Franchising can be a tremendously effective business model – it’s based on a
dynamic partnership that drives growth and delivers service excellence better than any other business system. But is it suited to all businesses?
Franchising – its now big business
Franchising has matured as a popular and effective basis for organising a business. Franchised businesses now contribute nearly £14bn to the UK economy, with over 940 different franchise opportunities available for budding entrepreneurs to choose
The appeal to those 940 plus businesses is that franchising is a highly cost effective way to expand. Building a network of franchisees requires minimal up-front investment and actually provides revenue – an initial franchise fee is charged to cover the costs incurred for helping to set a franchisee up in business – training, launch marketing, legal and administrative costs. Establishing a franchised branch should therefore be cost neutral.
What does franchising involve?
The appeal of franchising to a prospective franchisee is the opportunity to own a business that is well proven – the franchisor can demonstrate the business has a track record of success and that by replicating the business model, and with the franchisors on-going support and guidance, the franchisee should enjoy a similar level of success.
Franchising involves the sharing of knowledge and intellectual property. As a
franchisor you give another party, the franchisee, the benefit of your experience andbusiness methodology about how to successfully run the business so he/she can create exactly the same business elsewhere. You also allow them to use your intellectual property – corporate style, software, marketing material, web site etc. In acknowledgement of this the franchisee will usually pay you an up-front fee.
And, to operate the business the assets – plant, premises, vehicles, stock – are owned and paid for by the franchisee. So, overheads are significantly reduced.
You must also retain an on-going interest in the franchisees business – after all he/she will be representing your brand, offering your products or services. This could involve providing support such as marketing assistance, additional training, call centre services, periodic business reviews, group meetings/conferences. A regular management service fee would be charged to reflect this support.
What does a business need to franchise?
To effectively franchise a business must be able to show that there is genuine value in being a franchisee. To do this the following questions must be answered:
- Does the business have a successful track record? The business must have operated for a reasonable length of time and be profitable, having developed methods, systems and practices that could be applied elsewhere by another party to achieve the same result – scale, market share, profitability. The franchisee will expect to see that an adequate return on investment is achievable.
- Can the business model be practically duplicated? If operating the business requires an owner (franchisee) who possesses highly specialised skills or an investment in very expensive capital equipment it may not be easy to franchise. For this reason manufacturing is rarely suited to franchising, whereas service businesses are ideal – retail, domiciliary care, repair and maintenance etc.
- Is the intellectual property protected? It is essential that a company’s
trademarks, copyright and software licences are fully protected before it
grants access rights to a franchisee.
- Can practical training be given? The training of franchisees in the methods and processes for operating the business needs to be delivered within a reasonable timescale. A franchisee would not be earning during training and so if it takes several weeks to complete the training course this may present an obstacle to selling the franchise.
- Can effective support be provided? A franchisor has an obligation to support and guide franchisees to help them run the business. Good marketing techniques and materials, a well-managed web site, efficient product supply procedures, concessionary buying arrangements are examples of support that might typically be provided.
- Could a culture of mutual trust be established? Working with franchisees is very different to working with employees. Franchisees are independent business owners that have bought the rights to run a business using your brand and systems. They should be treated as partners, requiring an appropriate management style to be adopted.
Franchising is big business, and its good business. It works very well for many companies. But, it’s not always a suitable format. The type, structure, style and ambition of a business will dictate whether franchising is an appropriate development strategy.