What is Franchising?
Franchising is a highly dynamic method to expand a business. In simple terms it involves the owner of a successful business (franchisor) granting the rights to another party (franchisee), to set up and run a wholly identical business in a defined area and for a specific time using only the owners brand name, corporate style and systems. By doing so, the franchisee has a much higher chance of being a successful business owner and the franchisor will build a business comprising local stores or branches that benefit from a level of care and attention that only a business owner can provide. It’s a winning formula.
Franchising is big business. In the U.K. there are now over 900 franchised businesses in the UK in a wide range of market sectors – retail, fast food & casual dining, property repair & maintenance, property sales/letting, automotive repair, domiciliary care, parcel delivery – and franchising is adopted as a distribution method by many famous ‘high street’ brands. The reason is simple; franchising is able to maximise growth, service quality and profitability more effectively than traditional business formats.
It is an increasingly popular route to business ownership for budding entrepreneurs. Which is not surprising, because the chance of success is substantially better; 80% of new business start-ups fail within five years, whereas 80% of franchises succeed in the same period.
The benefits of franchising
Franchising is dynamic because it harnesses the power of vested interest. Franchisees are motivated because they run an already proven business, so the risk is reduced. For franchisors, franchising is very efficient from a financial viewpoint. The capital investment required for expansion is limited and overheads are significantly lower than a conventional business. Plus, a franchised business is much easier business to run compared to a company owned operation. Importantly, franchising creates a regional or national network of highly incentivised ‘brand ambassadors’ – franchisees.
- Cost effective, fast expansion: The business is able to expand with less capital, and usually at a faster rate, than one that is directly operated, since the start-up costs of opening in each new unit/area are met by the franchisees.
- Requires less management: There’s no need to create a large management ‘empire’ because franchisees take on greater responsibility. As a result, a franchised businesses can be easier to manage than one that is directly operated.
- Consistently high service quality. Franchisees typically deliver better service to customers than company-owned units due to their commitment as business owners.
- Constant flow of ideas and suggestions. Franchisees usually feel a sense of ‘ownership’ of the brand. So, they will contribute some great ideas about how to the business can be improved.
- Focused division or responsibilities. In a franchise the range of responsibilities of a business are efficiently allocated to each of the two parties on the basis of which has the greatest competence to perform those responsibilities. Typically, franchisees deal with the ‘front end’ service delivery, franchisors handle the ‘back office’ functions, such as marketing, R&D, procurement.
- You help people fulfil their dreams. Being involved with people who fulfil their dream of business ownership using your business model is hugely rewarding
The components of a franchise:
Protected IP – The intellectual property of your business (trademark, patents, software, copyrights) must be securely owned and adequately protected.
Franchise agreement – The anchor document, the franchise agreement sets out the specific product/service that the franchisee is granted the rights to, confirms the financial terms, the KPI’s and the respective obligations, termination arrangements. It is vital that careful consideration is given to the specific requirements of the franchise agreement and that it is prepared with precision.
Operations manual – This explains precisely what the franchisee must do to operate the business as you require. It provides the detailed operational processes and procedures, covering every aspect of the business. It is essential that this document is comprehensive, accurate, clear, expandable and easily updated.
Financial validation – It is essential that robust evidence is available to show that a franchisee could operate the business profitably, providing they follow the system, and also that franchising would produce healthy profits for your business.
Territory map/criteria – Defines the precise area in which the franchisee is permitted to operate the service. The geographic size will vary considerably by the type of business, but the criteria must be accurately determined.
Fees – Typically, the revenue is derived from an initial franchise fee – to acquire the rights, know-how etc. – and an on-going management service fee, or royalty, to acknowledge the continual support that you will provide to franchisees. A separate advertising levy may also be charged.
Support – As the franchisor you must retain an interest in the activities of your franchisees. Support should be available that will provide effective tools to enable franchisees to manage and develop their businesses.
Audit and review system – It is critical that a disciplined system is in place for monitoring the activity of franchisees to ensure compliance with the franchise agreement and create an enterprising culture focused on improvement and growth.
Training programme – The initial training would aim to equip franchisees with the competence needed to effectively operate the business in a reasonable timeframe and manner that precisely conforms to your business.
Recruitment plan – Appointing the right people to be a franchisee is a key to successful franchising. Discipline, creativity and transparency are the primary ingredients to an effective franchisee recruitment programme.
Pilot – Central to a robust franchise is ‘proof of concept’; evidence that demonstrates the business is functional, competitive and viable. Your current business should do this but the first 1-3 franchisees will also be ‘pilots’. Their performance will help validate and finesse the franchise model.
Franchise Focus will work on all of the above requirements in conjunction with you and your team to ensure that all aspects are considered, agreed and developed. The aim is to safeguard your business and ensure its franchise development strategy excels.
What it takes to franchise a business
Can any business be franchised? No, it’s not right for every business but it does work incredibly well for many. Franchising is essentially a method of distribution and so it’s particularly suited to service businesses that function through a branch, retail or mobile network.
For a business to franchise it must fulfil these criteria:
- Proven format: Is there a track record of success? Is the business profitable?
- Easy to duplicate: Will an individual be able to practically operate the business in an identical way?
- Easy to learn: You must be able to train people to operate the business within a reasonable timescale.
- Sustainable: Is the pattern of demand for your product or service stable? Is it likely the pattern will change to the detriment of the business?
- Profitable. The business must enable both parties to make money.
- Cultural fit: A culture of mutual trust and support is necessary for a franchised business to flourish.
Franchising or licensing?
There are close parallels between franchising and licensing. In both cases, you grant the use of your brand to a third party and set out the strict guidelines about how the logo-style, corporate identity and other aspects of your trading format should be used. But there are some fundamental differences that determine whether a business should licence or franchise.
The initial franchise assessment will examine this key issue and advise on which strategy should be adopted.
We look forward to talking with you!
-Clive Smith & Simon Mills