management team must have the expertise to: •Operate a single unit of the specific business concept: there must be evidence of an existing profitable business. An idea or concept cannot be franchised until the prospective franchisor has established at least one pilot operation. •Manage a chain of these units: the preference would be to see evidence of the franchisor’s ability to run more than one outlet. •Manage a franchise system: it would be more difficult to see whether the franchisor would be able to run a franchise system, but their management style would be a major factor. Running a franchised business is different to the normal corporate structure, where the boss simply issues orders to be followed. In a franchise system, the franchisees are separate entities and need to be encouraged and guided into following the system.
4. Capital should be available to underwrite the expansion program and deliver the services promised to franchisees In order to franchise effectively, all aspects of the business should be in place. For instance, the back office system should be working and be simple for a franchisee to follow. Marketing programs need to have been developed to assist the franchisees achieve their results. Corporate web sites, especially if they are used for sales, and social media policies will need to be determined. Location or territory structures should be established, franchise lawyers will be required to draw up the legal documentation, accountants used to establish the correct business structure, as well as specialist franchise consultants to guide you through the process. The funds required will vary according to the type of business and their stage of development. Part of the initial work in assessing the profitability of the business should ascertain the franchisor’s investment needs and their likely rate of return.
The three imperatives
1. There must be appropriate procedures to recruit franchises who are qualified to run the business This does not mean they need formal qualifications as such, except for those that require them such as builders or health practioners. The franchisor should establish the profile of their ideal franchisee and assess each applicant against that profile.
2. There must be policies and procedures in place to assist franchisees to be successful The induction training programs must be comprehensive and cover every aspect of running the business. The development of the appropriate operations manuals are an essential component of this process and should answer most of the questions franchisees have. In addition the franchisor will also need to develop a team of support staff as the system grows to ensure franchisees do not feel neglected and receive regular visits and communication
3. For the franchisees who cannot succeed for whatever reason, there should be a method to deal with the resulting problems in a timely and effective manner Sometimes people buy franchises and it does not work out. An appropriate recruitment process will mitigate this situation, but in cases where the fit between the franchisee and the business is not working, there should adequate procedures to deal with the issue. It should be done as soon as the problem becomes apparent, firstly for the benefit of the franchisee who is suffering, but also for the rest of the franchise system. It is often other franchisees who see problems in their colleagues and they do not want people in the system who are not maintaining the proper standards of operation.