Franchising Your Business in 5 Steps

Franchising your business is a proven route to rapid growth. But becoming a franchisor is not an automatic ticket to success, especially in a challenging economy.

Franchising Your Business in 5 Steps

Still, many business owners dream of seeing their brand become a household name, with a network of franchisees in major hubs, into Africa or around the globe. When the right concept is franchised effectively, it can be a great expansion strategy that doesn’t require as much up-front capital as growing through company-owned units.

Becoming a successful new franchisor entails making many thoughtful decisions early on that will affect your business for years to come. Here’s our guide to the important steps you’ll need to take along the road to becoming a new franchisor.

1. Evaluate if your business is ready

Beyond having a track record of sales and profitability at the existing business, there are several factors to weigh here.

Consider your concept. Most good franchise concepts offer something familiar, but with some unique twist to it. Some good examples would be Jimmy’s Killer Pizza serving local flavours like babotie pizza, offering a selection of unusual beverages including bubble tea, and Andiccio24 offering ‘build your own pizzas’.

The concept has to appeal both to end consumers and to prospective franchisees. There should be an expectation that more units will create economies of scale and increase profits. And of course systematisation and replication are key, not something that needs your personal touch to be successful.

Check your financials. Most successful franchises take a business that’s already profitable and try to replicate that success in other locales. A company should have a couple of profitable units beyond the first one already in operation before it tries franchising.

Gather market research. Don’t rely on your gut feeling that your business would be a smash hit across the country. Gather market research to confirm there is widespread consumer demand beyond your home city for what your franchise would offer, and room in the marketplace for a new competitor.

Prepare for change. Becoming a franchisor means you’ll be engaged in entirely different activities than you were as a business owner. You’ll primarily be selling franchises and supporting franchisees now, instead of selling pizza or fixing toilets.

Ask yourself if you’re comfortable having a role as a teacher and sales person, selling and supporting franchisees, as opposed to going out there and doing it yourself.

In addition, franchising your business will require that you relinquish some of the control you’ve had over how your concept is executed.

Franchisees won’t do it exactly the way you would, even if they do it well. If you are so married to your concept that you won’t let anyone else touch it, then franchising may not be right for you.

Evaluate other alternatives. Before you plunge into franchising, you may want to consider other options. Depending on your situation, slower growth, finding debt financing, or taking on partners are all alternatives that may prove better ways to move forward. Remember that while franchising allows you to grow fast, it also means giving up most of the franchise units’ future profits.

2. Learn the legal requirements

The franchise industry now falls under the regulatory compliance of the Consumer Protection Act. This means that information contained within the franchise agreement and franchise disclosure document need to be accurate and transparent and must be reasonably designed to protect the interests of the franchisee, franchisor and franchise system.

To assist this process, it’s recommended you hire a legal expert specialising in franchising.

3. Make important decisions about your model

As you prepare your legal paperwork, you’ll need to make many decisions about how you’ll operate as a franchisor. Key points include:

  • The franchise fee and royalty percentage
  • The term of your franchise agreement
  • The size territory you will award each franchisee
  • The geographic area within which you are willing to offer franchises
  • The type and length of training programme you will offer
  • Whether franchisees must buy products or equipment from your company
  • The business experience and net worth franchisees need
  • How you will market the franchises
  • Whether you want an owner-operator for each unit or area/master franchisees who will develop multiple units.

New franchisors don’t realise how much each of these decisions can affect their future profitability. If you’re thinking either 5% or 6% royalty, for instance, the difference doesn’t sound big, but five years later, when you have 100 franchises sold, and they each make

R700 000 a year, that’s a R7 million annual mistake. And you’ve signed a ten-year contract. Run a number of business model scenarios with your franchise attorney before settling on your fees.

4. Make key hires

As you prepare to become a franchisor, you’ll usually need to add several key staff members who will focus solely on helping franchisees. You’ll need to consider every function you have and will need, and the best person to fill that spot – from administration to accounts, procurement to brand evangelists and trainers. It might take you from a full-time staff contingent of five to 25.

5. Sell franchises

Now that you’re in business as a franchisor, one of your most pressing activities will be to find franchisees and convince them to buy your concept. To help stimulate interest, you might consider offering a R10 000 referral fee to anyone who sends the company a new franchisee.

Entering into partnerships with franchise brokers or consultants can also expose you to prospects. Other common sales techniques include attending franchise fairs or hiring independent franchise marketing firms to help locate investors.

Selling franchises is difficult because of the high risk involved for franchisees. Your sales people should know your business well and be able to tell a compelling story about why you’re a worth the investment of their time and money.

About the Author
Carol has been reporting on businesses large and small for 15 years now.

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