What you need to know before you franchise your business

In conjunction with Westpac and MYOB, I have recently presented a series of ‘How to franchise your business’ seminars in Auckland, Wellington and Christchurch. They were all well-attended, with Kiwi entrepreneurs and business owners clearly keen to follow in the footsteps of New Zealand companies like Columbus Coffee, Green Acres and Harcourts, or to expand internationally, like McDonald’s, InterContinental Hotels and Snap-on Tools.

As I explained at the seminars, franchising or licensing can offer many advantages, including:

1. Access to capital from external owners;
2. More motivated unit managers in the form of franchisees / licensee owners; and
3. Bulk purchasing and group marketing.

There are plenty of other benefits too, such as speed to market, flat management structures and access to local networks. Yet franchising doesn’t suit every business wanting to expand, and a significant number of new franchises never actually get off the ground. That’s why the starting point must always be to determine whether franchising is actually suited to a particular company and its ownership – and, if franchising is appropriate, to establish the many aspects of structure and management needed to help make any particular franchise succeed.

Is my business ready for franchising?

Before embarking on a formal assessment, it is valuable to consider your organisation’s general readiness and suitability for franchising. Should you proceed, wait till the time is right or consider other options? Here are some pointers to consider:

- Existing operations, whether location or van-based, should be profitable and yield attractive returns.

- The pilot business should have operated for a minimum 12-18 months, and having operated multiple locations is advantageous.

- The business model should be unique, hard to replicate by competitors, and feature a  protectable name and operating system.

- The business should have good systems, governance and ethics.

- The owners must have sufficient access to financial and management capital to establish a successful franchising programme and support the changing needs of a maturing network.

For many companies, these requirements set a pretty high hurdle – but if your business can meet these challenges (and a few more), then it’s worth carrying out a proper Franchising Assessment.

Why do I need a structured assessment?

Franchising requires the business owner to master a second market: their franchisees, as well as their end-user customers. This adds a layer of complexity that demands you have a good franchise structure in place before you start. That’s why franchising needs to be considered and evaluated in a highly methodical manner, preferably using specialists who have the experience you don’t. Here are some reasons why:

- Small differences in key areas can make or break potential franchisee and franchisor returns – and therefore impact future business value.

- Many often-prominent brands that appear franchisable are not, either because of cost structures, knowledge requirements or shareholder/management attitudes.

- If it’s to be worth anything, a properly-structured franchising assessment is always considerably more involved than most business owners imagine. It can’t be done in just a few days, no matter what some business mentors might tell you.

A successful Franchising Assessment will not only evaluate the ability of the business to be franchised but will also set out the path for what lies ahead. Should the Franchising Assessment suggest poor outcomes or sub-optimal returns at any stage relative to the owners’ objectives, then you have four options: continuing development; identifying and implementing improvements; looking at other models; or halting franchising plans altogether.

What does it cover?

The Franchising Assessment involves considering many aspects and inputs in a methodical and structured order. Decisions can then be made that help inform an overall financial and operational assessment. The goal of the Franchising Assessment is, of course, to determine whether franchising offers the high probability of solid and sustainable returns for franchisees and franchisor alike.

The Franchising Assessment should culminate in an overall assessment which includes the financial outlook. However, this can only be completed once all the critical aspects have been considered, such as:

The business owners  What is their background, their objectives for franchising and what resources are available to them?

Market and environment  What is the market size, brand positioning, market share, dispersion and dynamics? What relationship do they or their competitors have with suppliers?

Unit-level business model  What current and future operating resources are required? Define structure and configuration at the company-owned/franchisee level.

Type of franchising There are five common forms, but countless further variations are possible and every franchise should apply them in the way that most suits its own individual situation and objectives.

Roles and responsibilities What does the franchisor need to do? What do franchisees need to do? How are these divided?

Franchise Support What level of support is required? How should a support office be staffed?

Types and levels of fees  Again, there are many options including upfront and on-going franchise and marketing fees, fees for services, consideration of supplier rebates and other fee or income-related areas.

All these and other aspects need to be worked on before a realistic financial assessment can be made, focusing first on the franchisee’s outcomes. No franchise system can be viable or sustainable long-term unless a franchisee has the potential to earn reasonable returns. Getting to such a point can require evaluating many different configurations and areas of sensitivity – something only a skilled consultant can achieve.    

Implementation planning

Having established the base structure, the Implementation Planning phase then focuses on the roll-out, with key decisions made on structure, policies and restrictions, and franchise system management. The process still needs to be sequential in that many decisions in this area go on to impact coverage in the Operating Manuals and Systems, and the Franchise Agreement.

Examples of crucial decisions to be made include:

Territories What types of area and exclusivity structuring will best optimise market penetration and the appeal of the franchise?

Terms How long should the total franchise term be, and what renewal options should be offered?

Support How should different support forms such as field visits be phased and delivered?

Products and suppliers What degree and structure of controls is required to optimise product margins and marketing efficiencies?

Local and national marketing How should markets be planned and marketing implemented?

Franchisee profile What is the profile of the ideal franchisee, including necessary/helpful background skills, experience, psychometric, financial, health and family attributes? 

Management information and systems What key performance indicators should be monitored and how? What other management systems should be used?

Operating manuals and systems

Franchisee manuals are the cornerstone of a franchise system. By definition, franchise systems involve transferring knowledge and skill to franchisees so that they can successfully replicate the concept in different markets. This development of local markets needs to be undertaken in alignment with both the brand and the franchise system. Franchisee manuals are critical to achieving these ends, and thus central to both developing and protecting a franchise system. The protection element is important – for that reason, the franchise agreement will require franchisees to adhere to directives within their manuals.

The franchisee manuals should therefore convey a wide array of information, broadly covering:

- How to work within the franchise system and prepare to commence operations;

- How to plan and operate the business on an on-going basis; and

- How to exit the franchise network.

How to operate the business is one of the key aspects of franchise manuals and training systems. Common areas to be covered include business planning, local marketing, sales, human resources, operations, customer service, procurement and stock management, and finance and administration.

From a franchisee perspective, there may be one or many manuals covering a variety of topics. Increasingly manuals and training are delivered online. Ideally, the franchisor should also have a manual that documents processes and standards across several aspects of governing and managing the franchise system, covering areas such as planning, recruitment and selection, induction and training, field visits, marketing and performance management.

To a large extent, the quality and commitment of the franchisor can be judged and the potential for success of a franchise system is determined by the quality and comprehensiveness of the manuals.

Franchise agreement

At the core of the franchise relationship is the franchise agreement or contract: the legal document which expresses the entire arrangement made between the franchisor and the franchisee. Agreements can vary from 20 pages or less to more than 50 pages long.

A franchise agreement describes the rights and obligations of the parties and sets out the basis for the relationship. Franchise agreements also include controls with the objective of protecting the integrity of the franchise system and the entire franchise network.

From a franchise development standpoint, the agreement is a crucial part of the franchising infrastructure and needs to be prepared by a lawyer that specialises in franchising. Importantly, the agreement should only be prepared after the prospective franchisor has undertaken a comprehensive franchising assessment and implementation planning. Only then can the lawyer be suitably briefed to prepare a franchise agreement that a) is sufficiently specific to the needs of the business and owner’s objectives, and b) contains many of the key interrelated franchising decisions (eg. type of franchising, responsibilities, territories, fees etc) with sufficient background.    

Franchising recruitment infrastructure

Once the franchise system has been developed, attention needs to be given to how franchisees will be attracted and selected to meet the ideal franchisee profile. The Franchising Recruitment Infrastructure phase should include the creation of a recruitment plan, franchise recruitment marketing materials, systems for assessing franchisees, and an overall franchise recruitment management system.

The objectives are broadly a) attract and select suitable candidates, b) provide a system to filter unsuitable candidates early in the process, and c) complete recruitment whilst minimising the potential for any adverse downstream legal liability.

Franchisor capability development 

Franchise-specific training is important to ensure key Franchise Support Office executives and personnel understand franchising and franchise system management. There are many areas that the support office team needs to become conversant and skilled in in order to maximise prospects for success, both for franchisor and franchisee businesses. Examples include:

- Learning the fundamentals of managing a franchise system;

- Providing effective field visits;

- How to improve franchisee performance.

Overall, the new support office team needs to be led with a focus on increasing franchisee profit. Such a focus requires a lot of commitment, but also an infrastructure capable of supporting that objective.

Good franchise system development drives franchisor and franchisee value

Franchisors, franchisees, and advisors need to recognise the important role that good franchise system development plays in the ability to create and sustain franchisor and franchisee business value.

Franchising is simple in concept, but complex in its application. At a broad level, there are three key success factors: establish the right structure, select the right franchisees, and provide the right franchising leadership and support.

The type of assessment and developments outlined above are critical to ensure franchising is indeed appropriate for the business, and to ensure the right structure and infrastructure are in place to govern and support the franchise network.

Get it wrong, and you could waste a lot of time and money – both your own and other people’s. The unfortunate fact is that many franchise companies are failing to achieve their potential at a franchisor and franchisee level because they did not invest in or take the time to undertake the types of assessment and planning outlined above.

Get the right elements in the right order and franchising can be an excellent way to expand your business with a long-term strategy that creates sustainable businesses for both franchisor and franchisees. 

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