Franchising your business can be a very successful way of expanding your business, provided that you have a business to begin with. Many of today’s well-known brands have used franchising to accelerate the growth of their existing businesses, building national or even international brands in the process. However, franchising should never be seen as a testing ground for a brand new (and unproven) business idea but as a means of expanding an already successful business.
The following characteristics make a business franchiseable:
Credibility and a proven concept
The concept needs to be proven. The company must have a good track record and an experienced management team.
Potential to establish a memorable brand
The brand should be memorable, registered and capable of being expanded into different parts of the country, eventually perhaps even into other countries.
Profitability and access to capital
To franchise a business is not, and can never be, a means of funding a new business, or rescuing a business that is in trouble. For a business to be franchiseable, it needs to offer more than mere potential. 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.
Franchising is also capital intensive as the franchisor needs to get professional advice and build an infrastructure. The franchisor should have access to capital and shouldn’t sell franchises for survival.
Return on investment for the franchisee and franchisor
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 investment in setting up an individual outlet. A good franchise will deliver a return on the initial investment within 3 to 4 years.
Uniqueness and high barrier to entry
The business to be franchised needs to have a unique selling point that will allow it to differentiate its products or services from those of its competitors. This sustainable competitive advantage would allow it to compete successfully in its markets nationally, with possible potential to eventually expand internationally.
Sustainable and growing demand
The 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.
Intellectual property and systems
The business needs to have a set of systems, procedures, expertise, skills and know-how that optimises every operational step.
This, in a nutshell, is the purpose of the operations and procedures manual.
- To ensure consistency of delivery throughout the network and brand integrity, and to
- enhance franchisees’ ability to maximise profitability, this know-how needs to be carefully documented. This will facilitate skills transfer, more often than not to individuals with no prior experience in the industry sector.
Transfer of skills
It must be possible to train prospective franchisees lacking experience in the sector within a reasonable period. 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.
Practical considerations dictate that franchisees cannot afford to spend long periods in training. Most franchisors recognise this and aim to train their franchisees within three months or less. However, there are exceptions. This needs to be considered when working out the total cost of the franchise the prospect incurs (which needs to include the lack of income during training.)
Support infrastructure must be in place
The franchisor must provide intensive initial and ongoing support to franchisees. This requires manpower, facilities, a veritable set of skills and absolute dedication to the creation of win/win outcomes.
The product should demand a price premium
It’s difficult to franchise a product that is seen as a commodity or that is the target of price wars. This makes for a difficult competitive environment where franchisees will be under constant pressure. The margins must also be high enough to afford franchise fees. The added element of personal service from an owner operator can mitigate price sensitivity to some extent.
The company must have a franchise culture
It’s important to have a culture that is open, learning orientated and participative. Autocratic companies will find it difficult to franchise, since franchisees are not employees to be dictated to but should be seen as business partners.