HOW TO FRANCHISE YOUR BUSINESS
in this article:
Could your business be the next McDonald’s or Fastway Couriers? Win Robinson describes what you need to do to turn your opportunity into action
Franchising has been one of the most dynamic forces in business over the past 50 years. Companies such as McDonald’s, Century 21, Jani King and Thrifty Car Rental have proved that the combination of big business know-how with small business commitment is applicable to almost any business. In fact, today there are franchise networks operating in over 90 different types of industries. Those networks are enjoying a competitive advantage that’s hard to match.
And while the examples above have come out of the US, New Zealand companies have also used franchising to take their brand to the world. Names like Les Mills, Fastway Couriers and New Zealand Natural have become global brands while real estate company Harcourts has used the franchise model to expand first to Australia then on to China, Indonesia, South Africa and beyond. EC Credit Control is probably less well-known as it is not franchised in New Zealand, but the Hawkes Bay company has used the franchise model to become a big name in Australia, the UK and Ireland.
So whether your business is currently small or large, if you want to grow nationally or internationally you should give serious consideration to franchising. A properly-structured and implemented franchise model is often the fastest, most efficient and, in many cases, the most effective way to expand a business.
If you operate a successful business but are lacking the necessary capital to expand by conventional methods, franchising could enable you to leap ahead of your competitors. Alternatively, if you are in a very fragmented market without a clear leader or dominant player, franchising can give you the opportunity to become the dominant player – and get there very quickly. These are just two examples why businesses might choose to use a franchise strategy for expansion. Other reasons include the ability that franchising offers to:
- Achieve more rapid market penetration at a lower capital cost.
- Reach targeted consumers more effectively through increased co-operative advertising and promotion.
- Sell products and services through a dedicated distributor network.
- Obtain operating efficiencies and economies of scale.
- Increase market share and build brand equity.
- Use the power of franchising as a system to obtain and keep more customers and build customer loyalty.
- Replace the need for internal personnel (employees) with motivated owner-operators.
- Reduce wastage and stock loss.
- Improve competitive position.
- Reduce administrative and overhead costs.
- Improve the distribution channel through dedicated franchisees providing better service quality and operating efficiencies.
If one or more of the above appeals to you, read on. No matter what sector your business operates in, it will pay you at least to look at the possibilities of developing a franchise. However, the transformation of an independent business to a franchise network needs to be done carefully and with experienced assistance. Although franchising is simple in concept, a franchise system needs to be very detailed and tailored specifically for each individual business. Here’s a process that outlines the steps you need to follow to ensure that you stand the best possible chance of succeeding. Remember, a good franchise is not just about you – you need to get it right for your franchisees, too.
Having made the decision to explore the franchise option, the first thing to do is to seek out a qualified and reputable franchise consultant and arrange an assessment meeting. Although this meeting is free of charge, it should give you a great deal of useful information. It will also indicate whether your business can be franchised in concept. To confirm whether your business can be franchised, a comprehensive feasibility study will need to be done (see below).
How do you find a reputable consultant? A good place to start is the Directory on this website. But don’t stop there. Go and talk to several consultants before making your decision. Ask to talk to clients they have worked for, not just recently but three to five years ago – a franchise model needs be tested over time to prove whether it works for franchisor and franchisees. Talk to people in the sector, such as specialist franchise bankers, and find out what each consultant’s reputation is. After all, it’s not only your money you’ll be trusting them with – it’s your business.
Having chosen a consultant you want to work with, your next step is to ask them for a detailed proposal of what needs to be done to develop a franchise structure for your business. This should also include a price and timeline for each section of the work. The programme will probably include the following steps:
1. Strategic planning
- Situation analysis and feasibility study
- Implementation plan
2. Legal brief to specialist franchise lawyer
3. Systems refinement and documentation (manuals)
4. Recruitment documentation
5. Franchisor training
This is a vital stage, because without the right format or structure your franchise will not be maximised and may even fail.
Situation analysis and feasibility study
The first step is to gather all the necessary information about the business that is to be franchised, and then the market intelligence to know the conditions in which the franchise must operate.
All this information must then be carefully analysed to develop a feasibility study, which will show whether the business is franchiseable and, if so, what form it should take. Some businesses may not be suited to a full business format franchise model for any one of a number of reasons (including the management style or structure of the would-be franchisor). In this case, a good consultant will have the honesty to say so and the breadth of experience to suggest other options, such as agencies or distributorships.
- The feasibility study will help identify some key structural decisions that need to be made at the start. Some examples are:
- Who should do what? What roles and obligations would be required of the franchisor and the franchisee?
- Which type of franchising should be used? There are many different types of franchise apart from the common ‘one franchisor, many individual franchisees’ model. These include single unit franchises, sequential franchises, area development models, sub-franchising, area representation or a hybrid of any of these.
- How long should the franchise term be? Should there be rights of renewal? If so, by whom?
- Is it necessary or desirable to define territories? If so, how should they be defined? How can growth be provided for? How will customers be allocated and managed?
- What should the franchise support office look like at each stage as the system grows? What will franchisees need?
- What fees should be charged? At what level? How should they be gathered? There are many different ways of calculating and generating revenue to pay for services provided and generate income for the franchisor.
- How far have current operating systems been documented? What manuals are needed and what should they contain?
A workable franchisee model also needs to be developed to ensure that a franchisee can earn an appropriate wage or salary and also obtain a good return on money they invest in purchasing and setting up the franchise outlet. If these criteria cannot be met, franchising is not realistic and an alternative form of distribution must be considered.
If the franchisee model looks promising, the franchisor business should then be modelled to ensure that they too can earn an appropriate income and rate of return on money invested. While a business may well choose to franchise for reasons such a market dominance or competitive advantage, unless the franchise itself is profitable then it will not be a good long-term proposition for the franchisor.
The end result of this sophisticated designing and modelling should be a well-balanced franchise format that can yield both parties good returns for effort and funds invested in a business that can grow in size and value.
Every business is different
The number of questions that need to be asked and the complexity of the decisions that need to be made at this stage explain why it is important that new franchisors should seek outside assistance. While you may know your own business better than anyone else, if you have little or no franchise experience, it is extremely hard to know how to convert that knowledge into a workable structure that will succeed for others. You cannot just look at the structure of another franchise and copy it: each franchise system must be individually designed. Even franchises in the same industry can vary markedly because the objectives of each franchisor may be quite different from those of their competitors.
After satisfactorily completing the design and modelling of the structure, the next stage is the Implementation Plan. This details how the franchise network is going to be established, protected and rolled out. The list of items that must be addressed includes:
- Protection of intellectual property
- Corporate identity and branding
- Supply lines in place and secured
- Comprehensive site profile established
- Territory delineation and protocols determined
- Term and renewals decided
- Content headings for manuals defined
- Benchmarking criteria established
- Initial training programme compiled
- Ongoing training programme planned, including a field visits schedule
- Comprehensive profile of the ideal franchisee
- Recruitment strategy developed and required documentation agreed
- Recruitment advertising programme devised
Once the strategic planning is complete, the next stage is to create a Legal Brief from which a lawyer will create the franchise agreement. It is important to use a specialist franchise lawyer for this because a franchise agreement is not like any other commercial contract and requires an intimate knowledge of the law in a franchise context. Without a proper brief, though, your lawyer will not know what specific elements need to be included in the agreement and how it should be structured.
Don’t make the mistake of putting the cart before the horse and going direct to a lawyer to have a franchise agreement drawn up before you have decided what your franchise structure should be. Also, don’t even think about copying another franchise network’s agreement and adapting it to what you think your franchise should be. Without proper preliminary work, your franchise will not only fail – it will drag your franchisees down with it and the resulting problems will cost you dearly in terms of money, focus and time.
The next stage is to document the franchise system in line with the needs identified during the strategic planning stage. In particular, it involves preparation of the franchisee manual or manual set.
The franchisee manuals document the operating procedures and policies of your franchise system. To a large extent, the potential for success of a franchise system is determined by the quality and comprehensiveness of its manuals. Franchisee manuals:
- Set out procedures, systems and guidelines.
- Define standards to which work must be done.
- Act as a complementary, enforceable and upgradeable part of the legal agreement.
- Prescribe control mechanisms.
- Maintain brand integrity.
- Maintain a tangible record of your intellectual property.
- Act as a training tool for franchisees and the franchisor staff.
- Add value to the business and provide an exit mechanism for both franchisee and franchisor.
Manuals are the cornerstone of a franchise network. A good franchisor will also have a ‘Franchisor Manual’ so that, as their company grows, all staff are properly trained and thus maintain the integrity of the franchisor’s support systems and policies.
Obviously the section headings and content of these manuals will vary considerably from franchise to franchise but they must be comprehensive enough to be a ‘how to run your business’ book. Because of this, manuals must remain the property of the franchisor at all times. They are either loaned or leased to franchisees and must be returned when the franchisee exits the network.
It is worth noting that, in many cases, bankers who are being asked to lend money to a prospective franchisee will want to see the franchisee manuals to assure the bank that the systems are well-documented and sufficiently comprehensive.
The recruitment strategy will have been formulated in the implementation plan but the supporting documentation itself needs to be very carefully planned and written. This will guide prospective franchisees through all the stages of being granted a franchise in a seamless, co-ordinated process.
Before the franchise system can be professionally marketed, you will need to produce material to introduce prospective franchise applicants to the business opportunity. This may range from a brief brochure for use at expo’s to a more detailed outline of the opportunity and its benefits. All such material needs to be attractive, compelling and factual. It must accurately represent your franchise system and the support services provided, and give general information which will assist the applicant in making a decision.
There must also be detailed franchise application documentation to ensure you get all the information you need about a potential franchisee in writing. This may form a basis for formal interviews; there are also a number of professional franchisee profiling tools available to help determine the suitability of applicants.
Once the franchisor has confirmed that the applicant meets the franchisee profile and has checked their standing with referees and credit agencies, etc, the franchisor should make a formal disclosure to the prospective franchisee about the franchisor organisation, its directors, officers, history, etc. This disclosure document has to be very carefully drafted. It contains particulars of the franchisor company, its officers and professional advisors; describes the nature of the franchise system and the company and franchise operations; summarises the salient points of the franchise agreement in plain English; details the status of the intellectual property; provides a statement of financial position of the franchisor; and details other relevant information that could affect a prospect’s decision to purchase the franchise.
Recruitment documentation is therefore a mixture of advertising, marketing, application and vetting material, legal disclosure and supporting forms, certificates and confidentiality agreements. Again, it pays to take the time and advice to get it right.
Perhaps strangely, many companies expect to make the move from operators to franchisors with no specialist training whatsoever. Most business people who develop their business into a franchise haven’t had any experience of managing a franchise system before, so what should you do to learn the necessary skills?
First, you should find out about any relevant training courses covering topics such as franchise management, field visits, establishing franchise advisory councils, establishing KPI’s and so on. Such courses are run regularly in New Zealand by Franchize Consultants and there are also occasional visits by some Australian specialists. The more you learn about the philosophy and operation of a good franchise business, the faster you and your franchisees will attain good results.
Second, you should learn about the unique dynamics of the franchisor/franchisee relationship. A good book to get hold of is Profitable Partnerships by psychologist and franchise specialist Greg Nathan. This will help you (and your staff) to avoid some of the common pitfalls experienced by new franchisors. Subscribe to this magazine and its helpful monthly email newsletter.
Third, you should attend franchise meetings and conferences and get to know people who have ‘been there and done it.’ You’ll be surprised how willing they are to share experiences and learnings. Remember, though, that franchisors often only have real knowledge about one form of franchise and one industry or business sector, and that particular format may not be suitable for your business.
There are a lot of good reasons for franchising your business and a lot of success stories of people who have done it. It is not a simple process to get it right, though, and I would not recommend anyone, even a large company, to try doing it all themselves or in-house because of the specialist knowledge needed. Sadly, in recent years we have found ourselves asked to help with ‘rescue jobs’ more often than we would like in companies which, had they been set up properly in the first place, could have been very successful indeed.
So… take good advice from the right specialists; take trouble to get the correct structure to meet your own particular goals; and take time to get it right. By doing so, you may be able to expand your business not just beyond its own four walls but even beyond these shores.
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