In my business growth strategies post I briefly highlighted three routes we commonly see with clients for growing their businesses. In this post I aim to explain how to grow through using the franchising model to give you more information on this route.
What is franchising?
Franchising is what is called a structured-format business model and involves the granting of a licence by one person (the franchisor) to another (the franchisee), which entitles the franchisee to own and operate their own business under the brand, systems and proven business model of the franchisor.
The relationship is governed by a franchise contract and a very detailed operations manual. The industry is self-regulated and there isn’t Franchising Law in the United Kingdom – so much of the relationship is tightly controlled contractual law and best practice. The agreement is usually anything between 5 to 10 years long, with options to renew or exit the business built into the terms.
Some franchisors choose to become members of The British Franchise Association, which is the most recognised professional franchise association, founded in 1977.
Why choose Franchising to grow?
It is one of the growth routes that takes the lesser amount of capital investment. This doesn’t mean you don’t have to invest at all – it just means as you roll out new sites, or new locations/territories – the upfront investment is generally undertaken by the new franchisee.
Franchising (if done right) is a great way to grow your brand. There is a lot of work to do to get your business franchise-ready, as well as planning for ongoing infrastructure and support – which is key to successful, long term franchising.
What challenges do you need to be aware of?
There are a few key factors to bear in mind if you are looking to franchise:
- The business MUST be teachable to others (overcomplicated products and systems may deter prospective franchisees from investing in your brand.
- You will have to do ongoing internal ‘checks’ on your company culture. Make sure that you are always promoting innovation and inspiring franchisees and customers to the brand (keep it as one that people want to invest in).
- Your main business focus becomes growing and then supporting that growth (i.e. you end up managing the franchisees, product development, training, mentoring, etc). What you are doing NOW…is not what you will be doing in future.
- Your recruitment process and criteria for new franchisees needs to be rigorous to ensure the longevity and reputation of the brand you have developed. This also helps to reduce franchisee churn in the future (saving you time and money).
The success factors for Franchising
As the industry is self-regulated – there is scope for rogue franchisors to do pretty much what they like (not great news for unsuspecting prospective franchisees). However, there are many, many franchisors “doing it right” and have seen the rewards of much more sustainable model that survives the test of time.
To truly be successful in franchising, these are the factors to focus on:
- Prove the model
Before you start looking at who you could recruit to become your first franchisee – you need to prove the business works. You need to make sure that:
- You have documented your processes and systems (so that they can be easily teachable to others)
- You have proven that your sales and marketing strategy works (and is scalable) and it’s a smooth engine
- Your service or product is easily deliverable (and repeatable) with your training and instruction
- You service or product does NOT depend on you
- The financials WORK (for you and the franchisee)
- Operational set-up
You are ready to invest in setting up the support, admin, operational and marketing functions as the ‘head office’ (which you will become) – this includes in looking at technology that will make life easy for managing your franchisees and supporting them day to day with the admin of their businesses
- Training and mentoring
After recruitment the right type of franchisee, you need a robust way in which to induct them into the business, which should cover, amongst other things:
- Induction training: covering the brand ethos and principles, who is in the business; clarity on the market and target customers; admin processes; reporting; etc
- Business skills training: a good franchisor will ensure that their franchisees are trained to know how to run and manage a business (most franchisees come from being employed and have never run a business)
- Product / service training: specific training on the ins and outs of the service and/or products of the organisation
- Sales and Marketing training: this will coincide with what will be covered in the franchise agreement and operations manual. Support the franchisee with enough knowledge and practical skills to help them to drive the launch and growth of their business.
- Ongoing mentoring. It’s a good idea to mentor your new franchisees through their first 3 years of business. In the beginning this may be you, mentoring them, but it can become existing franchisees who help as a big brother or sister. 80% of small businesses fail in their first 3 years – so this will definitely help mitigate this loss to your brand.
Once you have set up your franchise and you’re recruiting well – remember, you cannot sit on your laurels. You must keep your eye on that renewal date of those agreements – because you want every franchisee to not think twice about renewing. This means that you have to constantly look to enhancing your offering (as a franchisor and as well as within the service or product development).
You will retain loyal franchisees and encourage a culture of excitement for the future that everyone wants to be a part of.
- Mutual benefit
The difference between ethical and unethical franchising is this: mutual benefit.
Ethical franchisors will work hard to ensure that the relationship is two-way and that both parties are winning. This means financially as well as in investment satisfaction. The relationship is a long term one – so, much like a marriage, you need to put the work in…together.
A franchisee will pay a franchisor:
- Upfront franchise fee, and
- Either a fixed monthly ongoing fee or a percentage of sales (or a mix of the two)
In return, the franchisor provides:
- Induction training
- Very detailed operations manual(s)
- Start-up package to get going (may be marketing collateral, tools, product stock, etc)
- A specific territory to operate in (with possibly no other competition from fellow franchisees – depending on the business)
- On-going support
- Regional and/or national sales and marketing support (depends on business)
- License to use the brand and intellectual property (under the terms of the agreement)
Businesses who shouldn’t consider Franchising
This model of growth is not suitable for all businesses – as you will have probably gathered when reading my list of challenges and success factors above.
Business which are not good for franchising, are ones where:
- the product or service is likely to only have a short-term market appeal
- the business is governed by regulatory issues and legislation that would pose challenges for franchisees
- they address a small niche market that only exists in a limited geographic area (so not really replicable across regions/locations)
- there are low gross margins
- its a “personality based” business that relies on customer loyalty to the individual and not the brand
Advantages and Disadvantages of franchising
While I have inadvertently talked about these throughout the above, there are some clear advantages and disadvantages to highlight.
If you have read this far and you are intrigued – I would suggest reading this blog post from Northern Ireland Business Info – a free service offered by Invest Northern Ireland (business advisory and information online service). The information is still relevant if you are in England, Wales and Scotland > “Advantages & Disadvantages of Franchising”.
Choosing what is right for you
There are many aspects to consider when growing a business, so do not be alarmed at the many options available to you other than organic growth. If you are in a position to consider the franchising option, then I think it’s a good idea to flesh it out!
We would be happy to help if you needed some guidance on evaluating your viability to franchise from a financial aspect – or indeed, if you would like to prepare your business to be franchised in the future.
Just give me call on 01788 577613 or email me direct on email@example.com.