Is your business thriving? Do you want to grow it? Franchising might be a good tactic, but it does require some strategic thinking to get the foundations in place.
Franchising has proven itself as a great way for businesses to grow from humble mom and pop establishments into multi-national companies. But, while the business model appears to offer easy business expansion at face-value, being in business for yourself as an independent is very different from leading a franchise chain.
Added to the finances required to kickstart a franchise operation, it’s advised to thoroughly investigate whether a franchise growth path is the right choice for your particular business – because not all business concepts are suited to franchising.
“Even the best-laid plans could result in failure if the underlying business is not ready for prime time. If you’re considering franchising, take a step back and ask yourself, ‘Am I really ready?’”– Mark Siebert, CEO of the iFranchise Group
Related: The future of franchising looks smaller (and fancier)
The cost of turning your business into a franchise
In certain instances, like food retail and fast-moving consumer goods, franchising can be a cost-effective method of expanding a business’ footprint. But, this doesn’t mean the cost of franchising comes cheap.
Developing legal documents, manuals, training programmes, marketing resources, and a marketing budget requires a reasonably healthy capital investment. Your finances may be in order at the moment, but you have to ensure you can cover fixed expansion costs and any other surprises that may arise as a new franchisor.
Costs to consider to become a franchisable business
Here are the average expenses to expect in your first year of launching a new franchise chain:
1. Feasibility study
Could cost between R41 000 to R87 000
Evaluate the competitive landscape and establish the probability for your potential franchise success. A feasibility study can help gauge the potential success of turning your independent business into a franchise concept by looking at a variety of factors in the sector.
2. Franchise Disclosure Document and a Franchise License Agreement
Could cost between R24 000 to R41 000
A Franchise Disclosure Document (FDD) is presented to a potential franchisee to give them an idea of the company’s background and history, while a Franchise Agreement is a legally binding document signed by both parties once a deal is made. A good FDD can help persuade a franchisee to join your franchise and sign the Franchise Agreement.
3. Training manuals and franchise-related materials
Could cost between R177 000 to R591 000
You will use these to assist new franchisees in the launch and operation of a successful duplicate of your business. Franchisees will also need manuals to help on-board new staff.
4. Creating a Marketing Plan
Could cost between R87 000 to R177 000
This plan can help you strategically promote your business. From attracting new franchisees to buy into your business, to broadening your customer base, the franchising marketing plan is your go-to document when planning national campaigns and outlining rules on localised advertising and promotions.
5. Establishing a new legal entity to be the franchisor
Could cost up to R160 000
You might have to change from being a sole-proprietor or CC to become a PTY Ltd. This could help protect your personal assets, because the new franchised company is a separate legal entity.
6. Additional Staffing
Could cost up to R2 364 000
If you’re looking to sell more than 10 units in your first year, you may not be able to handle the rapid growth without additional employees at a ‘head office’ level. Consider hiring a Franchise Development Manager, a trainer and additional support staff.
Related: As consumers’ tastes change can your franchise keep up?
The positives and negatives of turning into a franchise
As an experienced and highly successful independent business owner, the idea of converting your business into a franchise requires you to weigh up the pros and cons:
1. Benefits of being a franchisor
Access to ready-to-operate locations
You don’t have to recruit franchisees from scratch when starting a franchise system. Established business owners might be looking for to be part of a system, so this gives you an opportunity to work with like-minded entrepreneurs from the outset.
When converting independents into franchisees, you have the advantage of working with entrepreneurs who already have premises, staff and customers. They have key boxes checked for becoming a fully-operational unit within your franchise chain.
As an independent retailer, you’re probably buying in bulk. But the bulk you’re used to is nowhere near the levels of bulk that franchisors have to deal with. The advantage here is that your purchasing power improves, amassing savings for you and your franchisees.
It’s important to talk to your current suppliers to see if they can accommodate your increase in orders. You might find that your current suppliers are confident in supplying you as an independent business, but they might not have the capacity to supply a franchise chain. If you succeed in your negotiations with suppliers, you could drive up profitability to levels that could not be reached as an independent operator.
2. Challenges of being a franchisor
Managing experienced business owners
As mentioned earlier, converting existing businesses into new franchise locations can be a genuine benefit for new franchise outlets. Domino’s Pizza chain is experiencing success in terms of growing its footprint in South Africa, for example, simply by converting de-commissioned Scooters outlets into new shops.
Franchise experts, however, caution independent business leaders that franchisees who have prior experience in your industry may have their own methods of operation. They could clash with your own newly-developed systems and processes and trying to convince them to change old habits could be a challenge.
Are you prepared to give up operational flexibility?
As a franchisor you now have to answer to an entire network of shop owners before taking major branding or operational decisions, because these decisions will affect people other than yourself.
Standard Bank’s franchising experts can help you determine whether your independent business is ready to become a franchise. If you are ready, we’re able to provide you with tailored finance solutions to take on some of the costs associated with franchising.