Entrepreneurs who have grown a successful business may turn to franchising as a route to expand their operations. Like any other business model, franchising has its benefits and drawbacks. Not all businesses – regardless of how original or successful – are ‘franchiseable’.
There are a number of advantages of expanding through franchising.
Expand with top people: Franchising is a great way to find talented people and harness their skills and passion to manage your locations. Unlike employees who may come and go, they believe in the concept and therefore commit to realise their investment in both cash and time.
Reduce capital outlay: Franchisees buy into your network allowing you to grow the number of locations without draining your own capital or obtaining finance. This does not mean that there is no capital outlay – responsible franchisors invest in refining the concept before selling franchises.
Good returns: Franchising has the potential to generate high financial returns from the ongoing management service fees that franchisor collects. These returns may be many times what you would have earned if you had opened and ran the outlets yourself.
Franchising is certainly no silver bullet for business growth! Here are a few of the pitfalls associated with this expansion method.
Less control: Franchises are independent business owners and they can’t be instructed like an employee. Not if you don’t want a revolt on your hands! This can be frustrating for entrepreneurs who enjoy having their instructions obeyed to the letter.
Less innovation, less flexibility: Entrepreneurs enjoy the creativity and independence that comes with running their own businesses. It’s a lot harder to change business direction in a franchise network.
Mistakes happen: You may not always select the right franchisees. Even with careful selection, a poor choice of franchisee may be with you for many years!
The franchise factors
You will need to evaluate whether franchising is right for your company and that usually requires the help from a franchise consultant. But before you seek expert advice, you should have some sense of what are the critical success factors that make a business franchiseable.
The market: does the business operate in a large and growing market?
A would-be franchisor needs to ensure that demand exists in different areas, and that the product has staying power. The market for the product or service should be growing and the demand must be sustainable.
Margins: are the margins sufficient to cover the ongoing management service fees?
Franchising is not a means of rescuing a business that is in trouble. It needs to have a proven record of success and generate adequate gross margins to allow franchisees to make money after they have paid their franchise fees, repaid their loan and paid themselves a market related salary.
Product: can the product demand a price premium?
It’s difficult to franchise where the product or services are perceived as being commodities. This makes for a tough trading environment where franchisees will be under constant pricing pressure. Customers must be prepared to pay more for products due to value offered by the franchise.
Capital: can you fund the development of the franchise concept?
While franchising is a lower-cost means of expansion, it’s certainly not a ‘no cost’ strategy. A new franchisor needs capital to invest to refine the franchise concept, develop legal documents and commission an operations and procedures manual. This takes money and management time.
Brand: does the potential exist to establish a memorable brand?
A strong brand is critical to successful franchising. The brand should be memorable, registered and capable of being expanded into different parts of the country, eventually perhaps even into other countries.
Barriers: Is there a substantial barrier to entry?
The business must also have some uniqueness that is not easily copied, it must not be a “me-too” brand. This sustainable competitive advantage allows it to compete successfully in its markets nationally, with possible potential to eventually expand internationally.
ROI: will the development costs yield a solid return on investment?
Both franchisee and franchisor should obtain a reasonable return on investment. The franchisor should receive a return on the investment in the development costs. The franchisee should receive a return on the initial investment within a few years of setting up the operation.
Culture: can the business develop a franchise culture?
A franchise culture is open, learning orientated and participative. Autocratic companies find it difficult to franchise, since franchisees are not employees but should be seen as business partners.
Transferable: is it relatively easy to transfer the required skills?
If the concept only works because of a unique location, a superstar salesperson, or because an owner is working 80-hour weeks, it is going to be difficult to repeat the magic. The skills required for business success must be easily transferable within a short period of time. This is important because to permit new franchisees to operate a business under the network’s brand before they are adequately trained would be a recipe for disaster.
Systems: are suitable systems and procedures in place?
In order to franchise a business, the business model must first be proven. The business needs to have a set of systems, procedures, expertise and skills to optimise every operational step.
Franchising is not the only method for expanding an already successful operation. Get in touch with Franchising Plus to discuss these critical success factors and determine whether your business has franchise potential.
To discuss the above success factors in detail and how to franchise your business successfully, contact Franchising Plus.