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 agreement, advertising, sales and marketing and recruitment. These costs can vary greatly depending on which advisors, consultants, and solicitors you use.
You will probably recoup most of this outlay with your first franchise fee when you recruit your first franchisee, but remember that a franchisee’s income in the first year could be growing slowly which will affect your royalty or commission. You will also need to provide on-going training and head office support.
Less control over franchisees. Although your franchise is a tried and trusted model, franchisees operate as independent businesses. You can’t tell franchisees what to do in the same way that you can with employees. Once franchisees get their business up and running and become established some will try to change, add or modify existing products or services, advertising, hours, and even the quality and consistency that they have agreed to deliver.
Moreover, they will probably have different goals from yours, which can easily conflict and even lead to legal action.
A weaker core community. It’s much harder to get franchisees as opposed to hired managers to work together for the benefit of the network and the company as a whole. Franchisees have an incentive to profit from each other’s efforts to generate business. However, they are independent and have different goals and aspirations. Some switch off when they are in their “comfort zone” and some ride on the back of the most successful ones which can cause conflict and disagreements. There are ways of minimizing such issues, of course, but they can cost money and time and may require enforcing through your franchisee agreement.
Innovation challenges. It’s a lot harder to innovate with franchising than if you own your own outlets. With franchising, if you come up with a new idea, you may have to negotiate with your franchisees to get them to accept the new product or service that you want to introduce, instead of just putting the new idea in place on your own. Issues like this can be covered in a solid franchise agreement.
Before you talk to the experts about franchising your business, consider these pros and cons. Franchising isn’t a silver bullet for business expansion. But when the advantages outweigh the disadvantages, as they clearly do, it can be a great way to grow your business.
What is a Franchisee?
A franchisee is a person or company that is granted the right to conduct business under the franchisor’s trademark, trade name, and business model, in a specified location, area or territory by the franchisor.
In return for the right to operate the franchise, the franchisee will pay an initial franchise fee and an on-going royalty or commission.
The franchisee then operates the business in the specified location, area, or territory. He or she is responsible for certain decisions, but many other decisions (such as the brand, name, products or services) are already determined by the franchisor and must be kept the same by the franchisee. The franchisee will pay the franchisor under the terms of the agreement, usually either a flat fee or a percentage of the revenues or profits, from the sales transacted through the franchise.
Role of the Franchisee
A franchisee has four major responsibilities for the success of the franchise system.
- To protect the franchised brand by operating the franchise in strict compliance with the system operating standards.
- To build a strong and loyal customer base by offering only approved products and services and by providing superior customer service.
- To ensure that all employees are properly trained as per the operations and training manuals, and that the franchise is properly staffed at all times.
- To advertise and promote the franchise and its approved products and services as stated in the guidelines provided by the franchisor.
Attributes of a Successful Franchisee.
Be willing and able to learn new skills. As a franchisee, you will take on a multitude of roles, including training, management, customer service, sales and finance. The franchisor sets the brand standards, but they are not totally responsible for how the franchisee’s day-to-day business is run. It is a steep learning curve, but if you can master these new skills, you can become a successful franchisee.
Be able and willing to follow system standards. As a franchisee, you are agreeing to follow someone else’s operating system, often including specific requirements for what marketing materials to use, which suppliers you must work with, and what specific products or services you must offer. This, along with the rights and restrictions on how you can use the franchisor’s intellectual property, is what you are investing in.
In exchange for this ready-made operating system, a franchisee generally has to report their sales and expenses, follow instructions on how to present the products and services, and comply with the franchisor’s marketing requirements. If the franchisee fails to meet those brand standards, they risk being in breach of their franchise agreement.
Be ready to move from employment into running a business. Employees who wants to become a franchisee need to understand the implications. You may have a broad understanding of business, know how to work within a system, know how to motivate staff, and certainly are no stranger to long hours. But a franchisee is essentially a small business owner, which means leaving behind the internal support services you have grown accustomed to, as well as the many benefits that come with employment at a larger company, such as retirement plans and paid sick days, expense accounts, and health insurance plans.
As a franchisee, your success is measured by the performance of your franchise, requiring more self-reliance than many corporate managers have had to demonstrate. However, a well-structured franchised system will provide a level of support that contributes to the success of the franchise.
History has shown that successful franchisees tend to possess certain key traits. As you become more committed to the idea of pursuing a franchise opportunity, it is important that you take some time to analyze yourself from a business and personal perspective. You need to identify which traits you possess, as well as those you need to learn, develop, or hire, in order to give yourself the highest probability for success in your new venture.
What are the Pros and Cons of buying a franchise?
If your definition of success is becoming filthy rich, buying a franchise business could get you there… But it may not.
Although franchise ownership can provide a proven business model with instant brand awareness, it doesn’t always result in wealth. For that kind of success, you need to take on a franchise that’s in demand with consumers, you will need to employ strong people skills, and, of course, put in the hours learning everything about the company.
It may be tough to turn a franchise business into really big money, but it’s not impossible. Many franchisees now have multiple outlets. The franchising industry regularly likes to remind us that being a franchisee is a safe and potentially very profitable way of getting into business. This is true and the statistics speak for themselves, but while this may be true, there are also downsides.
Pros of franchising:
Proven system. Franchising offers you a much safer route into business, as your “Business Blueprint” has been tried and tested, thus avoiding many of the pitfalls of a new start up. Franchising combines the expertise of an established company with the commitment and entrepreneurial flare of the individual.
Big names can lead to big success: Franchising under a well-known brand such as McDonalds, or Subway has obvious benefits for franchisees. Not only are you following a tried and tested format, you can also benefit from the financial aspects of the larger corporations when it comes to funding. These increase the security for your enterprise.
You can also save time and energy by not worrying about generating publicity to raise awareness as customers will know what to expect from a big chain.
Having an established market, proven systems and a respected business name means that the battle is already half won for you before you even start your first day of trading.
However, a word of caution, not all franchises are “Big Names”, some are in the early stages of development and require lots of due diligence.
Ongoing help and support: Most franchisors provide initial and on-going training programmes and support. As well they will often help you to find and retain customers and provide accounting and stock control systems. The level of assistance varies depending on the franchisor but generally franchisees are not left to struggle alone. After all, it is in their own interests to help franchisees to become successful.
Defined territory: The British Franchise Association (BFA) lists this as one of the main reasons that makes franchising an attractive option. Franchisors carefully choose the location of their outlets to gain the largest possible amount of custom and to avoid treading on each other’s toes.
Also, unlike starting a business from scratch, many franchisors can afford prime trading premises, such as on the high street and popular shopping centres.
Greater access to finance: As a franchisee, you are looked upon more favourably when