Franchising can be a highly successful way to expand your business, raise capital, increase revenue at store level, obtain market share, develop a brand and increase future asset value. However, it can also be a disaster and send you bankrupt.
On the face of it franchising appears to be simple. You licence the use of your brand and business know-how to a franchisee, and in return, they pay you a fee to help them operate a business. Often business owners take a simplistic view and base their decision to franchise on the unrealistic expectation of becoming wealthy in a few short years. This is often based on simplistic thinking along the lines of; “If I sell one hundred franchises with an initial franchise fee of forty thousand dollars, I will make four million dollars plus have an ongoing royalty or income stream, enabling me to retire”. If it were that simple, everyone would franchise, and become a millionaire.
Many business owners neglect to consider the governance and support structure that is necessary to maintain and grow a franchise network. The income generated from upfront franchise fees and on-going royalties are not pure profit for head office – a large portion of the fees generated are required to cover the costs of finding the franchisees, training and inducting then and then supporting them. Examples of support include:
Business performance managers who will help franchisees improve profit and revenue
Investment in innovation for the business
Research for new products
Human resources who will manage supply chain, operations and administration
Business owners often turn to franchising as the answer to dealing with staffing issues and to raise the capital required for growth. It sounds easy: franchisees improve per unit performance because they have used their own equity to invest in a business and hence are totally committed to it. The result is revenue for the franchisor from royalties, rebates, wholesale margin etc. However, you need the right franchisee, location, training and support to be successful – the ability to invest in an opportunity is not a qualifier for performance and success.
Franchising is a complex business model which has its own unique challenges. You may have less staffing issues, but now you need to manage franchisees, and they will have their own expectations. The tenure of your franchisees is greater than your employees plus you have a different set of legal and business obligations. In addition, a franchising model may or may not provide you with the best sale price when you come to sell the business. Some potential buyers really like the model others do not.
Before establishing a franchise, a business owner needs to establish whether franchising is the right model for them and their business. There is no benefit in creating a franchise model if you cannot find franchisees and obtain significant market share, or if it does not increase future asset value compared to other expansion models.
Before you franchise your business, you need to be able to answer the following questions:
Am I operating in a mature market?
What value do my services or products bring to the end consumer?
Do I have a unique competitive advantage?
What market share can I realistically obtain?
What effect will the broader economy have upon my business now, and in the future?
Will franchising increase future asset value?
Will my business be attractive to potential franchisees?
Does my business have the capabilities to operate a franchise system?
Is there an alternative way to grow my business?
Will I have the capital to expand in the future?
Business owners’ first need to develop a strategy to grow their business based upon evidence; to identify and make apparent the most suitable model(s) for growth.
Today’s business environment is more competitive and more complex than ever before. Growing your business is exciting, and choosing the right strategy for growth can be the difference between success and failure. When looking for service providers to help you grow, ensure the company you engage in has extensive multi channel experience and is able to provide a suite of different growth solutions, as franchising may not be the right model for you or your business.
Glenn is a Manager at PricewaterhouseCoopers (PwC), and specialises in helping clients to grow their business through company owned, franchising, licensing and alternate distribution strategies.
Glenn has assisted many businesses transition from small companies and grow into emerging brands. His advice is based on strong hands-on practical business experience, having owned and operated a successful international training company.
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