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Becoming a franchise offers some businesses the opportunity to maximise their returns. But what does franchising involve and what key issues should you be aware of before you do it?
Franchising involves selling licenses to franchisees who can then sell your products and/or services using your brand, operating processes and other intellectual property as key elements of their own business.
Their rights and obligations are set out in a licence agreement and franchising manual, which regulates how they can run and promote their business. Franchisees usually have exclusivity in a specified location or area (their 'territory').
The franchisee pays you a fee and/or royalties and you also charge for ongoing support, such as marketing and training. The franchisee keeps any profit left over after paying fees.
Franchisees gain by using an existing, profitable business model, with an established brand and faster learning and economies of scale that come with being part of a network.
The advantages for the franchise owner include:
- Franchisees help to grow your business in their respective territories, generating returns for you without you having to invest in a new branch of your own.
- They're motivated to work hard because they're running their own business (in accordance with your franchising manual).
- You retain ownership of your brand, processes and other intellectual property.
- You control how franchisees run their businesses, so they maintain and build brand value for you. The more valuable your brand, the easier it is to recruit franchisees, and for franchisees to succeed.
- If you buy stock or anything else on behalf of your franchisees, you can negotiate significant discounts or other benefits from suppliers.
Which businesses are suitable for franchising?
Not all businesses can be franchised. Threshold requirements include:
- Your business must be replicable (ie it can be run according to standard processes and controls that others can use just as successfully as you).
- The market must be large enough for the number of franchises you plan to allow.
- Your products or services will give franchisees a competitive advantage to win business away from competitors. It should also provide them with greater returns than could be achieved by starting their own business or buying into another franchise.
- Your brand should have a market profile and reputation or is capable of developing both.
- Your intellectual property is legally protected (eg your brand has been registered).
- You have the skills and experience to pick suitable franchisees.
- You can provide the services and support they need.
- You can update your products and services if the market changes.
- Margins are large enough for franchisees to pay your fees and still provide the franchisees with a living.
Which businesses are not suitable for franchising?
- Those with customers who are loyal to the owner personally, not the brand.
- Those where margins are too low for the owner and any franchisees to make a living.
- Those where franchisees will need long and expensive training in order to sell the specific products or services.
- Those with product ranges that change constantly or that are suited only to a particular location.
- Those that hope franchising will be the answer to declining profit.
Should you create a franchise?
Starting out as a franchisor is hard work, and your initial investment can be large. You will have to pay for the creation of a franchising manual, carry out market research and work up financial projections for each territory and set up the infrastructure to provide ongoing services and support to franchisees (this could include help with premises, IT, stock/materials, marketing, accounting, tax planning, etc).
Some franchisors even provide franchisees with premises and/or funding to help them, which adds another layer of risk.
You then have to recruit the right franchisees. One bad apple can significantly reduce profitability and brand value (for you and other franchisees) and it can be hard to get rid of a bad franchisee once they're in place. Consider using a professional to help you assess potential franchisees.
You must keep franchisees happy with your services and support. You will also need to keep improving your products or services and developing new ones if the market changes, as well as providing ongoing training and marketing. And, after all your investment and hard work, a successful franchisee will usually end up with the lion's share of any profits they make in their territories.
But, if you do your research, put enough time, effort and investment into setting up your franchise, have an appealing brand with great products and services and pick franchisees wisely, the returns can be considerable.