When a company first decides to franchise, this decision is only the first in a series that’ll ultimately affect their success or failure as a franchisor. Even before getting to fee determination, the questions will fly fast and furious.
How fast should I grow? Where should I expand? Should I sell franchises close to my existing company-owned operations? What support should I provide? What will it cost me?
Related: Bringing the World Home
It starts with the goals
Any new franchisor should begin the process by gaining an understanding of what specific goals you’re hoping to accomplish through franchising.
You can get so wound up in the day-to-day operations of the business that you fail to realise the business is there to serve your needs – not the other way around. So you should take a step back and ask yourself where you want to be at some point in the future. Do you want to sell the business or pass it on to your heirs.
If you want to hold on to it, do you want to achieve some specific financial goals, and if so, when? If you want to sell it, when, and for how much?
Armed with this information, you can then work backward into a game plan. To do this, you divide your required growth in valuation by an assumed multiple of earnings (based on the selling price of comparable businesses) to learn the earnings your business will need to generate to achieve that goal.
Then, based on a variety of factors, you would make assumptions relative to overall profitability to provide you with an indication of what revenue level will allow you to achieve that selling price.
Then, look at estimated unit level performance, back out an estimated royalty, and divide royalties per unit into that revenue level to achieve a rough approximation of the number of franchises that will need to be operating to achieve your goals.
You then develop a game plan based on staging that number of franchise sales over your five-year planning horizon. And, voila! Everything starts to fall into place.
Once you know how many franchises you need to sell each year, you can set your marketing budget based on an assumed marketing cost per franchise sale.
You can develop a hiring plan based on staffing ratios relative to franchise sales person effectiveness, field support ratios and other measures of an efficiently run franchise organisation.
In fact, this process will tell you virtually everything you need to know in order to develop a successful franchise development programme.
Of course, the process outlined above has been vastly oversimplified for this article. We haven’t made provisions to account for franchise fees, product sales and other sources of revenue, nor the complexities of properly establishing an earnings multiple or estimating franchisor profitability.
The truth of the matter is that this process, in practice, requires a substantial amount of forethought, planning and financial analysis – and often in numerous iterations – before a reasonable game plan can be established.
But in every instance, it starts with goals and ends with strategy and tactics.
Don’t try eat the whole cow in one bite
You’re well advised to get your feet under you as a franchisor before stomping down on the accelerator.
Franchising is a means of leveraging your assets because you don’t have the people or the capital to develop company-owned units as fast as you’d like, and so franchising provides the magic pill for low-cost growth.
Unfortunately, one of the biggest advantages of franchising can be one of its biggest problems. Without capital constraints, a franchisor can literally sell itself into a position in which it can’t provide adequate support to its new franchisees. This can lead to franchisees who fail, who don’t open or who feel disaffected.
My advice: Don’t grow faster than your ability to support your franchisees. Or until you know just how much and what type of support they’ll need based on practical experience.
Over-support your initial franchisees. Make sure your first franchises are wildly successful, even at the expense of more rapid growth, because franchise marketing is driven by word of mouth. Remember: If your franchisees fail, you fail.
Stay close to home
Stay as close to home as possible when you begin expansion. Though further afield markets like Nigeria can be much more lucrative than say, Lesotho, it’s much harder to over-support your franchisees.
I advocate initial marketing efforts that’ll limit franchise growth to within about a three hours travel time of your franchise’s headquarters. That way, if an initial franchisee is in need of assistance, you (or your staff) can get up in the morning, be at the franchisee’s operation by the start of business, and still be home at the end of the day.
Related: Expansion Readiness
This local approach will provide you with economies when it comes to the franchise side of the business. Franchise marketing can be done more effectively. Rather than relying on national publications that may be too expensive for the new franchise, you can focus on less costly local media.
The support will not only be easier to provide, but it can be provided more economically – from a transport and staffing perspective. Clustered support allows fewer field support staff to handle more units, thus producing reduced cost combined with more face time with your franchisees.
Rules, like thumbs, are meant to be broken
Ultimately, however, all the decisions relative to a best practices growth plan relate back to goals and the marketplace in which you’re operating. Conservative growth carries its own risk that you’re possibly losing the race to a more aggressive competitor.
And thus, while the easiest and most reliable growth plans will be conservative and local, risk tolerance and an assessment of your market’s direction must also play a role in the assessment of the most appropriate growth strategy. Ultimately, it’s a balancing act of the risk-reward equation.