Part 1: Research and Preparation
It is commonly said of business that if you’re not growing you’re dying. And whether you are trying to prevent competitors from muscling in on your market territory, establishing a foothold in a new sector or aiming to leave your big-name competitors chewing on your dust, this growth needs to be significant.
However there’s a hurdle; the same one you probably came up against when you first started out. Funding. A healthy growth spurt usually requires a powerful capital injection, the kind that you know from experience is anything but easy to access. And so, mulling over the dilemma while sitting in the drive-through, the answer is literally handed to you. Follow MacDonalds and franchise. It’s that simple.
A simple solution?
It’s true that franchising provides a way for you to grow your market share in a way that you simply couldn’t on your own steam. As Bendeta Gordon, CEO of franchise consultancy company, Franchize Directions, confirms: “It gives the franchisor a rapid expansion route, certainly faster than opening up your own chain of stores slowly over time.
The economies of scale allow you to achieve critical mass far more rapidly so you can carry the type of infrastructure that allows your business to progress.” She cites a range of advantages including collated marketing spend, enhanced brand value due to more touch points with the consumer and bulk buying benefits, among many others.
And, as she explains, because franchises have a vested interest in the business they tend to work harder, give a better level of service and remain closer to your consumer than an ordinary employee might. “Provided there is a good communication conduit between franchisor and franchisee, the right kind of information will get back to franchisors about what is happening in their market,” explains Gordon.
Is your business up to it?
Although this might sound simple enough, the fact is that franchising is not suited to everyone. “Not every business concept is franchisable and not every businessperson can be a franchisor. It’s vital that people thinking of franchising their business consider these two important facts,” she says.
From a business perspective, the size of your market needs to be substantial enough to be able to support a chain of stores. “How many units of operation could you feasibly set up that will generate the kind of turnover needed to fund a franchise operation and still make profits?” she asks.
Next, look to the type of product or service offering you want to franchise. While it’s great to have carved out a niche for yourself in the market, too small a niche will limit your ability to franchise. “The products and services that do well in franchising, like fast-foot outlets and supermarkets, are successful because their market is not too niche and they offer something that generates repetitive purchasing,” says Gordon.
However, it doesn’t do to have too general an offering either. “Distinctive positioning is critical to the success of franchising. The brand has to have legs and there should be something very clear about why a consumer should frequent that business,” she adds. While brand recognition may only come with expansion into more outlets, it’s very important that the brand at least has ‘legs’ and clearly communicates the personality of the business.
Finally, you need to be able to standardise and replicate a significant portion of the business format. “There are a lot of businesses, such as consultancy-type operations, where too many of the critical processes rely on the personal attributes and skills of the consultant, for whom this is simply not possible,” says Gordon.
The franchisor personality
But as she pointed out initially, the business model is not the only factor that determines whether you will be successful in franchising. “Winning or losing in franchising comes down to the people,” she says, adding that being a franchisor is an entirely different role to being a small business owner. It’s not something suited to all personalities or levels of experience.
“Firstly it requires a mature and experienced businessperson. People with very limited business experience struggle terribly as franchisors and this is because their lack of experience in managing people makes it difficult for them to develop the kind of mature knowledge-sharing culture that is centred on people development.
This is vital to attracting and retaining franchisees of quality,” she explains. You need to be willing to share your business system with your franchisees, something that many entrepreneurs find incredibly difficult to do.
The position also requires strong leadership. “You will have to monitor, assist and consult with franchisees but it’s important to remember that franchising is not a democracy and, when it comes to poor performance, the franchisor must have the leadership strength to pull errant franchisees into line,” she says.
This strength needs to be tempered. “Franchisees are typically highly emotional and you need to be able to manage this maturely!” says Gordon. Apart from management skills, strong marketing and sales ability and financial acumen are critical.
Ready to roll?
It may be that both you and your business are well-suited to franchising, but this still doesn’t make you ready. When you franchise is as important as what you franchise and your business needs to have established a good operational and financial track record before you even think about expanding.
“The pilot franchise store needs to be in operation for a minimum of a year but even that is very short and I would advise that two to three years would give you a better indication of viability,” says Gordon. Franchising after one year – particularly if that year has been a good one – is not a great idea.
Your business needs to have gone through a couple of cycles – both fat and lean – before you can truly come to grips with the market and the potential challenges that the future may hold.
This time will also allow you to conduct the necessary research required for franchising. “And remember that you should not only know your target market inside out,” says Gordon, “but you also need to research competitors in your field to see if you are sufficiently differentiated and what the rate of market saturation is like.”
Because franchising will change the business fundamentally, you also need to draw up a business plan that details all aspects of its expansion. Remember that you will need to establish an entire infrastructure to support the franchise operation – and, unless you have more than one self-owned outlet, will have to fund it for between 18 months and three years before you start covering your costs.
“In your planning and your growth, depending on what your capital resources and the existing size of business, you may need to outsource certain things such as marketing, training or even financial operations. A sound business plan will help to highlight these issues,” says Gordon.
From a financial point of view, bear in mind that you need to factor in IT systems, transport and storage of stock (depending on the type of operation), rent, shop-fittings, a strong marketing launch and travel requirements. You can’t rely solely on the initial franchise fees to cover the capital intensive early stages of set-up, so plan accordingly.
The help of an expert in franchising can prove invaluable, not only in identifying whether you and your business are suited and ready to franchise, but also in raising important issues that you may not have even considered.
“So often, our assessment reveals that prospective franchisors have not answered some of the critical big questions and don’t have plans in place to deal with things that our experience in the industry reveals are potential risks,” says Gordon.
Setting up the franchise structure
Gordon says that developing the franchise package can take at least six to eight months. During this time you will need to put together a franchise management team. Support for the franchisees is a critical success factor.
“There has to be a dedicated individual or team whose sole function is maintaining contact with the franchisees, making sure they are operating according to the required standards and systems, and helping them with any challenges and queries they may have,” says Gordon.
Most franchisees are new to the game and a great deal of your franchise’s success or failure will hang on the quality of the training modules you put together. “When it comes to training, there are two elements that you need to consider,” says Gordon.
The first is training in operations. Each franchise has its own unique operating systems and procedures and it’s vital that franchisees are completely familiar with and competent in the use of these. If central operational processes such as ordering of stock, compilation of monthly reports and budgets, accounting and point of sale procedures are not standardised, your ability to maintain control of quality and standards will be compromised across your entire franchise operation.
Many new franchisors choose to conduct their own training and while this keeps your costs down it pays to bear in mind that just because you’re closest to and most familiar with the company’s operations doesn’t necessarily mean you’re the best or most qualified person to train franchisees in this area.
The input of a professional trainer can prove invaluable and is worth considering at this point.
The second area of training that you need to consider is management training. As Bendeta Gordon points out, although most franchisors place a strong focus on operational training, many of them neglect to train their franchisees in business management.
Bear in mind that although franchisees might have business acumen, many of them come to franchising as first-time entrepreneurs and can benefit enormously from comprehensive training in things like marketing, financials and labour relations.
Neglecting to cover these areas can set their franchises up – and therefore ultimately your business – for failure. Because different individuals will have different skills levels it’s a good idea to get each of their management abilities assessed so that you can target your training programme to meet specific needs prior to commencement.
When you become a franchisor, your biggest and most important role is to offer franchisees whatever support they require in order to run successful and profitable operations. Mature franchisors recognise the value of comprehensive support systems and reap the benefits these bring.
In addition to group-wide marketing activities, franchisees may require input on the kinds of initiatives they can put in place for local area marketing. You need to specify the type of accounting, point of sale and stock management systems that the franchisee should be using.
And although their initial training might have brought them up to speed on how to operate these systems, ongoing training is vital to maintain standards, reinforce brand messages and implement new systems and procedures effectively.
“Franchisors should also have a system in place that allows them to benchmark the performance of all the stores and a facility to provide this feedback and information back to the franchisee,” says Gordon. Not only will this keep you informed about the progress of each franchisee, but it will also provide them with clear and specific expectations and goals.
Part 2: Getting Going
So you’ve called in the experts, conducted the appropriate research, laid out your business expansion plan and are looking forward to launching your franchise. Doing so is a complex process and getting it right will mean laying a solid foundation from which you can ultimately grow a strong franchise operation. Getting it wrong can have far-reaching consequences for the future of your business.
Understanding your role
But before you get into the strategic, legal, recruitment and roll-out processes it’s vital that you understand your role as a franchisor. “So many small business owners don’t understand that being a franchisor is a new and completely different role to the one they played running their own business,” says Bendeta Gordon, CEO of Franchize Directions.
Apart from offering support and guidance to franchisees, the franchisor acts as the custodian of the brand and the business system. “Franchisors need to ensure that the brand remains contemporary and in line with what is happening in the market. They need to keep their eye on the market all the time,” says Gordon.
Being a brand custodian means ensuring that franchisees adhere to the required standards, systems, policies and procedures so that the brand value is not compromised in any way. “When they deviate from the standards that the franchisor has set, or interpret them in their own personal way, the brand is diluted,” she explains. What this ultimately means is a non-standardised experience for the end-consumer.
It’s also important to realise that, while you may think of this as ‘your business’, franchisees are not your employees and your relationship with them should accordingly be based on partnership and dual responsibilities. They have certain responsibilities to you, but you also have responsibilities to them.
Included in these is the critical marketing responsibility. The success of your franchise operation will depend to a large degree on the power that you put behind your marketing – particularly in the early days when you are trying to establish a footprint.
Without a strong marketing campaign to link all your franchise operations together in the consumer’s mind, you’re leaving your individual franchisees high and dry. A carefully considered brand map and goals should inform the marketing strategy of the business.
You’re also responsible for rolling out training, systems and internal communication strategies. The latter is vitally important to the success of your business. “Successful franchises are those that have a sound communication conduit between franchisor and franchisee,” says Bendeta Gordon. Regular meetings and discussion and feedback forums should form part of your internal communication strategy.
Finding the right people
While strategies are a vital part of the success of a franchise operation, there’s no getting away from the fact that the franchisees are the lifeblood of the business. Choosing the right people is critical and, in the same way that being a franchisor is not suited to everyone, so being a franchisee requires a particular skills set and personality type.
Gordon confirms that franchisees need to be a rare mix of independent and entrepreneurially-minded people who are self-motivated and can conform to the franchise system and follow the rules and standards that the franchisor puts in place.
But this is just a general profile and you will need to develop a comprehensive ‘ideal franchisee profile’ based on the market, product offering and needs of your particular franchise operation. In this regard, the input of a human resource or franchise consultant can prove invaluable.
Once you know who you’re looking for, you need to market the franchise opportunity. But, as Gordon points out, although this is an important part of brand building and attracting the right kind of talent, you only want to attract people who are genuinely interested in making a franchise purchase.
“You need to market the opportunity, certainly, but you shouldn’t push it with too hard a sell – you want legitimate buyers to come to you,” she says.
Even so, you will have to screen candidates extremely carefully. Gordon outlines some of the comprehensive screening processes that Franchize Directions goes through when assisting franchisors in selecting the right franchisees for their business.
“You need to include everything from telephonic screening, through to interviews, financial screening, reference checking, psychometric evaluation, on-the-job-evaluation and panel interviews. You may even want to have peer franchisees involved in the interviewing process at certain stages,” she says.
Drawing up documents and agreements
Sound contracts are to business relationships what good fences are to neighbour relationships. They lay the legal foundation for your relationship with franchisees and you only get once chance to get them right. Failing to do so can mean getting your fingers seriously burnt later on and could cost your business a great deal of money.
However, Gordon points out that there is important commercial work to be done before you bring in an attorney. “There is no question that you need to get a legal team involved but before you do that you need to make sure that your commercial plans and structures are sound.
Doing so requires the services of people who have specialised in franchising, not attorneys,” she says. “For example, how are you going to handle marketing levies, what are your responsibilities to the franchisee and vice versa, how are you going to determine fee structures?”
The answers to these questions will inform what goes into your franchise agreement and are partly based on your specific expansion plan and financial predictions.
“Once you have a clear idea of the financial implications of your plan and how you are going to run the operation, you can draft the legal agreement with the assistance of attorneys. They will help you will the legal wording, make you aware of where relevant precedents have been set and highlight potentially contentious areas. But use a franchise consultancy firm or speak to an existing and established franchisor first to get the answers to the big questions,” she says.
Gordon also points out that franchisors who are taking deposits from prospective franchisees need to set up a trust account into which these monies are deposited. “Should the deal fall through for any reason, certain of those monies may be refundable and would need to come out of the trust account,” she explains.
The pilot phase
“The franchise needs to have a pilot operation on which the business will be based. That needs to be in operation and sufficiently refined to ensure that the operational system is efficient and effective. And it needs to be trading for long enough to make sure that the business format is viable,” says Gordon.
Think of your pilot operation as a test run. It allows you to carry out important trouble-shooting and refine all aspects of operation and strategy before you start investing serious capital in setting up the other outlets.
“You need to look at things like footprint of the store and ensure that you are maximising the space. Store design and layout needs to create the kind of experience you want the consumer to have. In addition, you need to use the pilot operation to ensure that your offering is priced correctly and that the systems you have in place achieve what they are supposed to,” she adds.
When it eventually comes to setting up the franchised outlets, Gordon says, “Franchisors should have a clear idea of their target market and, based on what is hopefully a couple of year’s worth of experience, should know in which types of locations their particular concept works.”
She adds that although there are cases where prospective franchisees have a location in mind, the selection of outlet location is generally the responsibility of the franchisor, who will get information from leasing agents on new sites available and carry out negotiations with landlords on issues of rent and maintenance.
“Shop-fitting is also best done by the franchisor, particularly because it has implications for the brand’s integrity and achieving the same standards across all operations,” she says.
In conclusion Gordon says: “Research has shown internationally that when a franchisor subscribes to a code of ethics the probability of them being successful and sustainable over an extended period of time is far higher than those that don’t. This is why being a member of an organisation like FASA can be beneficial.”
FASA (Franchise Association of South Africa) is the official body for franchising in South Africa and grants membership based on a strict code of ethics and business practices to which all members subscribe. The organisation conducts a thorough assessment of franchisors applying for membership, investigating the viability of the business concept and the presence of appropriate documentation. The minimum requirements as listed by the organisation are:
- A disclosure document that complies with FASA’s stringent specifications
- A fair and reasonable franchise agreement that clearly reflects the spirit of FASA’s Code of Ethics and Business Practices
- A comprehensive operations and procedures manual
- A franchised concept that has been in operation successfully for at least one year in South Africa. International franchised concepts under the ambit of international franchise associations do not automatically qualify as members of FASA.