Ten Keys to the Decision To Franchise
An appropriate first step in your decision to franchise is an examination of the question of whether or not your business or concept is actually “franchisable.” Any organization seriously considering franchising should undertake this analysis before implementing a franchise strategy.
FranCnsult considers 10 key criteria when making their analysis to assess the readiness of a company for franchising and the likelihood that it will achieve success as a franchisor. While all conditions need not and, in fact, may not, yet be in place, they will need be to expect a successful outcome from your Decision to Franchise.
This is the real acid test of franchisability. A franchised business must, of course, be profitable. But more than that, a franchised business must allow enough profit after a royalty for the franchisees to earn an attractive return on their investment of time and money given their risk. Profitability is always relative. It must be measured against investment to provide a meaningful number. In this way, the franchise investment can be measured against other investments of comparable risk that compete for the franchisee’s dollar. Typically, FranCnsult looks for the franchisee to achieve a cumulative annualized anverage ROI of at least 20 to 25 percent by the fourth to fifth year of operations.
One or preferably more successful existing locations are necessary to demonstrate that the system is proven, and is generally instrumental in the recruitment and training of new franchisees. The prototype also can act as a testing ground for new products, new services, marketing techniques, merchandising, and operational efficiencies. The rare occasional exception to this rule is with companies whose franchises involve the direct sale of a proprietary product or service.
While franchising is a low-cost means of expanding a business, it is not a “no cost” means of expansion. A franchisor needs the capital and resources to implement a franchise program. The resources required to initially implement a franchise program will vary depending on the scope of the expansion plan. Franchise Disclosure Documents and a Franchise Agreement are just the begining. Total start-up costs will typically run $100,000 or more, and once the costs of franchise marketing, personnel, management, and audits are added to the mix, a franchisor may easily require an annual budget of at least $250,000 possibly much more to reach aggressive expansion goals.
A general indicator of the success of any business, the market and its trends are key to long-term planning. Is the market growing or consolidating? How will that affect your business in the future? Will the franchisee’s products and services remain relevant in the years ahead? What are other franchised and non-franchised competitors doing? And how will the competitive environment affect your franchisee’s likelihood of long-term success. What impact will social media and the Internet have?
Barriers to entry are a critical component. A franchise organization must be adequately differentiated from its franchised competitors. This can come in the form of a proprietary and/or differentiated product or service, a unique marketing strategy or niche, a reduced investment cost, or different target markets.
The single most important aspect contributing to the success of any franchise program is the strength of its management. FranCnsult has found that the single most common contributor to the failure of start-up franchisors is understaffing or a lack of experience at the management level. Oftentimes, new franchisors will try to take everything on themselves. In addition to absorbing several new jobs for which the franchisor has little to no time, the franchisor needs to exhibit expertise in fields in which he or she may have little or no experience: franchise marketing, lead handling, franchise sales, ad fund management, training, and multi-unit operations management.
All successful businesses have systems. But in order to be franchisable, these systems must be documented and replicable in a manner that duplicates and communicates them effectively to all franchisees. Controls must be in plase to insure compliance and project a seamless "Brand" awareness. Generally speaking, a franchisor will need to document its policies, procedures, systems, forms, and business practices in a comprehensive and user-friendly operations manual and computer-based training module. The franchisor will need to establish and maintain proper methodology to monitor performance.
The ability to teach a system to others and coach results. To franchise, a business must generally be able to thoroughly educate a prospective franchisee in a relatively short period of time. Generally speaking, if a business is so complex that it cannot be taught to a franchisee within 60 to 90 days, a company will have difficulty franchising. Some more complex franchisors can offset this handicap by targeting only franchise prospects that are already “educated” in their field (e.g., a medical franchise targeting only doctors) which also severely reduces the pool of potential franchisees effecting growth and expansion.
How well a concept can be adapted from one market to the next is paramount. Some concepts (e.g., snowmobiles) do not adapt well over large geographic areas because of regional variations in conditions or consumer preferences. Others (e.g., medical practices) are constrained by varying state laws. Still other concepts work only because they are in a very unique location. And some work because of the unique abilities or talents of the individual behind the concept. Finally, some concepts are only successful based on years of perseverance and relationship building.
To sell franchises, a company must first be credible in the eyes of its prospective franchisees. Credibility can be reflected in a number of ways: past performance, training & support, number of units, years in operation, look of the prototype unit, publicity, consumer awareness of the brand, and strength of management, to name those most prominent.