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
r?le of the franchisee to work in the business, and the r?le 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.
And above all, good luck. |
