Franchising is one of the fastest and most cost-effective ways to expand your business. Here you’ll discover how to convert to a franchise model, and learn from those who’ve done it. Sit back, get reading, and plot your next big business move.
The pros and cons
Franchising is a proven business model, but first consider these points. Most franchises start by converting an independent business into franchise units. But converting to a franchise means quite a lot more work of the kind you’re not currently used to. Here are some pros and cons:
Five advantages of franchising
- Franchisees are responsible for providing capital.
- A stable network spreads brand recognition, purchasing power and system-wide best practices.
- Standardised outlets can be opened quickly and cost-effectively.
- Owner-operator skin in the game is a motivator for success.
- Additional income and steady cash flow is generated through franchise fees.
Five franchising pitfalls
- Converting is expensive, franchisees take time to break even, and you need to be financially prepared for the ROI wait.
- Franchisee contracts and managing franchisee-franchisor relationships can be very complex, requiring qualified legal and financial counsel. This can get expensive.
- Franchisees need to operate in the interest of the brand. Failure of one franchisee can negatively impact the whole network.
- Staffing, infrastructure and resource demands to support a franchise system are much greater than an independent business.
- Your skills that made your business successful aren’t the same skills that make franchises successful.
Still ready to franchise? Read on for preparation and research.
Preparation: Don’t pull the trigger yet
13 checkpoints to tell if your business is ready to be franchised.
The kind of business you have now determines whether your business can be franchised at all. Here are some basics to have in place first.
1. Is it working?
To franchise, the business model must be proven. No law requires a franchisor to demonstrate competence, but credibility sells franchises. Show you’ve got a solid and profitable concept with an operating prototype. Run a pilot outlet for a year to test viability. It will help you resolve systems gaps, replication problems and cement your differentiator.
A prototype is a good way to illustrate you have something of value to offer franchisees.
2. Can you squeeze costs?
Reducing business and pilot expenses will save money and make your franchises more profitable and affordable. Optimised income and expenses will help determine initial fees, set-up and running costs, and profit margins — important elements for attracting franchisees.
While a value leak in one branch may be tolerable, multiplying it across a network can be a massive cash haemorrhage.
3. Can you clone it?
Successful franchises are easy to replicate — consumers want consistency no matter which outlet they visit. This means it has to be thoroughly systematised and its operations documented. If your concept doesn’t lend itself to standardisation, you’re going to have trouble franchising it. Simplicity is strength.
Try this:‘If I couldn’t run the business today, could someone else?’ Document the process of each task you do. A successful franchise can’t work if it relies on a unique location, a superstar sales person, your knowledge or personal touch, or because of crazy work hours.
4. Can you sell it?
The business model must be attractive to potential franchisees. Credibility, uniqueness, and brand sizzle all contribute to appeal. You can tell how desirable your concept is by how many unsolicited franchise inquiries you get.
How well are you able to explain the concept to other people, how easily do they grasp it, and do they get as excited as you?
5. Will franchisees get ROI?
A franchisee will expect a return for their time and investment. Even if you have only a brief operating history, can you project franchisee returns above comparable brands after deducting royalties? Your market research must confirm there’s sufficient consumer demand and room in the market beyond your home territory.
How many units can you open up before reaching a market ceiling?
6. Can you provide value?
Franchising is about long-term relationships. Does your training programme ensure franchisee success? Do you have great marketing, enough staff for frequent franchisee interaction, a culture of openness, learning and participation? Do you strive for innovation and industry leadership?
Quality and consistency in the network begins with initial and ongoing training, wrong behaviour can damage the brand.
7. Do you have the infrastructure?
Distribution, suppliers, IT support, HR, marketing and trainers serving the franchisees — infrastructure is critical to success. Inadequate network support can compromise the brand.
Beware hyper-growth. If your infrastructure can’t keep up, you risk system collapse. Can your suppliers scale up with you?
8. Do you have capital?
Franchising is not a ’no cost‘ strategy. You’ll need capital to develop legal documents, manuals, training programmes and marketing material for drumming up consumer interest and franchise leads.
Many new franchisors underestimate how much this marketing and support effort will cost in terms of money, manpower and time.
9. Is your model right?
A successful franchise model demands many tough decisions be made. Key points include:
- The franchise fee and royalty percentage
- The term of your franchise agreement
- The territory size awarded to each franchise
- Geographic areas you want to expand to
- The type and length of training programme
- Whether franchisees must buy products or equipment from you or suppliers
- The business experience and net worth franchisees need
- How you will market the brand and franchised units
- Do you want owner-operators or master franchisees who’ll develop multiple units?
10. Are you prepared for change?
Being a franchisor means you’ll work less in the operation of your business and more as a CEO. Are you comfortable being a teacher, motivator, overseer and marketer? Franchisees won’t always do things the way they should. Do you have the leadership skills to manage this?
Being a franchisor requires business experience and the ability to manage, assist and develop people.
11. Have you updated your business plan?
Franchising will change your business fundamentally. Redraw your business plan to account for the expansion. How will the business stay afloat while recovering costs? How will you plan and finance marketing, training, resources and infrastructure development?
A new plan will highlight concerns and the need for a contingency plan.
12. Is your intellectual property protected?
A common mistake by new franchisors is failure to protect trademarks before starting a marketing campaign. Check with the Companies and Intellectual Property Commission (CIPC), then register your brand.
An experienced trademark or intellectual property attorney can help with the search and application, saving you a costly mistake.
13. Do you have documented operations?
Cover everything from start-up activities, marketing and personnel management to office procedures and other activities. It should be step by step and include implementation and maintenance of systems.
Make operations manuals accessible and interesting, with illustrations, tables, lists and scenarios.