How to Franchise My Business?
Thinking of franchising your business?
Any business person wondering whether franchising is appropriate for his business will ask the question’ Why should I franchise?’ The answer requires a number of issues to be considered. The question will be asked by businesses at different points of time in development as well as established businesses. There have been some examples of companies which have been confronted with a series of problems in the course of their business activities and resolved them in ways which have unwittingly had as their outcome the establishment of a franchise system. There are those who start a business intending, after it is established, to expand by using the franchise method. Established businesses have also found franchising offers opportunities for expansion. Not only are there opportunities to add to existing networks but franchising cannot only help to convert loss making or marginally profitable outlets into profitable businesses but can also play a role in filling in gaps in the market place. Retail traders in many countries who do not franchise in their domestic market, have found benefits from franchising into foreign markets. Manufacturers can use franchising to secure outlets for their products. There may be some competition law issues to be considered. Wholesalers with surplus storage and distribution, capabilities may also find that franchising has much to offer them. Indeed, all businesses whether they deal in products or services may find franchising can assist their development plans. This does not mean that franchising will suit every business but certainly it should not be dismissed without consideration. There can be many benefits although the business of franchising is very different from running one’s own outlets. The profit in cash terms will be lower but:
- the capital requirements will not only be lower because the franchisee will provide the capital to establish the outlets, but the franchisee will pay the franchisor a franchise fee. If the franchisor intends to convert existing outlets or some of them to franchisees it will be able to sell the outlets as going concerns;
- the number of staff a franchisor needs to run a franchise network is invariably far less than a business needs to run a network of company owned outlets. For example, a franchisor does not need to provide relief managers or other staff to cover holidays or illness. The franchisor provides a range of advisory services with focussed and specialised advice about the franchisees businesses which benefits from the cumulative experience of the whole network.
- the franchisor does not become involved in the day-today operation of each franchised outlet;
- the franchise network can grow as quickly as the franchisor can recruit and train franchisees, acquire suitable premises and most importantly, develop its infrastructure to cope with the expanding size of the network;
- the commonly held belief is that franchisees are better motivated than managers. This is undoubtedly true - there is anecdotal evidence that in cases where managed outlets have been converted into franchised outlets there have been significant increases in turnover. However, some franchisees can reach a comfort level which satisfies their needs - that is a challenge for a franchisor.
Franchising is not a panacea for the ills of an ailing business or a business operating in a declining market. The success of franchising is built upon the successful operation of franchised businesses by franchisees using proven successful formats and systems. Franchisees do not need a franchisor to lead them into failure - no-one needs a franchisor for that! While franchising does not work for everyone, its benefits merit serious consideration and evaluation. Before deciding to embark upon the franchise method, consideration should be given to the advantages and disadvantages of the system from the point of view of the franchisor. Advantages to the franchisor
- The franchisor will only require a compact organisation, consisting of a few highly specialised managers in the various aspects of the business with which the organisation is concerned, and their support staff.
- The franchisor can earn a reasonable profit without becoming involved in high capital requirement or in the day-to-day detail and problems which arise in the management of scattered outlets.
- Since the franchisor is using others’ resources and can by its training programmes equip them to utilise its business system, its organisation has an ability to expand more rapidly on a national, and eventually (if appropriate) on an international, basis, using a minimum of risk capital and management resources.
- The franchisor will find it easier to exploit territorial areas which are not already within the scope of the organisation as franchisees with local interests and knowledge can be obtained.
- The introduction of a franchisee to an existing branch in a multiple chain can convert a loss-making, or marginally profitable outlet, into a profitable outlet, thus enabling a business presence to be maintained when otherwise it might have to be closed down. This outcome is achieved by removing from the profit and loss account for the outlet such expense items as the cost of employment of the manager and staff, including the cost of holiday and sickness staff cover, as well as the proportion of head office overheads which will normally be allocated to the outlet. Although a franchise fee will be payable it will be considerably less than these items.
- A franchisor has fewer staff problems with which to cope as it is not involved in the staff problems of each individual outlet.
- The local management of each franchised outlet will be keen, well motivated, and extremely alert to minimise costs and to maximise sales - much more so than would be the case with a manager.
- An existing business with multiple outlets can raise capital to enable it to reduce borrowing or to diversify its business interests by selling off some or all those outlets and simultaneously entering into a franchise agreement for the future operation of those outlets.
- Franchising offers the scope to an existing single owner of a multiple chain to develop its future outlets by a franchise system rather than expanding its own outlets, thus reducing the calls upon its capital and manpower resources.
- Certain types of franchise schemes are able to benefit from the development of national accounts. There are many large industrial concerns having a number of factories, offices and depots throughout the country which require the services offered by some franchise networks. Franchisors are able to negotiate with them for each franchisee to service the requirements of the local branches within his franchised area. None of the franchisees would have the ability or the capacity to negotiate or service arrangements of this nature on his own, yet the group as a whole has the capacity to do it. Each franchisee by the quality service which he provides to the franchisor’s customer ensures that the group as a whole retains the business of the large national multiple outlet company. Care must be taken not to overdo national contracting, since, if national contracts form too large a percentage of the franchisee’s business, it can prove to be a distincentive for him to develop his business and market to the full by his own efforts.
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