How to Franchise Your Business

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How To Franchise Your Business
Wondering how to make your business grow? Franchising could be the
answer, according to David Pearson. Here he offers some advice to
potential franchisors.
Franchising can be a profitable and rewarding strategy for almost all
types of business. These days, New Zealanders can buy a franchise in
anything from window cleaning to hamburgers, adult shops to aerial
photography. So if you have a bright idea, can you start your own
franchise?
The answer, fortunately, is almost always 'no'. Franchising does not
consist of someone paying you a vast amount of money for an idea.
ou have to have something tangible to sell ! a product or service, an
operating system, a name and reputation which you have developed
and which has been proved to succeed.
"et us assume that you have such a business. ou have been trading
profitably for a number of years, and the time has come for you to
e#pand. ou don't want to invest the capital and manpower necessary
to open additional outlets yourself, and you thin$ of franchising.
%erhaps somebody has already $noc$ed on your door and as$ed you if
you would sell them a franchise? &t sounds easy ! draw up an
agreement, show them how you do what you do, let them use the
same name above the door. Suddenly, you're in franchising.
The truth is actually very different from that. 'lthough a few very
successful franchises have started when somebody $noc$ed on the
door (The )ody Shop, for e#ample*, the ma+ority of worthwhile
franchises have been as a result of careful planning and lots of
research. ,ven an established chain such as )udget Travel spent two
years studying the concept and developing their strategies before
launching as a franchise.
The good news is that, although franchising can be comple#,
professional advice is available which can ma$e it easier. So don't be
put off, but do be prepared to do your homewor$. This article outlines
some of the things you will need to thin$ about if you are to franchise
your own business.
Investment
'ny new franchisor must be prepared to put in hard wor$ and time in
order to ma$e the concept mar$etable. They will also need to invest
capital. The costs involved will vary depending on the comple#ity of
the business and how well developed and documented it is already.
-owever, you should bear in mind that, despite the benefits of
franchisees investing their own capital in the individual outlets, the
costs of establishing the system and the support structure mean that
most franchisors do not see any significant return in the first couple of
years.
There are three phases in developing a franchise system.
• /eviewing the business for its suitability for franchising
• %reparation of a franchise business plan
• &mplementation of the business strategy
Reviewing for suitability
There are a number of essential attributes which a business must have
to franchise successfully. These are as follows0 treat them as a
chec$list for your own business. &f any of them are not present, then
you must be able to put them in place before going any further.
&mage and branding. There must be strong and easily recognised
branding and signage. Franchisees are paying to use the name ! ma$e
sure it is worth having. "ogo's and the name should be legally
protected. &mage and branding must be consistently used throughout
the business, not only on signs but on uniforms, stationery and
wherever else it appears.
%roduct supply. The product or service being sold must be able to be
sourced without ris$ of interruption or of significant currency or cost
fluctuation. There should also be a long!term, proven mar$et in this
country for the product or service.
Standards and systems. There must be (or be able to be developed*
operating systems and standards for all aspects of the business. These
would be consistently applied to the day to day operation. ,very
aspect of the business must be capable of being documented and put
into practice after suitable training.
1anagement. The management of the parent organisation should be
capable of dealing with owner operators as distinct from employees, or
be prepared to employ people who can. This is an important change in
philosophy which some organisations fail to grasp. /esults and change
in a franchise system are achieved by persuasion rather than decree.
The franchise relationship is one of mutual trust and co!operation.
%rofit and turnover. The business must be profitable and have good
potential for increases in turnover as a result of greater collective
buying and mar$eting and an increasing public profile. There must be
sufficient profit to be made for the franchisee to earn an acceptable
living and receive a higher than average return on investment. 't the
same time, the franchised outlet should be able to sustain a level of
fees payable to the franchisor which are sufficient for the franchisor to
provide appropriate services and still ma$e a profit.
'ble to be duplicated. The operation of the business must be able to
be taught to others, rather than relying upon the style or personality
of the e#isting owner. 2ith the aid of training, a detailed operations
manual and ongoing assistance, franchisees must be able to operate a
clone of the business as successfully as the franchisor has done. &n
addition, the business must be such that it does not re3uire ma+or
modification each time it is established in a new area or territory.
Preparing a franchise business plan
4nce you have reviewed the above factors and made the necessary
ad+ustments, it is time for the ne#t phase. This essentially deals with
how the franchise system you set up is going to wor$.
's a minimum, you should draw up a five year plan which addresses
all li$ely occurrences during the growth phase. This is important
because there is usually little opportunity to ma$e structural changes
once franchise agreements have been signed by your first franchisees.
&n the business plan, you should address the following.
/eview the mar$et. ou should underta$e a thorough analysis of
competition and trends applicable to the product or service your
franchisees will be supplying. This will give you a thorough $nowledge
of the mar$et and its future, and enable you to plan with more
confidence. &nformation generated from this will also give an insight
into the best geographic locations.
1anagement 5 corporate structure. ou need to put the right people in
place in the right operating structure to help the franchise grow and
mature. &f that 'right person' is only going to be you to start with,
ma$e sure you have the $nowledge and s$ills necessary to succeed in
your new role as franchisor. Ta$e e#ternal advice, and be prepared to
train and learn from others.
&n a larger business, a separate operating entity can ensure that the
new franchise is protected from e#isting operations. %rofessional
advice is necessary if this route is to be followed.
,#pansion. ' plan needs to be put in place as to what territories are to
be opened and when. 1ost franchises choose to spread outwards from
their e#isting geographical base on the grounds that they can manage
the franchise more easily the closer it is. This also promotes economy
and efficiency in both time and money. -owever, it is worth noting the
need to be fle#ible. The availability of certain sites, the lac$ of the
right franchisees or the threats or opportunities afforded by
competition can all affect the e#pansion plan.
Territories and premises. Territories need to be large enough to ensure
an ade3uate return can be achieved by the franchisee, and small
enough to ensure they can be serviced properly within an ade3uate
time frame. ,3ually, enough territories need to be established to
ensure that the overall mar$et is well serviced and the franchisor gets
a fair return on his investment. &t is also necessary to decide whether
territories will be e#clusive. 6etailed standards and rules for premises
need to be established and documented.
'dvertising and mar$eting. 1ost franchisors stipulate two separate
components. a national mar$eting fund, contributed to by all
franchisees but spent centrally0 and an individual re3uirement for
franchisees to spend so much money locally. ou will need to decide if
a national mar$eting strategy is appropriate, what it will broadly
contain, how it will wor$ and how much money will be re3uired. )ased
on this, you can set the level of the mar$eting levy (usually a
percentage of turnover*.
4bligations of both parties. ou must set out in great detail what will
be e#pected on an ongoing basis of franchisees, with particular
emphasis on the day to day operation of their business. 's franchisor,
you will also need to decide what your responsibilities are going to be,
with emphasis on long!term strategic matters and areas of support to
be provided.
&n setting out these obligations, it is helpful to remember the definition
that 'it is the r7le of the franchisee to wor$ in the business, and the
r7le of the franchisor to wor$ on the business.'
/eporting, monitoring 5 administration. 1ost franchises have
sophisticated daily, wee$ly or monthly reporting re3uirements. These
enable both the franchisee and the franchisor to monitor how
individual businesses are performing. )oth parties benefit, as such a
system often provides early warning of potential problems. 1ost
systems are now computerised to some degree, and a decision will
have to be made as to how this is best done.
Fees. 4nce all costs relating to the establishment and ongoing
operation of the franchise system have been established, you can
decide what fees are to be payable by franchisees. 8ommon e#amples
are.
9pfront fee ! for purchasing the initial rights to operate the franchise
system for a set period.
Service fees, also called management fees or royalties ! payments
made for the provision of certain services from the franchisor such as
product development, support services, etc. These usually also include
the profit margin on ongoing business for the franchisor.
Training fees ! sometimes for initial, often for ongoing training.
1ar$eting fund levies ! for centralised mar$eting. The e#penditure of
these funds is usually accountable to the franchisees.
&n setting each of the above it is important to ensure that reasonable
profits can still be achieved for both the franchisor and the franchisee.
4ne reason for failure in franchise systems is that fees and levies have
been set too high.
)udgets. &t is important that you prepare a five year financial forecast
based on your business plan. 't least the first two years should be
pro+ected on a monthly basis. This will ensure that you are aware of
your own financing re3uirements before you start franchising.
'nother common cause of franchise failure is the under!capitalisation
of the franchisor. Too many franchisors rely upon the income from the
sale of franchises to see them through the early months, when in fact
franchises are rarely as easy to sell as they might appear at first.
Franchisees are also, as any e#perienced franchisor will tell you, as
much of a cost as a source of revenue initially while they are finding
their feet and relying upon the franchisor for a great deal of assistance
and support.
Implementing the strategy
't last you are ready to franchise: Now you must put together all the
resources necessary, and actually start recruiting franchisees and
opening franchises.
The essential elements include:
Franchise agreement. This is the 'marriage contract' between
franchisor and franchisee which will incorporate all the decisions made
in the business plan. 9se a specialist franchising lawyer to draw this up
! this is not an area in which to cut corners.
6isclosure document. This must be provided to all potential
franchisees before they ma$e the decision to buy. &t should provide in
plain ,nglish details about how the franchise will operate, summarised
contents of the franchise agreement, plus full details about the
franchisor and his or her e#perience.
)rochures. These are a sales aid to be sent out to people who respond
to your advertisements.
4perations manual. This is the complete guide to operating your
franchise. &t serves as the first port of call should the franchisee have
a 3uestion or problem. &t is an evolving document, and provides the
franchisor with an opportunity to facilitate changes in the franchise
system as the business develops. 2riting a manual which others can
understand is an enormous underta$ing, and is often best underta$en
by a specialist.
Then you come to the magic moment of advertising for your first
franchisee. )e sure that you have the final stages in place.
/ecruitment and induction se3uence. This is a step by step procedure
for handling franchise en3uiries and establishing franchised outlets. &t
provides a standardised approach so that the best franchisees can be
chosen, the right information is provided when re3uired, and the
opening of each franchise is carried out in a pre!determined and logical
se3uence.
Training programme. This may be carried out in a classroom or on!
the!+ob. &t is usually a combination of both. )ased around the
operations manual, its purpose is to ensure that when the franchisee
opens their outlet they are able to operate it in a manner consistent
with all the other outlets.
Franchise finance pac$ages. 's ban$s become more prepared to
provide specialist services to franchises, franchisors are able to
develop tailored finance pac$ages with more favourable terms.
Be prepared
4f course, not every franchisor will approach all of these areas in the
systematic way & have outlined above, and most find several of the
stages happen all at once. 2hether you are a large corporation or a
one!man!band, though, you will find that you need to address all the
above points at some stage. The further in advance you thin$ about it,
the better prepared you will be.
&f you want to find out more about the possibility of franchising your
own business, a good source is the Franchise 'ssociation of New
Zealand. The 'ssociation holds regular meetings in 'uc$land,
2ellington and 8hristchurch, and prospective franchisors are welcome
to come along and meet others who have gone through this stage
themselves.
The Franchise 'ssociation can provide a list of e#perienced and
reputable franchise consultants who are members, and also publishes
a boo$, The Franchisor's 1anual. This contains a wealth of information
to help you evaluate your potential for franchising.
's & said at the beginning, developing a successful franchise ta$es a
long time and a lot of hard wor$. 4n the other hand, once you get it
right, the benefits are enormous. &f you decide to ta$e the plunge,
ma$e sure you get e#pert advice and ta$e the time to do it properly.

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