If you are business owner and looking to expand, have you thought about franchising?
Expansion is a risky business, whether by franchising or opening new facilities under your existing structure. You have an established product or service, a proven business model and the drive to take your business to the next level BUT there is no guarantee that the hard work you’ve put in to make your business successful up to now will work on a larger scale.
All commercial decisions have an element of risk; however, franchising could present a cost efficient and less risky opportunity to help you rapidly grow your business.
This article sets out what to consider when thinking about franchising a business to help you in your decision making:
IS FRANCHISING APPROPRIATE FOR MY BUSINESS?
When thinking about whether franchising is right for you, there are 4 key questions you must ask yourself:
- Is my current business model working? You need to be able to show that your current business model is successful and proven to be so over at least a 12 month period.
- Is my business transferable? You need to consider whether your business model can be effectively applied across other geographic target areas if you want your potential franchise to be a success.
- Can my business model be taught? Is it practically and realistically possible to teach potential franchisees how to operate your business to the standards you require?
- Is my brand protected? You must ensure that your name and/or brand is properly registered and protected before you decide to franchise.
If after asking yourself these 4 questions and you decide you can answer ‘YES’ to all of them, you have taken the first step towards deciding whether franchising is right for you.
PRO’s AND CON’s OF FRANCHISING
It is important to understand that, as with any business venture, there are certain risks and pitfalls to be careful of and before deciding whether or not to franchise you need to be aware of the Pros and Cons involved.
Pros – Franchising can:
- apply to many types of businesses with many opportunities available in the UK across a broad range of industry sectors;
- boost your brand recognition;
- help you become more attractive to potential investors keen to invest in a tried and tested business model;
- incentivise franchisees to maximise growth and profitability for your franchise network as they will have a personal financial investment in the franchise business;
- enable you to utilise a franchise network to take advantage of the collective buying power;
- help your cash flow as the franchisee will be responsible for the costs and operational issues associated with running their individual franchise businesses. You are only required to provide support and structure; and
- provide a quick and easy way to expand your business through franchisee capital.
Cons – Franchising can:
- place you under financial burden as there are unavoidable upfront investment costs involved in establishing your franchise network;
- take several years to recover your initial capital investment;
- require considerable management time to establish your franchise network which could have a negative impact on your current business;
- involve continuous investment in the infrastructure of your network with the understanding that you will not be able to cover your franchise running costs until your network grows and generates sufficient fee income; and
- threaten your brand and goodwill. There is an inherent risk in granting someone a licence to operate under your brand name as your success as a franchisor is tied to the way each franchisee manages and operates its business. An incompetent, undercapitalised or unscrupulous franchisee can cause significant damage to your reputation and the goodwill you have worked so hard to build up. Enforcing and/or renegotiating the terms of the franchise agreement can be costly and time consuming.
HOW TO BE A SUCCESS:
For your franchise to thrive, we have established 4 key aspects get sorted from the start:
Your Brand: Your brand and logo, if any, should be properly protected by the appropriate trademarks to prevent other businesses imitating your brand or passing their business off as part of your network. Your brand is your business identity and it is critical to put the time and resource into creating a brand that is distinctive and has a clearly defined image, message or concept.
Support and Motivation: As a franchisor, your job is to select the right franchisees and to provide an environment to incentivise and get the best out of them. A major factor enticing investors to become franchisees is the provision of the initial training, the brand standards and operations manual and the knowledge that you, as franchisor, will be on hand to guide and provide ongoing support. You therefore need to be clear as to what will be covered in you training programme, who will deliver the training, what goals you set for your franchisees and what level of support you will offer to help them achieve those goals.
Your Network: We have established that a crucial first consideration is whether your current business is appropriate to franchise and that you have a proven business model. For your franchise to be a success you need to know that; your system can be easily replicated across your network, you have a reliable method of monitoring performance and your operations manual contains the correct know-how and procedures for your franchisees to follow. A pilot scheme will let you know if your franchise will work and see how all aspects of your network will come together. This will allow you to fine tune your system before your franchise is up and running.
Your Agreement: Your franchise agreement is a legal document that sets out the terms under which you agree to grant franchisee’s a licence to operate within your network. It describes the relationship and both parties’ obligations to one another and, importantly, protects your brand, know-how and network. All franchisees will sign up to this agreement and as a rule all franchisees should substantially be on the same terms. If you have a strong brand, you may be less inclined to negotiate the franchise agreement terms and have an agreement which favours you over the franchisee. Keep in mind however that, in order to be enforceable, your agreement must be fair and reasonable. It is important you get the proper advice and we suggest you speak to a lawyer specialising in franchising to prepare your agreement.
- Make sure your business model is proven to be successful and that franchising is an appropriate option for expansion.
- Consider the pros and cons.
- Invest in your brand, make sure it is distinctive and, most importantly, protected.
- Commit to your franchisees, spend the time to recruit the right ones, invest in the right training, brand and operations manuals and clearly set out realistic goals.
- Speak to experienced franchising consultants and a lawyer specialising in franchising to make sure you get the right advice.