What is franchising?

Clearly understanding franchising and what being a franchisor or a franchisee means is essential to the success of the business.

A strong and effective business relationship between franchisor and franchisee is critical to the success of both businesses and the franchise system overall.

Here we are talking about “business format franchising” which can be defined simply as a relationship where one party, the franchisor, allows another party, the franchisee, to operate copies or clones of a proven business model in return for initial and ongoing fees’. The franchisee will generally be given an exclusive area or territory for a defined period of time. We are not talking about film franchises, rail franchises or any other variations.

In effect the franchisee is allowed by the franchisor to operate a branch of its business using the proven methods, processes, systems and brand. This gives the franchisee a head start in setting up their business because the sales and administration processes are already in place and, in many cases, the brand will already be well known. The franchisee will be expected to operate the business in accordance with those proven systems and not do anything to adversely affect the brand.

In return the franchisee will be required to pay both the initial and ongoing fees. The ongoing fees are usually determined as a percentage of the franchisee’s turnover and may vary from just a small percentage, say 4 – 5% up to, and sometimes in excess of 20%, dependent upon the level of support provided by the franchisor. These higher levels often apply where the franchisor provides a number of additional services, for example invoicing and credit control and in some cases finding new customers and sales opportunities for the franchisee.

One of the key attributes of franchising is that the franchisee will continue to receive advice, training, and support from the franchisor throughout the term of the franchise thus improving their chances of operating a successful business. Whilst no franchisor can ever guarantee that their franchisees will be successful it is certainly true to say that they are likely to be more successful than if they had started a new business on their own.

Franchising is a term that some business owners regard with anticipation and excitement and others with fear and trepidation. The truth is that franchising is one of the most significant, stable, and sustainable growth strategies that a business can implement.

Almost any business that can operate a branch network can be franchised. However as with any business venture there is risk involved and it must be done right. It is well worth spending the time, money and effort in the early stages as this will pay dividends in the long term. Better to get it right first time and seek advice from a reputable franchise consultant with a wealth of experience, someone who has been there and done it.

What is a Franchisor?

The company owning and controlling the rights to grant franchises to potential franchisees.

Whatever your business does now, courier service, hairdressing, coffee shop, cleaning, is somewhat irrelevant when you become a franchisor. Most of the elements needed to run any successful business are the same, accounts, admin, finance, operations, sales and marketing staff, and customer service but the job of the franchisor is to recruit, train, monitor, support and motivate people. It becomes a different business.

If you are considering franchising your business, ask yourself the following five questions.

Is your business successful? – Has it got a good reputation both in the business and geographical sectors that you are operating in.

Can your business be replicated? – Could your business operate successfully in a different region with someone else running the day to day operation.

Is your business profitable? –First off, franchising is not a solution to help a bad business survive. If your business is struggling to make a profit or experiencing cash flow problems it is folly to franchise it.

What are your profit margins? – Does your business generate sufficient profit margin to enable a franchisee to make a substantial living, and at the same time provide you with enough on-going revenue to make it worthwhile franchising your business.

Are you prepared to give up a certain amount of control over the business that you have passionately developed over the years? – This may seem a strange question as a “business format franchise” should be operated in line with a proven system, but you are dealing with people and some will want to change things and do it their way. There needs to be a culture of mutual trust and support, where everyone is working together towards a common goal.

If your answer to all five questions is YES then there is every likelihood that your business can be franchised successfully. Some businesses are ready for franchising, they are successful, profitable and have systems and processes in place that can be replicated, and they are generally run by business owners with the right mental attitude.

Some businesses can be made ready for franchising by implementing changes to the current structure and some will never be ready.

What are the Pros and Cons of franchising your business?

Entrepreneurs who have developed a successful business often look at franchising as a way to expand. Like any business model, franchising has its benefits and drawbacks.

There’s no way to know for sure whether franchising is right for your company until you evaluate its pros and cons in the context of your operations. That usually requires the help of a franchise advisor or consultant, but before you start talking to the experts, you should get a sense of the key advantages and disadvantages of franchising a business. Franchising offers several major benefits to business owners seeking to expand their business.

Pros of franchising:

Lower Capital Investment. Franchising is a good way to obtain expansion capital. You can use the investment of time and money from willing franchisees to grow your business quicker. You can grow the number of locations without using a vast amount of your own capital or needing to request financing from banks or other investors.

Motivated Partners. Because franchisees have invested their own money they are usually more motivated and dedicated than employees.

Rapid Growth. This is due to a combination of reasons. The introduction of capital, outsourcing the management of new outlets and the fact that you can open multiple franchises at the same time.

Local Knowledge. You can gain a competitive advantage by tapping into the local knowledge of your franchisees. They know the local market, the people, the places and often have networks already in place.

Increased Brand Awareness. The more franchisees that you have the more marketing you have and most of it is paid through the franchisees marketing fund.

Increased Revenue and Profits. Your revenue is typically based on the revenue, not the profit, of your franchisees. So even if you have some loss-making franchisees you can still be generating revenue and profits.

Minimized growth risk. Franchising can generate high financial returns for relatively little risk. Unlike adding company-owned outlets, when you franchise, you put relatively little money into adding each location. If you have a good business model, you can earn high royalties from sales at those outlets. The percentage returns you earn can be many times what you would have earned if you opened and ran the outlets yourself.

Increased Capital Value of the business. As the franchise network develops, sometimes into a national brand, so does the capital value of the business.

In short franchising offers a “low risk”, high return on investment.

Cons of franchising:

It is not all plain sailing. Although there are many positive reasons for franchising your business there can also be some disadvantages of the franchise business model:

Up-front costs. Franchising your business will require a certain level of investment. Costs will be incurred in setting up the model, the operations manual, training manual, franchise agree