In this special My Business feature story, Clare Loewenthal explains how to evaluate if franchising could be the right growth strategy for your business
Having someone else pay for your expansion may seem like a dream come true, but not all successful businesses can become successful franchises. So before you set out to become the next Jim’s Mowing or Boost Juice, be sure that franchising is the right way for your business to reach Emerald City.
The Australian franchising sector is worth $131 billion and amongst the estimated 1,025 business format franchisors in Australia, there are plenty of winners and losers. Bill Lockett, Director of Franchise Systems Group, has helped countless retailers and other small business operators to franchise their business. He believes that business owners need to ask themselves four key questions if they are thinking about franchising:
- Is the business profitable and capable of replication?
- Can you develop a franchise system that is fair and equitable to both parties, the franchisee and the franchisor?
- Can your management team make the transition from a single or limited number of units to managing a group of franchisees?
- Do you have access to adequate capital to fund the franchising process?
ASSESS THE SUITABILITY OF YOUR MODEL
In a cluttered market – 91 per cent of our franchise systems are developed in Australia – a healthy level of profitability is critical if a new franchise offering is to win over potential franchisees. You must have a proven business model with a history of successful trading.
“It’s not just a matter of your turnover,” Bill Lockett explains. “You need to look at controlling expenses, thecost of goods and any shrinkage that might occur, so your franchisees can make a decent profit.
“And being capable of replication is important because there are some businesses that rely wholly and solely on the operator themselves or on a great location.”
Bill says that sometimes a person comes along who wants to franchise but keep all the good shops and franchise the poor performing locations, which is obviously neither fair nor equitable.
“This is a recipe for disaster,” he says. “Not only will the franchisee fail, but there could also be legal consequences if you are selling franchisees locations that you know aren’t going to perform because of their previous history.”
ASSESS YOUR MANAGEMENT CAPABILITY
“We say head office must grow at the same pace as the network,” says Bill. “The existing management – and that could be just one person, or a husband and wife team, or a few people – already have the expertise to manage the current units and make them profitable, but they also have to show an ability to manage a chain of these units.
“Even if you have more than one location, managing a franchise system is very different from running a chain of stores because as an owner you are in an executive position telling people what to do,” Bill continues.
“When you create a franchise system you are more of a coach than a cop. Your future customers are the franchisees as well as the people buying the goods over the counter. That’s a big mindshift, and some franchisors find this very hard to do. In such cases we recommend that the franchisor very quickly appoints someone experienced in the operation of a franchise to manage that side of the business.”
Bill cautions against franchising a single unit operation, “A single retail operation is often difficult to assess from a profitability point of view, because it might just be the ideal location at the right time, It is certainly better to have more than one pilot location to ensure model works.”
ADEQUATE FUNDING IS ESSENTIAL
People often mistakenly think that franchising means cost-free expansion. Not so.“To franchise successfully, the franchisor should have access to the capital required to underwrite the expansion program and deliver everything that franchisees have been promised,” Bill explains.
Money needs to be set aside for:
- A back office system that is easy to manage, simple for franchisees and franchisors to learn, and one that is capable of producing the financial information needed to track the performance of individual franchisees.
- An impressive website that tells the story of the business and also has a franchise section that lets people know what the franchise is all about and how they go about getting one.
- A marketing program that will deliver results and includes not just ongoing marketing but also the launch of new locations and local area marketing. The marketing program is particularly important to recruiting the right franchisees. There will need to be a separate marketing budget for franchisee recruitment.
- The development of a financial model that provides potential franchisees with an attractive ROI.
There will be legal and possibly consulting costs attached to the franchising process that also needs to be included in the budget.
WHERE TO FROM HERE?
If you decide that franchising is the best way to grow, don’t think it will happen overnight. The Franchising Council of Australia (FCA) estimates that establishing a franchise system can take up to three years and that it may take a further three to five years before the franchisor sees net profits.
Some people embark on the journey alone, but the franchising process is a complex one and mistakes can be costly. The consequences of getting a fundamental like royalty figures or franchise service fee even slightly wrong can be dire, when taken over multiple units and many years.
The other consideration is that if you decide to go it alone, creating the franchise system will require a huge time commitment, which has to be juggled with your existing day-to-day responsibilities to the business.
You need to be cognizant of the legal obligations franchises have to meet under the Franchising Code of Conduct, which is a mandatory code. Changes to the Code are coming into effect in January 2015, including the introduction of an obligation to act in good faith, financial penalties of up to $51,000 for major breaches and increased power for the Australian Competition and Consumer Commission (ACCC).
Obtaining assistance from a franchise consultant comes at a cost, but people choose this option knowing that cost can usually be recouped from early sales. The costs charged by suppliers vary, so it pays to do your homework. A good place to start is www.franchisebusiness.com.au, the FCA’s official directory. This lists a range of services including legal, franchising consulting, accounting, franchise recruitment and sales and advertising.
Franchise consultants usually work in two distinct phases:
- Feasibility studies that includes financial modelling and analysis (sometimes for up to 10 years) to assess the viability of creating a franchise system.
- Consultants offer a range of services once a client has decided to proceed. These may include liaising with lawyers to create the Franchise Agreement and other documentation, writing an operations manual, producing an induction program and assisting with marketing and advertising. They may also help with franchisee recruitment, site selection and store fit out.
Franchising consultants sometimes help grow a network once it has been established. There are times when franchise sales will inexplicably stall or internal issues will arise, and the franchisor is too close to the operation to identify and solve the problem. The people who helped create the franchise are well placed to resolve the issue because they know the business from the ground up.
It could be the franchisor has deviated from the profile of the company’s ideal franchisee, or the best locations have already been taken. Sometimes there is a need to strengthen the management team through the appointment of a Business Development Manager or an Operations Manager.
WHAT MAKES A FRANCHISE SUCCESSFUL?
Myriad businesses decide to franchise every year, so which are the most likely to be successful once they launch? Unless you have a model that is attractive to potential franchisees, the system cannot grow. While credibility is essential to attract the best candidates, so too is brand “sizzle”, something much harder to predict. Quirkiness must be balanced with reliability, an ability to stand out from the crowd supported by a system that is easy to operate without special skills or qualifications.
From an internal systems point of view, Bill sees three imperatives:
- There must be proper procedures in place to recruit qualified applicants.
- Head office must provides adequate support, backed up by effective policies and procedures.
- There needs to be an effective system to deal with franchisee disputes.
And a final word on the need for franchise systems to be fair and equitable to both parties, and how this affects long-term success: a good relationship between franchisor and franchisees is absolutely critical to building a profitable business.
Franchises work best when franchisees follow the system, which is why recruiting people with the right mindset is so important. But each franchisee is still an independent business owner and cannot be told what to do in the same way in the way that you can instruct a paid employee to follow procedures.
Finding the balance between respecting the independence of the franchisees and maintaining adherence to the system is difficult, and at times requires considerable patience and restraint. And these qualities are often at odds with the entrepreneurial spirit that made the founder successful in the first place.
So perhaps the question to ask yourself should be reframed from, “Is my business suitable to be franchised?” to “Do I have what it takes to be a successful franchisor?”
BUSINESSES SUITABLE TO FRANCHISE SHOULD:
- Be profitable.
- Be replicable.
- Be perceived by potential franchisees as an attractive brand.
- Have a system that is easy to learn and operate.
- Have a management team capable of managing a network of franchisees.
- Have access to adequate capital to fund the franchising process.
- Have an owner committed to making the franchisor/franchisee relationship successful.
Clare Loewenthal is a highly respected small business commentator and author.
This feature was originally published in the December 2014 print issue of My Business. To read more in-depth features for SME business owners immediately upon publication, subscribe to My Business magazine now.
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