More and more businesses are quite rightly considering the opportunities and benefits offered by franchising when planning their future development. Indeed, any business which operates through branches should at least look at franchising as one of the potential strategies for growth.
By Dugan Aylen, Director and Co-Owner at The Franchising Centre, Europe’s largest franchise consultancy.
However, the process of turning a business into a franchise begins long before the first advertisements are placed for potential franchisees. The people who run the business, whether they are main board directors of a Plc, or are virtually a one-man band, must first gain a full understanding of franchising, including its advantages and disadvantages, and its likely effect on their existing operation.
Only when fully armed with all the relevant information should a business make the decision to become a franchisor. This information includes hard elements, such as the financial aspects, and the softer, personal elements of the unique franchisor/franchisee relationship.
It is important to look very closely at the more personal elements because there is much more to building a successful franchise than the cold legal agreement, operations manuals and financial projections. Whilst advice on these matters from properly qualified professionals is, of course, essential it must be considered in tandem with issues concerning human resources and personal development. Make no mistake, if a business becomes a franchisor, personal development is the name of the game.
Whatever it is you do now, whether you are a restauranteur, printer, carpet cleaner, car tuner, fashion retailer, or deliverer of parcels, your business will change when you become a franchisor. It will then be all about recruiting, training, monitoring and motivating people (franchisees) who want to run a business under your name, using your system and operated to your standards.
They will expect leadership and direction; help when they want to expand, or when they meet the inevitable problems; on-going training and marketing support; and the product or service development to keep their business at the forefront of its marketplace. They will also expect you to create and maintain standards, both in your own business and throughout the network.
As this is what you will have promised them when they were considering joining you as a franchisee, you had better deliver it. Whatever happened, you may ask, to running a restaurant, printing, cleaning carpets, tuning cars, and so on?
If you are ready for this fundamental change, let us look at how we decide whether a business is franchiseable. We will examine firstly the mechanics and then the cultural implications.
Just about any type of business that operates as a branch network has already been franchised somewhere in the world.
In the U.S. for example, you can be born in a franchised maternity hospital, buy just about every product and service you will need in your lifetime from franchised outlets, then be seen off by a franchised undertaker, and finally buried in a franchised cemetery. However, not every business that has tried to franchise has been successful, and this is due to a number of reasons. To create a successful franchised network certain key elements need to be present. These are:-
- A business with a clearly defined image and system of operation, both at branch and head office levels
- A business with a proven and successful format suitable for franchising and with a product or service that has stood, or will stand, the test of time
- A business that is easily duplicated and easily learned
- A business that generates enough profits to support both the franchisor and the network of franchisees
- A business which has, or can adapt to, a culture of mutual respect and support, and in which it is clear who is responsible for what, and how often, and how well, they will perform their obligations.
Image and system
The clearly defined image and system are what we call the intellectual property. This includes the trade name, the method of operation and the way in which the various elements of the business come together to make up the franchise formula. None of the elements of the package need to be individually secret. What matters is the way that the franchisor has combined them to create a successful business system.
Naturally, the trade mark or name has to be owned by the franchisor as he is licensing others to use it, but do not worry if your name is not yet well known. That will not stop franchisees from joining you. After all, even McDonald’s and Marks & Spencer started with only a single outlet.
All the elements of the package from the design and layout of the premises, through marketing campaigns, to accounting and administration will be detailed in the franchise manual, and it is the system in the manual that the franchisee agrees to operate.
Pilot operations prove that the concept works and it is the evidence of their success that will convince your first franchisees that they should choose your franchise. Even if you have run company-owned branches for years, you must be aware that things will change when you franchise and you must be prepared to run pilot units at arm’s length.
This is just as important if you currently have company-owned outlets which you are planning to convert to franchises and even if the franchisee is going to be the existing branch manager. Something different will happen when it becomes a franchise, so it is wise to find out what that is before you take the plunge.
Pilot units should, of course, mirror the proposed franchised outlet as far as possible in terms of size, location, catchment area, population profile, staffing and so on. It is no use doing brilliant business from a site in London’s Leicester Square and then expecting a franchisee to be equally as successful in the high street in Leicester. Ideally, you should pilot the concept in two or three places for at least one complete trading cycle.
Pilot operations help to prove that what you thought on paper will work in practice. If it does not, then you still have the chance to adapt it before offering it to franchisees. Pilot units also give you the opportunity to write the manual from practical experience rather than theory.
Depending on how many franchisees you need to properly service your potential market, you will not want to have too much difficulty finding premises, or people to join you as franchisees.
If there are a limited number of sites suitable for your business, or it needs particularly unusual conditions (say a constant supply of fresh spring water) then it will not be easy to duplicate in sufficient numbers to support a network. Similarly, if it calls for special skills which few people possess, say something particularly artistic or creative then franchisees will not be able to learn how to do it. Every rule has its exceptions, but generally speaking the easier it is to duplicate and learn the business, the easier it will be to franchise it.
The whole area of profits and fees is what we call structuring the franchise, and it is one in which you will need professional advice. Do not just look at a similar business and simply decided to charge the same franchise fees.
Whatever percentage they charge for their management services fee and advertising levy, or the size of the mark-up they charge on supplies, will probably not be appropriate for you, and it may not even be right for them either.
A franchising feasibility study has to consider many things. Having sorted out whether the business is proven, and easily duplicated and easily learned, it is then necessary to look at the structure. How big is the market? How much business can the proposed size of outlet handle? Consequently, how many franchisees will you need?
Having decided the number, what support staff and structure will you need to recruit and support a network of that size? Can the business make enough to satisfy the franchisee, and give the franchisor a profit?
These and many other considerations are best discussed with someone who has franchising experience as it is easy to overlook simple items when you have not had experience as a franchisor.
Naturally, it is sensible to work out the franchisee’s finances first. After all, if it does not work for the franchisee, it will never work for the franchisor. If things look good for the franchisee, then go on to work out your finances as a franchisor. Ideally, you should prepare a three-year profit-and-loss and cash-flow forecasts for both your franchisees and yourself. These can later be used as the basis for business plans, both for raising finance and the on-going monitoring of the business.
It is vital to get the structure right. This may seem obvious, but if one or other of the parties sees the other making all the money or, indeed, if neither of them is making enough, the relationship will come to an end.
The business, therefore, has to generate enough profit for the franchisee to make a decent living and pay back whatever he borrowed to start the business, and also make some more on top to re-invest in future improvements. Finally, the business must contribute enough to the franchisor for him to do the same, and in addition provide on-going support to all his franchisees.
So if your business has a low margin it is likely to be difficult to franchise successfully. It also really goes without saying that if your existing business is not making sufficient profits, franchising will not offer a way out of the problem. In such a situation, you must first put right whatever is wrong and then use franchising to build on your new success.
None of the above will work if you do not get the relationship right and build a business based upon mutual trust, respect and support. To support franchisees, it is essential that franchisors and their support staff understand the unique relationship between the franchisor and franchisee.
Like all relationships, both parties in franchising have different motivations for becoming involved, and there are advantages and disadvantages on both sides.
For the franchisor, the benefits have mostly to do with using other people’s money to expand the network quicker than would otherwise be possible, whilst having less involvement in the day-to-hassle of running branches. The disadvantages are having to accept that the bulk of the profits from the branches will go to the franchisees, and learning how to deal effectively with people who are using your name and system, but who own their own businesses.
Some research says that it is a relationship which is becoming increasingly attractive to many businesses as proved by the fact that more franchisors come to the market every year. However, other research says that as many as 90% of franchisors drop out of franchising within the first 10 years.
There may be any number of reasons for firms dropping out, and they are not all due to failure or disappointment with the system, but it is likely that many of those who did withdraw did so because they had failed to understand the principles of good franchising practice before they started and were subsequently unable, or unwilling, to get to grips with the all-important question of the franchisor/ franchisee relationship.
As in many relationships, the major cause of failure is often due to the failure to communicate. It is the franchisor’s job to communicate what the network is trying to achieve; how it will be done; who is responsible for what; and by when it should be done. He should set an example by his own actions, and motivate and encourage franchisees to play their part in making the system successful. Not many networks fail because of the franchisees.
Assuming the franchisor has properly piloted and proven his system, he then needs to understand the motivation of franchisees for choosing this particular form of self-employment. Research tells us that at the top of the list comes reduced risk, marketing and training support, the fulfilment of a long-term desire to have their own business, and trading under an established name. At fifth place is the level of prospective income.
If you have recruited your franchisees, or sold your franchise, on the strength of the support you will provide, that support had better be there and it had better be good.
The first step towards mutual understanding is for each party to accept their individual and joint responsibilities.
Broadly speaking, the franchisor is responsible for marketing and developing the network and its products or services; assisting the franchisee to be profitable; and creating and maintaining standards. The franchisee is responsible for upholding the good name of the franchisor; operating in accordance with the agreement and manual; and maintaining and improving standards. Jointly, the responsibility of both parties is to build a network with a defined image and standards, under a recognised brand name.
Franchisees must be made to understand from the outset that they are being allowed the opportunity to operate a proven business system, using an established name. They are not opening a business in which they are free to do their own thing. The position of franchisees is, in fact, unique in the field of commercial relationships.
Franchisees are not employees, although they work to instructions and will hopefully have been recruited with as much, if not more, care. They are not customers, although they will have been, and continue to be, sold products or services. They are not, whatever the PR message may say, partners. Not legally, anyway.
They are, in fact, people who have trusted the promises made by the franchisor and his staff to the extent that they are prepared to devote probably their entire financial assets and most of their working life to the pursuit of the promised opportunity. In return, as we have seen, they expect to receive the support that they have been promised in terms of marketing assistance, training, business planning, product development, and general business advice.
The franchisor’s support staff must realise that their role is to deliver what the franchise sales staff have promised. The recruiters for their part must be careful not to promise more than the franchisor is capable of delivering.
Becoming a franchisor
Franchising is about supporting franchisees in order that they can operate a proven system, and that support must be available to the very first franchisee who joins the network. It may not then be necessary to add to the initial support staff until there are 15 – 20 franchisees, but they all need to be there at the start. If the early franchisees are not supported, they will not succeed and it will then become increasingly difficult to sign up others.
Similarly, the operations manual and legal agreement must also be in place at the start, as must the systems for monitoring and managing the performance of franchisees. Franchising, therefore, requires considerable up-front investment by the franchisor before there is any income stream.
Agreement and manual
The agreement and manual are the documents which lay down the ground rules which govern the relationship. They are linked together through clauses in the agreement, and both need to be professionally prepared by recognised franchising experts.
There is a substantial cost to be met in preparing these documents, but over the life of the network this will appear negligible, and will usually be amortised from the fees of the first few franchisees. Both documents must be properly prepared. Cutting costs here will create problems down the line which will prove far more expensive than taking proper advice at the start.
Having agreed that franchising has its particular skills, the staff involved in the franchise operation should either have, or quickly acquire, those skills. Basically there are three choices: either recruit experienced franchise managers from outside; have your own staff trained in franchise management; or work with an effective outsourced specialised franchise consultancy like The Franchising Centre.
Prospective franchisees may soon be asking for evidence of such qualifications being held by the staff of the franchisor they are planning to join, and perhaps choosing to go with a different network which has more evidence of such a professional approach.
Whether there is just one manager doing it all, or a separate one for each of the support functions, personnel need to be proficient at recruiting, training, monitoring and motivating franchisees, with all the technology, knowledge and inter-personal skills called for by such responsibilities.
A franchisor has two marketing responsibilities – one for continuing to market the product or service; the other for marketing the business opportunity and recruiting franchisees. These are not the same, and require different approaches. Presumably, if he has established the business, the franchisor already knows how to market his product or service. What the franchisor may struggle with is developing a marketing strategy that their franchisees can follow, and is effective in a short period of time.
The feasibility study and franchise plan will have established how many franchisees are needed and where they should be located. The manual will make it clear what is required of the franchisee in terms of duties, responsibilities, knowledge, skills and attitude.
The franchise marketing plan brings the two together, and the franchisor needs to choose people, or perhaps companies, who fit a pre-determined profile and have the ability to succeed. It usually proves disastrous to simply appoint anyone who has the money to buy the franchise and to locate them wherever there is a blank space on the map.
There are any number of ways of reaching potential franchisees, but no way that is right for every franchisor. Having established a clear idea of what a prospective franchisee looks like, it becomes easier to decide where to look for them.
Professional advice will help to ensure that the message is properly targeted, leads are handled effectively, and procedures are implemented to accept or reject applicants. The skills required by franchisee recruitment personnel include marketing, selling, business awareness, negotiation, and legal and financial understanding.
Subject to the usual lending criteria, all the banks are keen to lend to franchisees of a properly-structured and proven franchise. Most franchisors present their opportunity to the franchise sections of the banks to clear the way for later applications by their prospects.
Naturally, the franchisee needs his own business plan, based on the experiences of other franchisees in the system and franchisors, or their approved third parties, can help with the preparation of these plans.
Agreeing business plans (both action plans and financial projections) with franchisees allows more sensible discussion of progress once the outlet is up and running, and most franchisors will insist on franchisees using a particular system of accounting. This can even be overseen by a professional adviser who monitors the performance of the entire network, rather than leaving it to in-house staff.
Once agreement to go ahead has been reached, the franchisor will commence his set-up and support procedure. This will vary according to the type of business and may include help with locating and acquiring a suitable site; converting and equipping premises or vehicles; preparing a marketing launch package; and providing initial stock.
Whatever the business, it will include training for the franchisee, and probably his staff, in every aspect of the business. This may be carried out either in classroom style, or hands-on at an existing unit, or in a mixture of the two.
Training is the very essence of franchising. It is how the franchisor passes on the proven format which he has developed and in which the franchisee has decided to invest. Having successfully completed initial training, franchisees should be able, or indeed required, to attend further training on a continuous basis.
Franchisees expect and are entitled to continuing support in operating their business, whether this be concerned with new products or systems of operation, training, assistance with business development, encouragement during times of difficulty, and help in finding a purchaser for their business if they want to move on.
The franchisor must learn how to both motivate and monitor franchises – motivate to encourage them to do better, monitor them to ensure that they are maintaining standards, both for their own good and that of the network as a whole. There are numerous techniques to achieve these aims, and professional advisers can explain how to implement them. There are also outsourced services to help franchisors manage this aspect of their business.
A business can probably be franchised successfully if it is proven and successful in an established format; capable of being easily duplicated and easily learned; likely to be profitable for both franchisor and franchisees; and the management is prepared to accept considerable operational and cultural changes.
Franchising in the UK has come of age, and there is now a wealth of professional guidance available to prospective franchisors. To not take advantage of such advice may turn out to be not just remiss, but fatal to the businesses of the franchisor and his franchisees.
If it is operated properly, franchising is a superb way of building a business in which everybody wins – the franchisor, the franchisees, and through the franchisees’ personal commitment to the success of their local outlets, the customers.