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How To Franchise Your Business
Wondering how to make your business grow? Franchising could be the answer,
according to David Pearson. Here he offers some advice to potential franchisors.
(David Pearson is a franchise consultant based in Wellington, NZ, with many years experience of developing franchise
systems for New Zealand companies.)
Franchising can be a profitable and rewarding strategy for almost all types of business. These days, New
Zealanders can buy a franchise in anything from window cleaning to hamburgers, adult shops to aerial
photography. So if you have a bright idea, can you start your own franchise?
The answer, fortunately, is almost always 'no'. Franchising does not consist of someone paying you a vast amount
of money for an idea. You have to have something tangible to sell - a product or service, an operating system, a
name and reputation which you have developed and which has been proved to succeed.
Let us assume that you have such a business. You have been trading profitably for a number of years, and the
time has come for you to expand. You don't want to invest the capital and manpower necessary to open
additional outlets yourself, and you think of franchising. Perhaps somebody has already knocked on your door
and asked you if you would sell them a franchise? It sounds easy - draw up an agreement, show them how you
do what you do, let them use the same name above the door. Suddenly, you're in franchising.
The truth is actually very different from that. Although a few very successful franchises have started when
somebody knocked on the door (The Body Shop, for example), the majority of worthwhile franchises have been
as a result of careful planning and lots of research. Even an established chain such as Budget Travel spent two
years studying the concept and developing their strategies before launching as a franchise.
The good news is that, although franchising can be complex, professional advice is available which can make it
easier. So don't be put off, but do be prepared to do your homework. This article outlines some of the things you
will need to think about if you are to franchise your own business.
Investment
Any new franchisor must be prepared to put in hard work and time in order to make the concept marketable.
They will also need to invest capital. The costs involved will vary depending on the complexity of the business and
how well developed and documented it is already. However, you should bear in mind that, despite the benefits of
franchisees investing their own capital in the individual outlets, the costs of establishing the system and the support
structure mean that most franchisors do not see any significant return in the first couple of years.
There are three phases in developing a franchise system:
Reviewing the business for its suitability for franchising
Preparation of a franchise business plan
Implementation of the business strategy
Reviewing for suitability
There are a number of essential attributes which a business must have to franchise successfully. These are as
follows; treat them as a checklist for your own business. If any of them are not present, then you must be able to
put them in place before going any further.
Image and branding. There must be strong and easily recognised branding and signage. Franchisees are paying to
use the name - make sure it is worth having. Logo's and the name should be legally protected. Image and
branding must be consistently used throughout the business, not only on signs but on uniforms, stationery and
wherever else it appears.
Product supply. The product or service being sold must be able to be sourced without risk of interruption or of
significant currency or cost fluctuation. There should also be a long-term, proven market in this country for the
product or service.
Standards and systems. There must be (or be able to be developed) operating systems and standards for all
aspects of the business. These would be consistently applied to the day to day operation. Every aspect of the
business must be capable of being documented and put into practice after suitable training.
Management. The management of the parent organisation should be capable of dealing with owner operators as
distinct from employees, or be prepared to employ people who can. This is an important change in philosophy
which some organisations fail to grasp. Results and change in a franchise system are achieved by persuasion
rather than decree. The franchise relationship is one of mutual trust and co-operation.
Profit and turnover. The business must be profitable and have good potential for increases in turnover as a result
of greater collective buying and marketing and an increasing public profile. There must be sufficient profit to be
made for the franchisee to earn an acceptable living and receive a higher than average return on investment. At
the same time, the franchised outlet should be able to sustain a level of fees payable to the franchisor which are
sufficient for the franchisor to provide appropriate services and still make a profit.
Able to be duplicated. The operation of the business must be able to be taught to others, rather than relying upon
the style or personality of the existing owner. With the aid of training, a detailed operations manual and ongoing
assistance, franchisees must be able to operate a clone of the business as successfully as the franchisor has done.
In addition, the business must be such that it does not require major modification each time it is established in a
new area or territory.
Preparing a franchise business plan
Once you have reviewed the above factors and made the necessary adjustments, it is time for the next phase.
This essentially deals with how the franchise system you set up is going to work.
As a minimum, you should draw up a five year plan which addresses all likely occurrences during the growth
phase. This is important because there is usually little opportunity to make structural changes once franchise
agreements have been signed by your first franchisees.
In the business plan, you should address the following:
Review the market. You should undertake a thorough analysis of competition and trends applicable to the
product or service your franchisees will be supplying. This will give you a thorough knowledge of the market and
its future, and enable you to plan with more confidence. Information generated from this will also give an insight
into the best geographic locations.
Management & corporate structure. You need to put the right people in place in the right operating structure to
help the franchise grow and mature. If that 'right person' is only going to be you to start with, make sure you have
the knowledge and skills necessary to succeed in your new role as franchisor. Take external advice, and be
prepared to train and learn from others.
In a larger business, a separate operating entity can ensure that the new franchise is protected from existing
operations. Professional advice is necessary if this route is to be followed.
Expansion. A plan needs to be put in place as to what territories are to be opened and when. Most franchises
choose to spread outwards from their existing geographical base on the grounds that they can manage the
franchise more easily the closer it is. This also promotes economy and efficiency in both time and money.
However, it is worth noting the need to be flexible. The availability of certain sites, the lack of the right franchisees
or the threats or opportunities afforded by competition can all affect the expansion plan.
Territories and premises. Territories need to be large enough to ensure an adequate return can be achieved by the
franchisee, and small enough to ensure they can be serviced properly within an adequate time frame. Equally,
enough territories need to be established to ensure that the overall market is well serviced and the franchisor gets
a fair return on his investment. It is also necessary to decide whether territories will be exclusive. Detailed
standards and rules for premises need to be established and documented.
Advertising and marketing. Most franchisors stipulate two separate components: a national marketing fund,
contributed to by all franchisees but spent centrally; and an individual requirement for franchisees to spend so
much money locally. You will need to decide if a national marketing strategy is appropriate, what it will broadly
contain, how it will work and how much money will be required. Based on this, you can set the level of the
marketing levy (usually a percentage of turnover).
Obligations of both parties. You must set out in great detail what will be expected on an ongoing basis of
franchisees, with particular emphasis on the day to day operation of their business. As franchisor, you will also
need to decide what your responsibilities are going to be, with emphasis on long-term strategic matters and areas
of support to be provided.
In setting out these obligations, it is helpful to remember the definition that 'it is the rôle of the franchisee to work
in the business, and the rôle of the franchisor to work on the business.'
Reporting, monitoring & administration. Most franchises have sophisticated daily, weekly or monthly reporting
requirements. These enable both the franchisee and the franchisor to monitor how individual businesses are
performing. Both parties benefit, as such a system often provides early warning of potential problems. Most
systems are now computerised to some degree, and a decision will have to be made as to how this is best done.
Fees. Once all costs relating to the establishment and ongoing operation of the franchise system have been
established, you can decide what fees are to be payable by franchisees. Common examples are:
Upfront fee - for purchasing the initial rights to operate the franchise system for a set period.
Service fees, also called management fees or royalties - payments made for the provision of certain services from
the franchisor such as product development, support services, etc. These usually also include the profit margin on
ongoing business for the franchisor.
Training fees - sometimes for initial, often for ongoing training.
Marketing fund levies - for centralised marketing. The expenditure of these funds is usually accountable to the
franchisees.
In setting each of the above it is important to ensure that reasonable profits can still be achieved for both the
franchisor and the franchisee. One reason for failure in franchise systems is that fees and levies have been set too
high.
Budgets. It is important that you prepare a five year financial forecast based on your business plan. At least the
first two years should be projected on a monthly basis. This will ensure that you are aware of your own financing
requirements before you start franchising.
Another common cause of franchise failure is the under-capitalisation of the franchisor. Too many franchisors rely
upon the income from the sale of franchises to see them through the early months, when in fact franchises are
rarely as easy to sell as they might appear at first. Franchisees are also, as any experienced franchisor will tell
you, as much of a cost as a source of revenue initially while they are finding their feet and relying upon the
franchisor for a great deal of assistance and support.
Implementing the strategy
At last you are ready to franchise! Now you must put together all the resources necessary, and actually start
recruiting franchisees and opening franchises.
The essential elements include:
Franchise agreement. This is the 'marriage contract' between franchisor and franchisee which will incorporate all
the decisions made in the business plan. Use a specialist franchising lawyer to draw this up - this is not an area in
which to cut corners.
Disclosure document. This must be provided to all potential franchisees before they make the decision to buy. It
should provide in plain English details about how the franchise will operate, summarised contents of the franchise
agreement, plus full details about the franchisor and his or her experience.
Brochures. These are a sales aid to be sent out to people who respond to your advertisements.
Operations manual. This is the complete guide to operating your franchise. It serves as the first port of call should
the franchisee have a question or problem. It is an evolving document, and provides the franchisor with an
opportunity to facilitate changes in the franchise system as the business develops. Writing a manual which others
can understand is an enormous undertaking, and is often best undertaken by a specialist.
Then you come to the magic moment of advertising for your first franchisee. Be sure that you have the final stages
in place:
Recruitment and induction sequence. This is a step by step procedure for handling franchise enquiries and
establishing franchised outlets. It provides a standardised approach so that the best franchisees can be chosen,
the right information is provided when required, and the opening of each franchise is carried out in a
pre-determined and logical sequence.
Training programme. This may be carried out in a classroom or on-the-job. It is usually a combination of both.
Based around the operations manual, its purpose is to ensure that when the franchisee opens their outlet they are
able to operate it in a manner consistent with all the other outlets.
Franchise finance packages. As banks become more prepared to provide specialist services to franchises,
franchisors are able to develop tailored finance packages with more favourable terms.
Be prepared
Of course, not every franchisor will approach all of these areas in the systematic way I have outlined above, and
most find several of the stages happen all at once. Whether you are a large corporation or a one-man-band,
though, you will find that you need to address all the above points at some stage. The further in advance you think
about it, the better prepared you will be.
If you want to find out more about the possibility of franchising your own business, a good source is the Franchise
Association of New Zealand. The Association holds regular meetings in Auckland, Wellington and Christchurch,
and prospective franchisors are welcome to come along and meet others who have gone through this stage
themselves.
The Franchise Association can provide a list of experienced and reputable franchise consultants who are
members, and also publishes a book, The Franchisor's Manual. This contains a wealth of information to help you
evaluate your potential for franchising.
As I said at the beginning, developing a successful franchise takes a long time and a lot of hard work. On the
other hand, once you get it right, the benefits are enormous. If you decide to take the plunge, make sure you get
expert advice and take the time to do it properly. |
