Suitability to franchising depends on two things:
- What kind of business do you want to have?
- What kind of business do you have now?
These two questions actually work together. The kind of business you want to have dictates whether franchising is the best way to build it. The kind of business you have now determines whether your business can be franchised.
Think about this: almost every franchise system in the world started with just one store or shop. Can your business do the same?
During the course of running and growing your business, you will need access to both short-term and long-term cash savings to pay salaries, suppliers, or even to save for a future project or large payment. Standard Bank provides a range of flexible Savings and Investment solutions, with competitive interest rates, to help you meet your business’s savings and investment needs.
What is a franchise?
A franchise is a business relationship with three primary components:
- The use of a common name or trademark
- The presence of significant operating assistance through head office support or control of a prescribed method of operation, including procedures, practices, and techniques
- A required upfront and ongoing payment by the franchisee.
How franchising works
Franchising means opening additional outlets through the sale of ‘franchise rights’ to ‘franchisees’: independent investors who will use your name and operating system.
One of the biggest benefits to this system for the franchisor is that while your business grows, the franchisee furnishes the capital required to start the business and assumes much of the risk for success or failure.
The process usually follows these steps:
- In return for the rights to open and operate a business under the franchise trademark, a franchisee pays a franchisor an initial franchise fee.
- This fee usually includes training on how to set up and operate the business and makes provision for set-up costs.
- Depending on the franchisor, it may also cover additional services like assistance with site selection.
- In most systems franchisees also pay an ongoing periodic royalty fee, which can be up to 12% of sales. This is payment for training and continued support in marketing, advertising, sales, financial and HR consulting, operational guidance, and other services. In many cases, this support is in the form of proven systems and operational software designed specifically for the business.
The benefits of franchising
Before you franchise, you need to establish the kind of growth path you want your business to follow, and if franchising the brand rather than focusing on internal expansion suits your goals and overall vision.
Franchising vs internal expansion
- You own and operate all company stores and locations yourself.
- You provide the entire investment for the start-up of each new location. You keep all the profits each store generates, but you’re also responsible for all losses and you’re often managing operations that may be far from your home base.
- Suits business owners who are passionate about preserving the values they built into the original operation and believe they are the only one who can do that.
- You can focus on the competitors in your own industry. While many of those competitors might actually be franchises, you won’t be competing with unrelated industries for franchisees – you’ll just be competing for customers.
- Staffing solutions are largely within your control. Company-owned offices, as opposed to franchises, are run by managers hired by you - and they can be fired by you.
- Managers are ultimately employees. They will never be as dedicated as someone who has invested their future in the business, unless you have a system that offers strong incentives or is based on profit sharing principles.
- You may own a handful of stores yourself, but the model is built on independent franchisees owning and operating stores.
- The start-up investment for each new store is provided by the franchisee. They will pay you royalties in exchange for certain services, but the ultimate risk and reward is theirs.
- If you want to expand quickly and get ahead of the competitive curve, franchising is one of the most effective ways to grow.
- There is far more competition. You will be the new kid on the block amongst large, established franchises, and in many cases you are competing with franchisors in other industries. In franchising it’s as much about the industry as the franchise system, support and ROI on offer.
- Franchisees are more independent than managers, and they take care of their own staffing solutions. You need to be able to trust them and their judgment.
- Franchisees have skin in the game. They need to make the business work or they lose their investment.
Further benefits of franchising
Franchising allows you to expand your business quickly, with minimal capital and risk. It also offers a number of advantages:
- You expand using someone else’s money
- Franchisees are responsible for all unit-opening expenses, hiring, and leases, reducing your risk
- Franchises can open quickly, which often means getting a new concept out ahead of the competition
- A franchisee assumes the risk of succeeding or failing
- Franchise owners tend to be highly motivated operators.
What makes a business franchisable?
The whole point of franchising a business is to be able to sell franchises. In order to do that, the business must be appealing to potential investors. So, what makes a franchise appealing?
- The concept has pizzaz. It captures the imagination of potential franchisees.
- It produces a superior product or service.
- It has clearly distinguishing, positive characteristics.
- You can control and standardise the quality of the product or service. Consumers are drawn to franchised brands because they know that whether they walk into a store in the heart of Sandton or a small town in the Karoo, they can expect the same quality.
- You can (or have) developed a strong trademark and brand identity.
- You have created systems that ensure operations, products and service delivery are measurable and easily replicated.
Can your business be franchised?
Before you can begin the franchising process, you need to determine if franchising is a viable strategy for your particular business.
There are three core criteria for franchisability: you must be able to duplicate the business; you must be able to sell the business; and you must be able to provide your franchisees with an appropriate return on investment in terms of both time and money.
To know whether this is possible, ask yourself these key questions:
Is there a wide market for my concept?
Does the market for your particular product or service exceed your current operating area? Note: you may need professional advice to see the bigger picture objectively. Don’t fall into the trap of ‘knowing’ you have a hot new concept and then acting on these convictions without testing your theory.
You have to have opened several prototypes in a variety of markets to test the validity of your convictions. It’s also important to ask yourself frankly whether or not your concept will work under other owners and in locations – in other words, can it be replicated?
Do I have a point of differentiation?
What makes your business special? Again, be careful. Your differentiator doesn’t have to be something no one has ever seen before. It just needs to have something about it that’s unique and that will attract franchisees and consumers. Most importantly, the public needs to see it as desirable.
Can my concept be duplicated?
A franchisor needs to be able to duplicate their original success in multiple regions. Some businesses simply don’t make good candidates. Will you be able to train inexperienced franchisees to run an operation like yours? Will this be relatively simple or incredibly difficult?
Remember, franchising is all about the system. Have you streamlined processes to make them easy to teach? If your success has been the result of years of perseverance and relationship-building that is not readily transferable to a new owner, franchising probably won’t suit your business. You also need to determine if your concept is very niche, or if it will flourish in a wide variety of locations.
Remember: Systems can be duplicated. Superstars cannot. What is the basis for your business’s success?
Is my concept saleable?
Will investors (ie. potential franchisees) see the value of your offering? Will they be willing to commit to it? Will you be able to offer a programme with real advantages for the potential franchise owner?
Every business must have something that sets it apart from its competitors. This can be anything from a unique recipe, to proprietary products, to innovative support services or marketing approach. In order to be ‘salable’, a business must have credibility in the eyes of its prospective franchisees.
That credibility can come from a track record of success, strength of management, or a very popular brand. These just some of the ingredients that create credibility. Focus on the areas that can build credibility for your business – without it, no one will buy your franchise.
Can I offer franchisees a return on investment?
The franchise system works on royalties. This means that the franchise must make enough profit for franchisees to earn an adequate return on their investment after they have paid royalties. This benefits them and you as the franchisor – without those royalties, your business doesn’t make a profit either. You also need to show a good ROI to other potential franchisees if you want to sell more locations.
Franchising your business
Good franchise concepts are teachable and repeatable. In other words, they can be explained to other people, grasped readily, and duplicated. The best way to achieve this (and the only successful way in franchising) is through strong systems. These should be based on operational documents that allow the system to be copied by others. It must also be a business that can be run in a non-centralised way.
Tip: If your business is based on your personal involvement every step of the way and is run on the basis of knowledge that exists only in your head, you’ll have trouble franchising it. Successful franchisors are able to create detailed operating manuals that set standards and describe procedures for every facet of the business. These are then implemented through training programmes for franchise owners, managers and employees.
Over and above being repeatable, the franchise concept needs to be supported. Franchisees invest both time and money in the concept you have not only created, but sold, and they can be demanding when it comes to support and training. Before you commit to franchising, make sure you have the time and inclination to support multiple franchisees.
It’s important to remember that even though your franchisees will furnish the capital required to start each new business, developing a franchise programme requires your own investment of time and funds. It is recommended that you use the services of franchising professionals.
The cost of professional advice to get you going the right way is often less than the cost of opening one additional company store – and it’s certainly less than having the whole concept fail.
In South Africa, franchising is not a regulated industry, which is why it’s important to get expert advice before franchising your business. You will need to adhere to the Consumer Protection Act, and you want to ensure that your disclosure documents and franchise agreements follow best practice.
In order for franchising to work as a legitimate growth strategy for your brand, you will need to ensure you have a good reputation within your industry that other potential franchisees will invest in.
Here are the elements required of a good franchise programme:
While this is not a legal requirement, a prototype is a good way to illustrate that you have something of value to offer. Selling a franchise based only on an idea is a long-shot at best – remember, you are asking people to invest in your idea. For many business owners, this investment is their life savings, or even their retirement plan.
A prototype is also a reasonable way of finding out if your idea will work; if it’s profitable, and most importantly, if it can be duplicated. It can also become a live training centre for future new franchisees and a testing place for new services, products and techniques.
In addition, many of the most successful franchises have a number of head office-owned stores. They ensure that the franchisors stay in touch with store operations and customer trends. They are also a good source of income, allowing the franchisors to not rely completely on franchisee royalty fees.
Once you have your prototype, you need to document how the business operates. The written procedures of your business methods will become the textbook for training new franchisees, as well as a formalised operations manual.
A franchise’s operations manual is a valuable document that should cover everything from start-up activities to office procedures, marketing to personnel management. It’s a step by step list of everything that makes your system work, including how to implement and run that system.
Make the information as lively and accessible as possible. Illustrations, tables, and lists can help. This should not be a document that sits on a shelf gathering dust. It’s the heart and soul of the franchise’s daily operations.
Whether you write the document yourself or get an expert to assist you, make sure to have it reviewed by a competent franchise consultant as well as an experienced franchise attorney.
A protected trademark
A protected trademark is one of the most valuable assets of a franchise programme. A trademark represents the brand – and it is that recognised brand that franchisees invest in. Failure to protect a trademark is a typical mistake made by new franchisors.
Make sure your first task is to develop a name that can be protected. This means ensuring that it isn’t being used by anyone else already, and then registering it with the Companies and Intellectual Property Commission (CIPC).
Many franchisors start marketing their concept before they protect their name, and this can be a costly mistake.
Tip: Hire an experienced trademark or intellectual property attorney to do the recommended search and application process for you. It’s not a very expensive project, and it can save you thousands in the long run.
By now your legal documents are being developed and your operations manual is being created and developed into training materials. You now need to turn your attention to the marketing tools that will help you sell franchises.
It is recommended that you work with a franchise development consultant who has experience in designing these sales materials, which will most likely include a DVD that introduces your concept and company to potential investors, a franchise brochure, and training on franchise sales techniques.
You will also need to know what to disclose to prospects to avoid pitfalls like making illegal financial performance representations. You will also need to develop a marketing plan that optimises your franchise advertising budget.
This will help you to generate an adequate number of franchise leads, which will be needed to meet your franchise sales goals. Track the results of each medium you choose to use carefully and see what works and what doesn’t so that you can adjust your plan as necessary.
The Franchise Disclosure Document
Franchising starts with the development of a Franchise Disclosure Document. The FDD, as it can be known, must be prepared according to strict guidelines.
It should include the following:
- An outline of your offering, including franchise fees, royalties, marketing fees, advertising offered by the franchisee, training, the franchise term, renewal provisions, and dedicated areas.
- Your business history and the experience of your principal officers.
- A report of your financial preparation for franchising.
- A copy of the actual franchise agreement, along with any other contracts that you will execute with your franchisees.
Because of the importance and lasting effects of the decisions included in the FDD, it is recommended that you work with an attorney who specialises in franchise law, and that you prepare a detailed business plan that outlines these business decisions before legal documents are drafted.
Your plan should also include a realistic financial analysis that tests a variety of options for fees, royalties, organisational structure, territory size, and growth options before any details are finalised.
When you are ready for your legal documents to be drafted, it is recommended that you work with an experienced franchise attorney. Although this may sound like an expensive task, a well-prepared FDD is the foundation of a solid franchise programme.
Finally, a franchisable concept must produce an adequate profit. Because of the extra costs franchisees must bear, this becomes an even more significant concern than with many other businesses. These extra costs include upfront franchise fees and royalties paid in the form of an ongoing percentage of sales.
This means that the profit-making power of the business must be sufficient to allow franchisees to pay you a royalty, while still leaving enough income for their own business. The franchisee is likely to have invested a significant amount of money into the business.
In addition to providing the franchisee with income, the business must therefore yield an adequate return for the franchisee’s investment. If these criteria are not being met, prospective franchisees are likely to find out during their own pre-investment research. Not only will you struggle to sell more franchises, but your brand will develop a poor reputation within the industry.
You’re going to have to spend money before you can make money. It takes money to get a franchise up and running, so make sure you’ve done your numbers and you have the cash you’ll need. This can be generated organically from your existing business, or you can get an investor on board – either way, before you start you’ll need a business plan.
Costs will range from hiring franchise consultants to paying attorney fees. You’ll need accountants to prepare audited financials. Additional costs result from running advertising and creating marketing materials to promote the franchise to prospective franchisees, training staff, creating manuals and developing operating systems.
Over and above the hundreds of thousands (even millions) of rands you’ll need to get the concept off the ground, you’ll still need to cover the everyday operational costs of running your business in the meantime.
The upfront franchise fees are designed to help you recover your development costs rapidly, but you will still need to budget for these investments. Burning through franchise fees without a strong financial plan will just lead to bankruptcy – for you and your franchisees.
Becoming a franchisor
Once you’ve decided to franchise your business, you’ll soon realise that you’ve added a second career to your current one. You’re now not only a mechanic, or restaurateur, or retailer, but you’re also a franchise executive, and this brings with it a whole new set of responsibilities.
This is no longer about the skills that made your own business successful. As you develop a franchise network, you begin to take on the responsibility of your franchisees. There is a reason they are investing in your concept: they want the training, guidance, encouragement and a host of other services that comes with joining your proven system.
Franchising isn’t for the faint of heart. However, for a knowledgeable, confident business owner who passionately believes in their concept and who wants to show others how to duplicate their success, it’s an excellent growth strategy.