Is Franchising Right for Me and My Business?

Franchising has experienced tremendous growth in Australia over the last 5 years. Since 2002 the number of

For Franchisors it is a proven method for attracting capital to expand an enterprise without having to tie up the majority of existing financial resources. Added to that the operating costs of individual oulets are the responsibility of motivated franchisees, for whom the cost of supporting are more often than not covered by income from regular royalty payments and marketing levies.

For many Franchisees, being able to join a franchise network gives them the confidence to realise a long held ambition to operate their own small business, because the risks are less than in a stand-alone operation.

However, this does not mean that franchising is an appropriate way to structure and grow just any businesss. In the case of franchising you need to start with the foundation of a tested and profitable business that has a history of successful operation. The business should be offering a clearly defined product or service, backed by proven operating marketing and management information systems.

Te application of franchising to an unproven or half-baked business will inevitably lead to problems as the business is replicated. Because franchising is replicating a business, it has the effect of copying not only the good aspects but also the bad. Business owners considering franchising as a business strategy must completely understand the following steps when positioning their business as a franchise.

Plan, Plan, Plan

The importance of preparation and planning when establishing a franchise system cannot be overemphasised.

The first essential step is to determine the viability of franchising the business by undertaking a detailed feasibility study. The feasibility study should be conducted by a franchise professional and consider such aspects as the specifics of the franchise business model, capital requirements, financial viability for both the franchisee and franchisor, a SWOT analysis of the business, critical issues for success, supporting market research and a clear direction and action plan for development.

If the feasibility study proves negative, then a more suitable option for growth can be identified and implemented, but if the feasibility study proves positive, the next step is to develop a complete franchise system.

Pay Attention to Detail

The franchise system is the complete operating format that will enable the franchisor to implement, manage and control the business over the longer term.

It must consider the administration of the franchise network, including the financial controls, reporting and marketing activities. Initial and ongoing support services to be provided to franchisees must be clearly defined.

The franchise support team must have defined job roles and be accountable for their performance. A comprehensive training system is essential. Induction training for new franchisees must be supplemented with regular ongoing training, as well as when innovations are introduced to the franchise system.

Every franchisor must have a real interest in the ongoing viability of their franchisees. The franchisor is really a coach to the team of franchisees. Forty Winks is an excellent example, providing strong ongoing support with sales and marketing, purchasing and business advice on financial and staffing issues.

Run a Pilot

Utilising a pilot franchisee to fine tune the franchise model enables the franchisor to make any necessary adjustments to the franchise model, and is very important prior to a full launch of the franchise.

Franchisors who fail to pilot commonly end up with multiple headaches, which should have been rectified with the first franchisee.

Additionally, it is wise to establish the pilot close to franchisor's home base of operations to facilitate monitoring performance and enable the provision of all necessary training, support and guidance. This will also help to control costs such as travel.

Take Care Defining Territories

The basis for allocation of franchise territories and business location are critical success factors for franchisees.

A territory may be a physical territory such as a defined area on a map, or it may be a customer/client base that is provided by the franchisor at the commencement of the franchise.

If the territory granted is too large, a franchisee will never adequately service the area. However if the territory is too small, the franchisee will likely not generate sufficient income to be viable.

Again, the pilot franchise should help fine-tune the criteria for allocating a franchise territory, prior to further expansion.

'Hasten Slowly' when Choosing Franchisees

Spending time ensuring that the franchisees brought into the franchise system have the right qualities will have a major influence on the success of a franchise system. A defined recruitment strategy together with the appropriate documentation, including application forms, checklists and a documented understanding of the preferred franchisee profile, are all essential tools needed to select the right franchisees for a franchise system.

In addition to the required tools, a franchisor must understand the need for, and be prepared to, allocate adequate funds towards the marketing of the franchise opportunity to potential franchisees. There are various forms of marketing that can be utilised including newspapers, franchise and business magazines, direct marketing, search engine marketing and exhibitions. Fundamental to the marketing process is the website of the franchisor. More often than not, a potential franchisee will research the franchise opportunity via the internet prior to deciding whether or not to make an enquiry.

Franchisors should also consider the lead-time involved to secure a franchisee, particularly the first franchisee. It is not unusual for this to be in the vicinity of three to six months. One of the hardest things for a franchisor to do is to say no to a person with finance approved when they do not meet the required profile for the business.

Know and Conform to the Law

Legal requirements, including the Franchising Code of Conduct and other aspects of the Trade Practices Act, must be addressed in detail when developing the franchise system and documentation.

The preparation of a Disclosure Document and Franchise Agreement that comply with the Code are mandatory. Not only are the contents of these documents important but also the timing and order in which they are presented to a franchisee during the recruitment process.

The Franchising Code of Conduct is primarily designed to protect the interests of the franchisees who need to know the credentials, experience and background of the franchisor. Franchisors must take care that they update their Disclosure Document at a minimum once per year as required under the Code.

Document Your Standards in a Manual

The preparation of an Operations and Procedures Manual detailing the daily operating methods of the business provides an excellent introductory, and often legally binding, curriculum for franchisees.

The manual also provides franchisees with an ongoing point of reference. This can considerably lessen the burden on the franchisor in the area of problem solving, because the franchisee and their staff have at their disposal the complete 'bible' for operating the business to a proven and successful formula. In fact many franchisors are making their manuals available to franchisees via an intranet, partially eliminating the need for bulky printed material that can be easily copied.

The manual is also a vehicle for the franchisor to introduce innovations and changes into the business as they occur. New techniques must be incorporated into the manual as soon as practicable. A franchisor should allocate the responsibility of updating their manual to a particular person within their organisation.

Keep Moving Forward

After the launch of the franchise system, the franchisor must not only commit to the ongoing support of their franchisees, but also to the maintenance of the operational systems and update all the associated documentation on a regular basis.

Franchisors should also encourage franchisees to contribute marketing ideas and suggestions for innovations to the product and service offerings of the business. These must all be approved by the franchisor and fit within the constraints of the franchising system.

Many innovations at McDonald's have come from franchisees' ideas or out of necessity. For example: the Fillet of Fish. A franchisee in a Catholic community suggested a fish product to counteract falling burger sales on Fridays. Other innovations derived from franchisee suggestions include the playground, Ronald McDonald, the Big Mac and McValue meals.

In today's competitive environment, there is no room for complacency. Franchisors must have a long-term attitude to growing the business and their franchisees. This will nstil confidence into franchisees which should inturn transfer to their customers.

The strength of a franchise system will have a dramatic influence on how successful the franchise strategy will be in the longer term. Potential franchisors should not compromise in seeking the best advice or committing the time to getting the foundations right.

Written by: Eric Morgen (Franchise Feature)

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