Entrepreneurs who are looking at innovative growth strategies may consider the possibility of “franchising” their business. The following outlines some of the issues and decision points associated with embarking on such a strategy. The list is not exhaustive and is not a substitute for professional advice, but hopefully will provoke some thought on the issues involved.
What is franchising?
Franchising is an established business expansion strategy that has proven to deliver rapid growth – with arguably reduced risk. Some stellar examples include MacDonald’s, Singer and Coca Cola.
More recent successful exponents of this model include:
1992 ETYRES; 1994 CHIPSAWAY; 1997 Mail Boxes Etc; 2009 ORANGE.
Typically, a franchising company (a ‘franchisor’) licenses its Trademarks, Copyright, know how and established business model to ‘franchisees’. These franchisees adopt that business model, including the brand and then operate in new markets. The franchisor’s business model changes subtly to a “support” rather than “operational “ model and market share, brand recognition, and revenues grow as a result.
For franchising to be a success there must be mutual benefit.
Franchising is a long term partnership and companies who wish to be successful must recognise the true nature of the relationship, and the responsibilities on each partner.
Typically a franchisee will pay a franchisor:
- a license or purchase fee
- a percentage of the sales or profits
- an annual fee
In return, the franchisees would typically receive:
- initial training
- operations manuals
- a start-up package
- a ‘territory’
- on-going support
- national and/or regional marketing support (including possibly leads and opportunities)
- a trademark license
Depending on the type of franchise, the arrangement may also include provision of product, raw materials or supplies.
Franchising is not appropriate for all types of company. The following guidelines will help you identify whether a franchise strategy might be suitable for your business.
Typical characteristics of a company that may NOT be suitable for franchising
If your business exhibits one or more of the following characteristics, you may wish to address these before embarking on a franchising strategy.
- a product or service which is likely only to have a short term market
- a business that addresses a small niche market that only exists in a limited geographic area
- a business that returns low gross margins
- a “personality based” business that relies on customer loyalty to the individual and not the brand
- a business governed by regulatory issues and legislation that would pose challenges for franchisees
- attempting to operate as separate legal entities
- a business thinking of a franchise model to address current business cashflow issues
- a business which has limited capital and limited access to credit
Typical characteristics of a company that IS suitable for franchising
Brand: The core of a successful franchise operation is the brand. Franchisors must have a brand that people wish to buy and be associated with. The brand should be recognisable, respected and appropriate for use across different geographic territories. There should be a strategy for continued investment in the brand.
A Compelling Sales Proposition: A company should have a clear sales proposition that is understood and easily communicated. Whether it be based on price, quality, service, availability or whatever - the proposition must be able to be consistently deliverable.
Business Processes: A business that has developed quality, consistent and documented processes for creating or delivering its products and /or services.
Product and Service Consistency: The products or services themselves do need not be unique or even best in class but they do need to be consistent in the quality v price v availability v desirability attributes that they possess and that are reflected in the brand.
Repeatable Model: Franchisors are not just selling a product or service, but a way in which business is carried out against a proven business model. A business that does not take decisions or implement activities consistently against agreed methods of working will find it difficult to satisfy the needs of a franchisee. As such start-ups, some creative businesses or businesses that haven’t developed their detailed business processes will struggle to find and then manage franchisees.
Proven Track Record: Although not impossible, selling a “concept” to a potential franchisee is a more complex task. Desirable franchisees will likely want to see a proven product or service delivered to a proven market before investing their money.
Geographic Location: If a business is already able to operate independently in different locations, whilst using common processes and methods, then there is the basis to extend that model to a franchise operation.
Franchising is a proven business model that can bring about accelerated growth and fast-track market penetration. However, it is a strategy for businesses that clearly understand the basis of their success and are able to repeat that model again and again. For businesses whose success is based on brand development, consistency and organisational or process excellence franchising could well be the right strategy for growth.
About the author
Paul O'Collins is Head of Innovation at Business West and manages Enterprise Europe Network South West (EENSW). EENSW helps ambitious businesses innovate and grow internationally. With a team of specialists who provide sector and products specific support. For more information call 01275 370997 or visit www.enterprise-europe.co.uk .