For most retail businesses, franchising offers an excellent opportunity to grow the brand across a large geographical territory very quickly. Opening up a company’s systems and its heart to an individual who wants to come on board primarily because he senses a financial return on his investment takes an organisation time to understand and digest.
It is essential to make sure that a company embarks on franchising only when the organisation and its people are ready to welcome a franchisee into its fold.
Benefits of franchising
From the perspective of a franchisee, it is important to understand what benefits he can expect and from the perspective of a franchisor, they must understand that they must be able to provide value to any potential franchisee.
- Consumers buy from brands they trust – Brands are what convey credibility to a consumer and brands outlive any promoter or manager. A strong brand ensures long term profits and an association with a strong and credible franchisor helps to build a long term and sustainable business for an investor.
The franchisor must support his brand and the franchisee must assure the brand owner that the brand will be respected and that no steps would ever be taken that will tarnish the image or diminish the value of the brand.
- Efficient business practices as systems are proven – Strong companies are able to bring strong systems and good business practices into the business of any franchisee. It is important to adhere to these values to ensure that there is no clash of values between the franchisor and the franchisee
- Marketing costs are lower through volume – Becoming a member of a large franchise operation helps to defray marketing costs over a large number of business owners.
- Mentoring the franchisees – The franchisor must put together a senior team that is available to mentor all franchisees through their early stage of taking the franchise. This mentoring is really an extract of all the learnings of the company over a period of time through experience.
- Reduced risk through proven business model – The franchisor must believe that the learnings of the franchisor can be transferred to a potential franchisee so that his learning curve is not as steep or as expensive as that of the franchisor.
- Defined territories protect franchisees from competition – Once a franchise territory has been defined, it becomes a valuable piece of “real estate” since there should be no other franchisee in this defined territory.
A franchisor must look at what he can to offer to a potential franchisee before agreeing to sign up and give the rights to their brand to any franchisee.
- Strong Value Proposition – the brand proposed to be franchised must offer a strong, clear and unambiguous value proposition to the potential franchisee.
- Control Systems – The franchisor must have strong back office and control systems to help a franchisee manage his business as well for the franchisor to manage several franchisees.
- Buy in from everyone within the company – Getting a buy in from every department and every head of department is essential for the process to work. The franchisor must create a dedicated team of people who will be able to address the issues faced by any franchisee.
- Business Plan – The franchisor must not prepare or commit to a business plan for any franchisee. All that he should do is to give the assumptions for preparing a business plan and share all the relevant data from their company owned operations in a similar market. The business has to be run by the franchisee and they have to commit to their numbers, not the franchisor.
- Don’t differentiate from company owned store – Franchisee operations have the same needs as those of a company owned operations and the franchisor cannot afford to differentiate between these. This problem becomes more acute at the field level where issues start between the two formats. Such issues need to be tackled immediately before these become serious problems.
From a customer’s perspective, the franchisor must remember that there is no differentiation and if there is a problem in service delivery, the franchisor cannot tell the consumer “The problem occurred because of the franchisee”!
Before an individual takes up a franchise of any brand, he must address the following questions to his satisfaction. Once money is committed, then it is very difficult to change one’s mind.
- Is this the right franchise for you – Every franchisee should ask himself the question whether he has the skills or the training to handle the chosen business. I have met a number of potential franchisees who assume that they simply have to make an investment and then wait for the results. When I tell them that they have to actually run their business and not simply make an investment, they start to think twice.
- Get professional advice from an accountant, lawyer or other business expert – I always ask a potential franchisee to develop a business plan before they start making the investment. Unless a franchisee understands his own business model, he will never be able to extract the maximum value for his franchise in terms of monthly returns after meeting all his costs.
- Check out the franchisor – It is the responsibility of the franchisor to give a detailed data pack to every potential franchisee to conduct a detailed due diligence on the company and its directors. This is important so that a person who wants to invest money satisfies himself about the franchisor and people behind the company.
- Speak with existing franchisees – Potential franchisees must be encouraged to meet and discuss the franchisor experience with other franchisees. Only when they hear a satisfied franchisee speaking will they understand the value they can get for themselves from the brand and organisation they may choose to partner with.
- What is the exit strategy and what goodwill can be retained? – For every potential franchisee, the franchisor must offer an exit by offering to buy out the franchise at the end of the agreed period. If the franchisee wishes to continue longer, the renewal should be on terms then applicable.