Franchising is a successful way of growing a business. As proven by many household names in NZ. Learn how to Franchise a Business… We are certain you will know Columbus Coffee, Green Acres, NZ Post and Harcourts. Globally the well known Franchise systems are McDonald’s, Coca-Cola, InterContinental Hotels and Snap-on Tools.
All these nationwide Franchise companies are looking to grow a valuable business by harnessing the many advantages franchising or licensing can bring such as:
- Access to capital from external owners.
- More motivated unit managers in the form of franchisees / licensee owners.
- Bulk purchasing and group marketing – among many other possibilities.
In New Zealand alone, there are now more than 400 different franchise brands and 20,000 franchisees across a range of different industries.
Yet franchising is not suited to every business desirous of expansion. Indeed, not all are successful. Therefore, it is very important to determine whether franchising is suited to a particular company and their ownership. And, in turn, if franchising is appropriate, it is important to establish the many aspects of structure and management that are needed to help make franchising successful. Clearly, there are many important aspects to think about when considering your own business.
Is my business ready for franchising?
Prior to embarking on a formal and structured Franchising Assessment (see below), it is valuable to consider your organisation’s general readiness and suitability to franchising. Here there are many factors you can consider that might suggest you wait, proceed or consider other business options. Useful franchising readiness examples to consider include:
- 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 multiple locations are advantageous.
- The business model should be unique, hard to replicate (by competitors, not the business) and backed by protectable name and ways of doing things.
- Having sufficient access to financial and management capital to establish a successful franchising programme and support the changing needs of a maturing franchise network.
While there are many more factors that demonstrate suitability (like your concept being attractiveness, winning business/customer awards, having good systems, governance and ethics etc), those above provide a high hurdle for many desiring to franchise.
Why I need a structured assessment
Franchising needs to be considered and evaluated in a highly methodical manner and using specialists. This is for many reasons; not least because:
- Numerous areas and options need to be addressed.
- Small differences in key areas can make or break potential franchisee and franchisor returns [and therefore] future business value.
- Many often-prominent business that appear franchisable are not.
- A structured franchising assessment is always more considerably involved than the business owners imagined.
Importantly also, franchising requires the business owner to master a second market, which is the market for franchisees, in addition to the principal market for end-user customers. Thus, franchising adds a layer of complexity that demands a good franchising structuring and management.
The process of building a valuable franchising business
A solid process, encompassing a wider methodology and considerable specialised knowledge, is needed to approach franchising your business. Following a consideration of franchising readiness, a much more structured Franchising Assessment (more below) is needed. A successful Franchising Assessment will suggest the path forward, be that a) continuing developments, b) working on required changes / improvements, or c) addressing other options or doing nothing.
There are then several business areas that need to be addressed to prepare the business.
Such as franchising infrastructure for the owners and managers, to successfully implement a franchising programme. None of these further areas need to be addressed should the Franchising Assessment suggest poor franchising outcomes or suboptimal returns relative to the owner objectives.
The Franchising Assessment.
The Franchising Assessment is needed to consider your business’ potential franchising and, in the process, make many important decisions needed going forward.
The Franchising Assessment involves considering many aspects and inputs in a methodical and structured order. Many decisions are then made that help inform an overall financial and operational assessment. The goal of the Franchising Assessment, of course, is for franchising to look highly appropriate, and there to be the prospect of solid and sustainable returns for franchisees and franchisor alike.
The Franchising Assessment needs to work in a methodical way through many areas, making decisions along the way, such as, the:
- Owners, including their background, objectives for franchising and available resources.
- Market and environment, including customer segmentation, market size, dispersion & dynamics, suppliers etc.
- Unit-level business model, encompassing current and future operating resources, structure and configuration at the company-owned / franchisee level.
- Type of franchising, for which there are five prototypical forms, but countless further variations possible.
- Franchisee and franchisor roles and responsibilities.
- Configuration and level of franchise support required, and resultant need for Franchise Support Office staffing.
- Types and levels of fees, including upfront and on-going franchise and marketing fees, fees for services, consideration of rebates, and other fee or income-related areas.
Many other areas and aspects all need to be worked in before a financial assessment can be made. The financial assessment then, in turn, needs to consider all the above aspects. The financial assessment should always also focus on the franchisee first – as no franchise system can be viable or sustainable long-term unless a franchisee has the potential to earn reasonable returns. Such an assessment at a franchisee level can require evaluating many different configurations and areas of sensitivity, and under the proposed structure – something only a skilled consultant can achieve.
Franchise a Business Implementation Planning
The Franchising Assessment establishes the base structure (e.g., business model, type of franchising, roles, fees etc) including the feasibility and attractiveness of franchising. The Implementation Planning phase then focuses on the role out, including further key decisions 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.
Here there are a multitude of areas where decisions need to be made. Select examples of crucial areas include the organisation of:
- Territories, including decisions on types of area exclusivity structuring to optimise market penetration and franchise attractiveness
- Franchise term, including decisions on total franchise term length and renewal options
- Franchisee support, including how different support forms, like field visits, are to be phased and delivered
- Products and suppliers, including the degree and structure of controls to optimise product margins and marketing efficiencies
- Local and national marketing, including how markets are planned, and marketing implemented
- The ideal franchisee profile, including necessary/helpful background skills, experience, psychometric, financial and health and family attributes
- Management information and systems, including what key performance indicators should be monitored and how
Operating Manuals and Systems
Franchisee manuals are the cornerstone of a franchise system and achieve multiple purposes. By definition, franchise systems involve transferring knowledge and skill to franchisees so that they, in turn, can successfully replicate the concept in different markets. It follows, that such franchisee development of local markets needs to also 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 for the benefit of the franchisor and all franchisee investments. The protection element is important, and for that reason the Franchise Agreement will require franchisees to adhere to directives within their Manuals.
The franchisee manuals therefore should 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.
- How to exit the franchise network.
How to operate the business is one of the key aspects of franchise manuals and, indeed, training systems. Common areas requiring coverage include business planning, local marketing, sales, human resources, operations, customer service, procurement and stock management, and finance and administration. 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.
Other manuals are also advisable. From a franchisee perspective, there may be one or a multitude of manuals, and increasingly manuals and training systems are delivered online. A franchisor can and should also ideally have a manual that documents process and standards across several aspects of governing and managing a franchise system, covering areas such as planning, recruitment and selection, induction and training, field visits, marketing and performance management.
The Franchise Agreement is at the core of the Franchise System and franchise relationship. The Franchise Agreement or contract is the legal document which expresses the entire arrangement made between the franchisor and the franchisee. Agreements can vary markedly in length from 20 pages or less, to more than 50 pages. 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 Franchise Agreement is a crucial part of the franchising infrastructure – and it needs to be prepared by a lawyer that specialises in franchising. Importantly also, the Franchise Agreement should only be prepared once the prospective franchisor has undertaken a comprehensive franchising assessment, and further planning as per the mentioned Implementation Plan. Only then can the lawyer specialising franchising 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 (e.g., type of franchising, responsibilities, territories, fees etc) with sufficient grounding to know they are, in fact, optimal for the business.
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, accordingly, should help prepare for finding franchisees through the creation of a recruitment plan, franchise recruitment marketing materials, systems for assessing franchisees, and an overall franchise recruitment management system. The objectives when creating such a recruitment infrastructure are broadly to a) help 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 for the support office team to become conversant and skilled in in order to maximise their prospects for success, for their own and franchisee businesses. Examples include:
- Learning the fundamentals of managing a franchise system.
- Providing effective field visits.
- How to improve franchisee performance.
But overall, the new support office team needs to be lead with a supporting focus on increasing franchisee profit. Such a focus requires a lot of commitment, but also an infrastructure, as outlined above, capable of supporting that objective.
Good Franchise System Development Drives Franchisor & Franchisee Value
Franchisors, franchisees, and advisors need to recognise the important role good franchise system development plays in the ability to create and sustain franchisor and franchisee business value. The type of assessment and developments outlined above are critical to ensure franchising is indeed appropriate for the business, and, to ensure critical franchising decisions, structure and infrastructure are in place to govern and support the franchise network.
People need to recognise that some companies have franchised that should not, and there are well-known brands that have not franchised because a comprehensive assessment has indicated it inappropriate. The unfortunate fact is that there very many franchise companies that are failing to achieve their potential, at a franchisor and franchisee level, largely because they did not invest in or take the time to undertake the types of assessment and planning outlined above.
Franchising is simple in concept, but complex in its application. Notwithstanding, 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. Good franchise system development is at the core of each of these, and the long-term sustainability of both franchisor and franchisee businesses.
Author Dr Callum Floyd Managing Director
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