Many businesses consider franchising as a strategic method of expanding their operations and financial results. But how do you know if franchising is for you? Let’s start with the benefits of franchising:
- Building your team with quality, motivated people. Because of the ownership element of franchising, those who become franchisees have a stake in the organization other than a paycheck. A franchise owner tends to be highly motivated, hard-working, and if you set your criteria correctly the most qualified people you could bring onto your team. They are willing to invest, work the hours, and recognize that they determine how successful their franchise will be.
- Access to capital. Because the franchisee is purchasing from you the market for operation, you the franchisor have an inflow of capital. Also, franchise models (once proven) are highly appealing to lenders. So both you the franchisor and the franchisee have improved access to expansion funds.
- Limited risk. As the franchisor, the investment in each new franchise location is minimal as compared to owning each new location (company stores).
- More rapid expansion. Many franchises are able to rapidly expand with multiple locations opening each year. The gating factor for expansion becomes how strong the franchise screening, negotiation, and operational launch systems and processes are. From location guidance to the “business in the box”, launch of successful franchisees requires:
- Robust qualification and screening of applicants
- Applicant due diligence
- Established financing plans, contracts, and terms and conditions of sale.
- Well-developed training and education programs
- Established sources for construction of location to franchise standards.
- Ability to identify national/local sources for food, labor, and other site specific needs.
- Compliance with federal, state and local regulations.
- Financial systems – sales, franchise fees, and audit (internal and franchisees)
- Business process documentation.
There are other benefits to franchising; those listed above are simply the biggest ones. Just as there are big benefits there are also drawbacks to implementing a franchise model. Let’s take a look at some of those:
- Franchises are independently owned and operate by contract agreement within the franchise rules and policies. However, they are not company stores where you have full oversight and control. A franchise will be run based on the owner’s goals, values, and preferences (again within your agreement). For instance, you as the franchisor will be compensated based on sales as part of your franchise agreement. The owner gets the profits. Where sales and profits are not aligned, there is potential for conflict. For example, franchisor instigated coupons will increase sales, but not necessarily profits. So franchisees may resist coupon campaigns. To the extent your franchise and operational agreements stipulate participation in marketing, promotional campaigns, etc., potential conflict can be managed by managing expectations and setting up a minimum number of campaigns that require franchisee participation.
- Franchisee competition. Store managers are compensated based at least in part on cooperation with other store managers in company owned outlets. Franchisees may feel the pressure to compete, especially if they are located in the same geographic area or adjacent areas. For instance, one franchisee may want to ride the tails of another franchisee’s advertising efforts if they are in the same local TV/radio/print markets rather than invest in their own or pay to participate in a franchisor sponsored advertising push. Again, your franchise and operating agreements can address these issues to a degree, but you will sill have potential for conflicts.
- Inevitably you will want to change some aspect of your franchise. It could be a product offering, branding, advertising, or any number of aspects of the business. In a company owned operation, you make the change and everyone follows your direction. In a franchise system, you may find that the franchisee resists innovating the business model, brand, marketing, or products and services. They may be perfectly content with the current status. Getting franchisees to change may require some effort, time, and you may still not get the cooperation you desire.
- Legal disputes. Along with giving up control, you also run the risk of litigation when a franchisee fails to live up to legal agreements or from a dissatisfied franchisee, who fails to achieve profitability, etc.
The better the foundation you lay for your franchise, the better your chance for success. Developing and documenting business processes in existing company owned operations is just the beginning of building your franchise. Taking time to think through your expectations, the elements of the operational agreements, lessons learned, and your objectives are the minimum elements of getting started franchising your business. Perhaps more important is understanding where you want to expand, how fast (conservative) you want to expand, and how to establish the franchise support system that is needed to enable you and your franchisees to succeed.
If you are ready to get started on your franchise model, find the right resources to facilitate development of the franchise system, obtain specialized legal counsel, and establish clear goals in a written business plan for your business. The investment of time and money will payoff in the long run.
Copyright ©2015 Lea A. Strickland, F.O.C.U.S. Resource, Inc.
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