Developing a Franchise System

by Philip Morrison

last updated 31/07/2019

Philip Morrison is Managing Partner of Franchise Accountants, a specialist accounting and consulting firm based in Auckland.

Franchising your own business

by Philip Morrison

last updated 31/07/2019

Philip Morrison is Managing Partner of Franchise Accountants, a specialist accounting and consulting firm based in Auckland.

Philip Morrison provides an introduction to what you need to think about when franchising a business

Green Acres, the company that became New Zealand’s largest home services franchise, started off with one man mowing lawns in Auckland. From a single outlet in Ponsonby, BurgerFuel has become a publicly-listed company with outlets throughout the Middle East. Fastway grew from a man with two vans in Hawkes Bay to a multi-national courier and post company. Franchising made it all possible – but could you follow in their footsteps and franchise your own business?

Franchised business networks touch many different industries these days from retail and food to home services and business-to-business. Some are owner/operator businesses while others occupy vast premises with hundreds of staff and thousands of stock lines. The 2017 Franchising New Zealand survey by Massey University suggests that there are 631 franchise systems in New Zealand with about 37,000 franchisees employing almost 125,000 people and a turnover equivalent to 11 percent of the nation’s GDP.

It should therefore come as no surprise to learn that franchising can be likened to Joseph’s technicolour dream coat, with a vast range of inputs intermingled to produce the overall effect. What is appropriate for one industry is not appropriate for another; what works for one business may not work for another. That means it’s important to take professional advice to create a workable and sustainable business model. Over the years, we have observed many DIY-built franchise systems. These are often doomed to failure before they start, or underperform and typically give franchising a bad name.

Before you take money from someone else for a franchise, then, you need to invest some of your own money into developing a robust and sustainable franchise format. Use a consultant who has standing in the franchise sector, and beware – not all consultants are created equal. The first question to ask would be: ‘Are they a member of the Franchise Association of New Zealand?’

Where Do I Begin?

As the flowchart (below) suggests, the first place to start is with the business concept itself. Do you have a successful business already? You’d be surprised how many people with an ailing business think of franchising it as a way out of their financial difficulties rather than as a way to get themselves (and others) deeper in the mire. Or are you considering bringing in an overseas-based franchise business model into New Zealand?The Franchising Process - flowchart copyright Franchise Accountants Ltd

Pilot Operation

Either way, you’ll need a workable concept and a proper business plan before you develop a pilot operation. A pilot operation is essential to test systems, marketing, supply chains, service, pricing, margins, seasonality and all sorts of other essential elements. Part of establishing a pilot operation is also to try what works and find out what doesn’t, and to document the systems as they are developed. Sounds like hard work? Well, this is what future franchisees will be expecting to pay for.

Feasibility Assessment

Franchising is not a golden bullet to success in business. It’s one type of business model or configuration that a business can operate through but it’s not the only one; in some cases, a franchise business model may not be suitable. So is your business franchiseable? To find this out, you’ll need to get your advisor to undertake a franchise feasibility assessment. This is a structured approach that covers all the key components which determine how a workable franchise would be configured.

Just as going to war under-prepared can have fatal consequences, so going to market without adequate preparation can kill your business. The purpose of the feasibility

assessment is to build a franchise model that is scalable, replicable, profitable, viable and sustainable for the stakeholders – franchisor and franchisees alike. This creates the platform from which you can develop your franchise system.

Franchise Process Preparation

Once the feasibility assessment has been completed, an informed decision can be made whether to proceed. If the decision is yes, it may then be necessary to re-model aspects of the pilot business so it can be configured into a franchiseable business, and then to test and measure the changes to ensure they achieve the desired results. All this takes time, which is why franchising a business is not a quick process – if you do it properly.

Franchise Documentation

Once the business model has been properly developed and proven through the pilot operation, the next stage is to prepare the various documents that you and your franchisees will need to establish, promote and run successful clones of your pilot operation in new locations. All of this documentation should, where appropriate, be compliant with the Code of Practice and Code of Ethics of the Franchise Association right from the start. There is no franchise-specific legislation in New Zealand, but compliance with the Codes and Association membership helps reassure potential franchisees.

Franchise documentation breaks down into a number of different areas.

Franchise manuals

These document the systems and processes by which your franchise operates. A manual set may include franchisee and franchisor manuals, operating manuals, training manuals, health & safety manuals and more. They form an integral part of the franchise system and a major part of the Intellectual Property (IP) which the franchisee is going to use. As such, they are commonly referenced in your franchise agreement and must be returned to you at the termination of each franchise agreement.

Corporate identity & marketing

A franchise needs a brand that will encapsulate the business, and marketing systems that will attract customers for franchisees. These must not only be properly-developed and proven in the pilot outlet, but also properly protected. The brand, logos, website addresses in all their variations and other items also form a part of the new franchisor’s IP and need to be registered and secured prior to franchising.

Franchisees must have access to proper marketing material and clear guidelines on brand values and usage. Failure to do so may lead to your losing control of your brand.

Franchise recruitment

Building a franchise system is one thing; recruiting franchisees is another. You will need to attract, inform, evaluate and appoint suitable people as franchisees. This will require advertising in a variety of media, the creation of information packs and, for serious prospects, the preparation of a full and detailed Disclosure Document. Documents may include figures showing the performance of the pilot operation or other outlets. You must consult a franchise-experienced accountant and a lawyer in the preparation of such material.

Franchise agreement

This is the contract which governs the ongoing relationship between the franchisor and franchisee and is the basis of the whole franchise. It’s therefore vital that it is properly developed for your specific business and not just a ‘cut-and-paste’ job from other agreements. Your consultant should develop a proper brief for your lawyer which will set out the main elements of the franchise including fees, territories, causes of termination, etc.

Information management systems

These days, documentation isn’t just about documents –­ it covers digital and online systems too. One of the advantages of a franchise should be that it allows franchisees to benchmark their performance against others and franchisors to spot areas where the right support or training can maximise potential. It’s easier to build in the right systems to achieve this from the start, rather than trying to retro-fit at a later stage. Take your consultant’s advice regarding data-gathering and data-sharing POS systems, on-line accounting with common coding, and suitable communications tools.

Ongoing Franchise Management

The outcome of this documentation process is you will have a ‘business in a box’ to present to a new franchisee, with all the documentation, training and systems in place for them to develop a successful business under the franchise brand. This is part of the substance for which new franchisees will pay an upfront franchise fee.

However, as a new franchisor you will still have L-plates on for some time as your franchise network grows and you learn the diverse skills of leadership, support and compliance management that all franchises need. You will also need a way of bringing together all the information and structures of the business. A subscription-based internet software solution such as Franchise Infinity can provide the structure and disciplines you require. Your consultant, accountant and lawyer will form your professional support team, and it’s worth developing a relationship with a specialist franchise banker, too. Develop a peer group of other franchisors by going to franchise conferences, seminars and networking events – you’ll find that they’ll already have experienced the opportunities and issues you face, and will often share their experiences freely.

Your Own Personal Everest

Sir Edmund Hillary didn’t climb Mt Everest on his own – he teamed up with the experienced Tenzing Norgay for the final assault. Similarly, scaling the challenges of building a franchise requires working with advisors who have navigated the path before. Engaging franchise-experienced specialists with proven track records will greatly improve your chances of launching your franchise business successfully.

As this brief guide demonstrates, there’s a lot to learn about franchising your business. It requires commitment and the investment of considerable time and capital – and there are no short-cuts. The DIY route may seem cheaper but it is almost certain to cost you more in the long run, and the distractions may kill your existing business as well as your dreams.

Build on solid foundations with the right architects and franchising has the potential to leverage your business from one to many. It can be a great journey, building a national brand with international potential and a network that supports many families and creates employment. There will always be challenges but there will also be rewards. Do it right and enjoy the franchising journey.

This article appeared in full in Franchise New Zealand magazine (Year 26 Issue 4). Read the entire article in the digital magazine or, if you live in New Zealand please send for your free print copy.

Philip Morrison is Managing Partner of Franchise Accountants, a specialist accounting and consulting firm based in Auckland.

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