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HOW TO SPOT A QUALITY FRANCHISE

by Simon Lord,
last updated 04/06/2015

New Zealand has more franchises per capita than any other country. How do you tell the difference between the good and the great? Simon Lord looks at what quality franchises have in common

Buy a good franchise and you stand every chance of success. All the effort you put into developing and marketing your new business will be directed towards activities that really work, offering a product or service that people really want. Buy a flawed franchise and you’ll use all your energies trying to overcome the flaws; worse, your efforts might just multiply problems you can do nothing about. That’s why you need to choose your opportunity carefully.

But if you’re new to franchising – or even new to business – how do you make that choice? What are the differences that make one franchise successful while another one struggles? In the following article, we share some of the ingredients that make up a quality franchise system.

It’s important to realise that you won’t find all of the information that you need to decide about any particular opportunity in one place. You’ll have to do a certain amount of research yourself and you’ll also need to take advice from a franchise-experienced lawyer and accountant. If you need finance, you’ll also want to get a good bank involved. See here for more information on using advisors. A good guideline is that you and your advisors should invest around an hour of research for every $1000 you plan to invest. Do this and you’ll increase your chances of success before you even buy the franchise!

The key ingredients that make up a quality franchise can be broadly divided into four main categories. These are:

  • The franchise
  • Establishing new franchisees
  • Ongoing business management
  • The culture

Let’s look at each of these in turn.

The Franchise

For any business to succeed, it must provide a product or service that people actually want, at a price they are willing to pay, and which delivers a profit to the business owner after all costs are taken into account. For that business to be successfully franchised, it must be capable of being reproduced in other locations and run by other people – the franchisees. Crucially, the level of profitability must be high enough that both the franchisor and franchisee can make a fair income from the business. The key ingredients here are:

Proven product or service – If you are looking at any franchise, you need to be certain that the main product or service is a popular one with a real market. If the business has been operating for some time that should be quite easy to confirm. Talk to the franchisor, to franchisees and to customers. Have a look online to see what people are saying and what feedback they give about the product or service versus those of its competitors.

Real market – Successful franchises not only have a great product or service; they have a large enough market to sell it at a profit on an ongoing basis. New Zealand has a small population and if a product only appeals to a niche market then it may not work here – even if it is successful overseas. But be aware that new niches are developing all the time. Concepts such as Noodle Canteen, which has 50-60 franchisees, would probably not have worked 10 years ago but changing demographics and new eating habits have made it viable now. Equally, new technologies and even new legislation constantly open up new opportunities. For example, Fastway Couriers started after the deregulation of the postal service, and Telcoinabox and Compass Communications after deregulation of the telecommunication industry.

Strong brand – For a business to attract customers, it has to communicate what it stocks or what it does, and what advantages it offers compared to others in the same market: price, service, quality, convenience, range or whatever. Having a well-known brand means that the business can short-cut that communication. If you see the McDonald’s logo you know it stands for speed, cleanliness and a value range. Burger Wisconsin, on the other hand, offers a slower experience but a gourmet product. In either case, if you open a new burger restaurant with one of those names above the door, you will have a ready-made fan base. The stronger the brand, the more the franchise is worth – providing that it has the rest of the ingredients for success in place. A big customer base is only worth having if every sale makes a worthwhile profit. Which bring us on to…

Proven business model – Good franchises know what a franchisee needs to achieve in order to be successful, and have proven it across multiple locations. They have target percentages that have to be met in key areas such as rent, staff costs, power bills, fuel costs, wastage and so on. They have target figures for foot or vehicle traffic past a location, or the population numbers and type within a particular territory. With this information, they can evaluate the probable success of any new venture and if the numbers don’t stack up, they won’t proceed – whatever the would-be franchisee might think. If the numbers do stack up, they are able to give the franchisee a good indication of the level of sales they need to achieve in order to build a viable business.

Record of growth – No business can go on growing constantly, and one of the frustrations of New Zealand’s small size is that many businesses are restricted by our market size. Even so, quality franchises can demonstrate a track record of steady growth in outlet numbers and/or outlet turnover. In the case of a new franchise, they should have a carefully-researched feasibility study and business plan that shows how this will be achieved. Of course, every franchise will have its setbacks now and then, for reasons ranging from poor franchisee performance to natural disasters, but they should be able to demonstrate overall growth.

Financially healthy franchisor – For a franchisee to succeed they must be on a sound financial footing with adequate finance and borrowing capability in place. The same applies to the franchisor – if the franchisor is not sound, the investment of all the individual franchisees could be in danger. A good franchisor will provide would-be franchisees with a viability statement with key financial information and/or an independent audit. In fact, it is a requirement for members of the Franchise Association of New Zealand to include this within the disclosure document.

Establishing New Franchisees

If the franchise you are looking at has all the above ingredients, that’s a good sign. Now you need to look at how the franchisor can help you establish your own business as a franchisee. Once again, there are some key elements that quality franchisors will offer:

Recruitment procedures – These vary greatly between franchises, but the best franchises have systems in place to ensure that the franchisee is selected for their ability to succeed and receives all the information necessary for them to make up their mind about the business. Part of this process is helping the would-be franchisee have a clear understanding of their role in the business and realistic expectations of what they can hope to achieve.

Initial training – When you buy a franchise, the chances are that you will be moving into a business – and possibly an entire industry – of which you have little or no experience. That need not be a problem as long as the franchisor has a good training programme in place. Franchisees are required to take in an enormous amount of information of varying types in order to learn not just how to operate the business (make pizzas, mow lawns or whatever it might be) but how to market it, manage it and handle the administrative and time-management functions that come with being self-employed. A good franchise does not dump all this information on the trainee at once, but provides a series of stages that allow the franchisee to become comfortable in all their various roles before, during and after opening their business. They also provide manuals to refer to in the future.

Site Selection – Because the franchisor has established various figures and percentages that they know will make their business model work, they can accurately assess the potential value of any site. I recently talked to a very successful franchisee who had a very successful business in a particular location. When the circumstances of that location changed, the business model became unsustainable. That was not the fault of the franchisee or the franchisor, so there was no point crying about it – with the franchisor’s assistance, he simply found a new location where the model would work. Good franchisors can calculate whether a location is realistic.

Systems documentation – A good franchise relies upon using procedures which are the result of years of learning, development, fine-tuning and experimentation. These systems need to be properly taught by franchisors to franchisees, and by franchisees to staff, in order to ensure that the customer’s expectations of the franchise are met and that the franchisee is operating in a safe, efficient and profitable manner. Quality franchises document their systems in a way that franchisees can easily follow.

Information management – As we said above, a quality business model means knowing what the franchisee needs to achieve in terms of both costs and sales in order to be profitable. However, this has no value unless you can measure the same figures that you are actually achieving in your own franchised unit on a regular basis and compare them with the targets, and with the figures being achieved in other comparable units of the same franchise. This is called benchmarking. For it to be useful, the franchise has to have good information systems in place that are applied consistently throughout the franchise.

Purchasing power – Large franchises often have considerable purchasing power; quality franchises make the most of that power to offer real competitive advantages to their franchisees. Purchasing power is not all about getting the lowest possible price: it’s also about terms, service, marketing assistance, rebates and many other factors. A wise franchisor mixes all these elements to get the best possible outcome for the franchise. McDonald’s, for example, regards its ‘family of suppliers’ as a fundamental part of its business – it expects a lot, it gives a lot and it believes in long-term relationships.

Transparency on fees –  Whatever the financial relationships between franchisors, franchisees and suppliers, good franchisors reduce the possibility of confrontation by ensuring that any rebates, commissions, mark-ups or contributions to marketing funds are not concealed from franchisees.

Structure – Quality franchisors believe that in order for them to be successful, they need to ensure that their franchisees are successful. That is not to say that they have never had a franchisee fail – franchises can run into all sorts of problems. What it does mean is that they have a substantial proportion of successful and satisfied franchisees who have proven that the model works and that the business is structured in a way that enables franchisees to make a fair return on their investment and labour.

Ongoing Business Management

Having the right product, the right people, the right business model and the right locations are all vital parts of establishing a new business, but ongoing success depends on continual input and response to change by both the franchisor and franchisee.

Re-investing in the business – Good franchises have always had a policy of re-investing in their businesses through product research, systems upgrades, adoption of new technology and other forms of support and marketing. Similarly, they have insisted upon franchisees upgrading their own premises or systems on a regular basis (you’ll find some examples of franchises who have done that in the following pages). As Daniel Cloete of Westpac has commented, franchises that reinvested during the economic downturn now find themselves in a very strong position with increased market share and improved relationships with both customers and franchisees.

Competitive edge – New competitors come and go, markets change, customers’ tastes change. Good franchises can demonstrate a solid track record of managing issues and opportunities well, of learning from past mistakes and maintaining their advantage over competitors.

New technologies – Technology can be a great way to waste time and money. Good franchises adopt new technology early when it can be demonstrated to provide real business advantages for franchisees. Carpet One, for example, introduced a hand-held device for franchisees that combined measuring, quoting and production management functions. It saved time and money, increased accuracy and increased sales opportunities. Columbus Coffee created a program that takes sales information straight from the till to create a management ‘dashboard’ that requires no extra information input. This is hugely valuable for information management and benchmarking (see above).

Management of performance – Measuring and benchmarking franchisee performance is only part of the challenge. A quality franchisor will have procedures in place to monitor and compare all that information, to spot trends and anomalies and to draw issues to the attention of individual franchisees at an early stage. It has to be said that while franchisors can offer good advice, franchisees are not always willing or able to take it. That’s one reason why, even in the best franchises, you will always find a small percentage of under-performing franchisees. It’s also why good franchisors help poor performers to get out of the business.

Auditing of standards – The value of any franchise lies in its reputation for consistency and reliability, whatever product or service it offers. That’s why good franchises have various auditing procedures in place to ensure that every franchisee is meeting the required standards on everything from product quality to service time, image, cleanliness, layout, uniform and many other key measures. This will be managed through personal visits, mystery shoppers, technology (the managing director of McDonald’s has a screen upon his desk showing service times at every drive-thru in New Zealand) and other systems.

Support – Most franchises offer some form of ongoing support to their franchisees at different levels, but the best always go beyond the basic in-store consultations. A few weeks ago, I attended a franchisee conference where the franchisor had brought in an expert in retail planning to talk about how supermarkets plan the layout of products on their shelves. The franchisees operate vending machines that carry maybe only 25-30 different products, but the supermarket experience helped them consider how best to maximise sales and stimulated an incredibly lively debate. That sort of outside contribution is just part of the broader support that quality franchisors offer franchisees. Good support is not just about encouraging operational excellence – it’s about providing encouragement and assistance with sales skills, marketing, profitability, cash-flow management, calculating break-even, cost control, security, personnel management, insurance, staff recruitment and training, goal setting, business planning and so much more. It’s about ongoing education and improvement.

Culture

The final characteristic that distinguishes quality franchises from the rest is the culture: the mood within the franchise, the sharing of common aims and ideals and the level of trust that exists between franchisor and franchisees that each will do their best for the good of all concerned. This is developed in a number of ways:

Aligned expectations – Good franchisors ensure that new franchisees have a clear understanding of their roles and responsibilities, along with realistic expectations of what they can hope to achieve in the franchise. This helps to build trust right from the start.

Communication – Having a variety of communication tools helps keep everyone informed and on target, and helps to prevent misunderstandings. Phone calls, emails, regular meetings, conferences and visits all help. Quality franchises also encourage both formal and informal communication between franchisees, with intranets and online discussion boards proving especially valuable in systems where franchisees may be far apart.

Franchise Advisory Councils – Franchisee consultation and participation in strategic planning is actively welcomed by the best franchises through advisory councils and, in the larger franchises, committees on sub-topics such as marketing. Involving franchisees in decision making not only enables a wider understanding of the issues that the franchise faces;­ it encourages buy-in to the decisions and produces better results.

Dispute management – All franchises experience disputes occasionally. Franchising is about business and personal relationships, and relationships can go wrong. The mark of a quality franchise is not that it doesn’t have disputes, but how it handles those disputes when they arise. Good franchisors respond quickly, listen to issues and seek early agreement on the way forward. If agreement cannot be reached, they seek mediation. However, if there is a problem that affects the franchise as a whole, they take firm and decisive action to protect the brand and the investment of other franchisees.

Confidence in leadership – According to Greg Nathan of the Franchise Relationships Institute, ‘Effective leadership is the single most important factor in the long-term success of a franchise network.’ The market is constantly changing and no franchisor will make the right decision 100 percent of the time. Even within the same system, what works for one franchisee will not work for another. But if the franchise has a leader who can set a clear direction and communicate it to everyone involved, who is seen to listen to franchisees’ concerns and is trusted by them to deal in an honest and straightforward fashion, it will enjoy a culture that makes facing the challenges of business life a much more positive ­– and successful – experience for all concerned.

It’s important that a new franchisee is familiar – and happy – with the culture of the franchise before they finally decide to buy the business. If you are comfortable with your new colleagues and share similar goals, you are far more likely to achieve your ambitions.

It’s About Security

The quality of a franchise is not measured by immediate financial return. If you were to buy a McDonald’s franchise, you might be surprised to learn that you won’t instantly become a millionaire. In fact, you’d probably find the first five years quite tough as you get to grips with running a complex business in a demanding market. But after that, you’d start to earn well, and five years later you might be very happy indeed. Along the way, you could be confident that you were getting great advice, great deals and great systems to help you make the most of your investment. You could also be confident that, however the market changed, someone would be monitoring it for you and thinking up ways to make the most of each new opportunity.

The message, then, is that buying a quality franchise won’t necessarily make you rich quick, but it will provide increased security and reduce the risks involved in starting up your own business. It will also make it easier to raise finance, manage your business and maximise the return on your investment. Above all, it will help you enjoy the experience. That’s why it’s worth looking for a franchise that has all the right ingredients.

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