Franchising - Do You Make the Leap?
Written by : Lori Karpman
We in the franchising field are of a special ilk. We are in operating business like restaurants, dry cleaners, and video stores but operate inside a specialty designed business model called “franchising”. Think of it this way, franchising is to business like orthopedics is to medicine, it is a specialty of the business world. Deciding to franchise is primarily a financing decision that companies make to fund growth. The options available to fund this growth are conventional bank financing or private investment. Both of these options have serious long-term financial implications. Growth is slow and high priced. Hence, the major attraction of franchising. The speed of development. Growth is funded by the investment of individual partners called “franchisees” who will replicate your concept in return for royalties for the right to use the systems you have created. In essence then, it is a series of partnerships between the franchisor and individual investors. The whole forms a franchise system-complete with its own set of rules, regulations and hopefully, common goals.
When making the decision to franchise there are many factors to consider. The first and most obvious is whether the concept is “franchisable”. To be capable of being franchised a concept must be easily replicated anywhere in the world. Can a franchisee in Winnipeg get the same dinnerware and food supplies? Will the raw materials needed for the construction of the store be 3 times the price in Cape Breton? The next biggest consideration is the cost of entry. How much will it cost a franchisee to buy into your concept? What is the total investment required for a turn-key operation? And operations? Is a specialized skill set is required? This will narrow your target market for potential franchise prospects. How easy is the business to run? These factors, although not exhaustive by any means, are the primary ones that will essentially decide whether franchising is a viable model for your business.
The heart of the issue, however is financial. My first inquiry is always to the financial position of the company. How well capitalized is it? Frankly, if financing is not an issue, I rarely recommend franchising. Why? Because, franchising is a whole other business in and of itself. I tell clients that they will no longer be in the restaurant business for example. Their operations people out in the field will remain so but they, at head office, will be facing a whole new set of responsibilities and challenges. Franchising brings with it a host of onerous obligations and responsibilities to which you will be held by your franchisees-I can promise you that! Obligations of support and training, new product development, marketing, and the like are what occupy the time of the executives at head office now. Your obligations center on ensuring the smooth operations of multiple stores in a chain. Successful franchisors understand that from this point on the franchisee is their client. While the ultimate goal is always to satisfy the end consumer, that result can only be achieved by providing the front line franchisees with all the tools necessary to ensure their success. That means not only research and development and strong marketing programs, it means having the right personnel in support roles as well. The same rules of customer service at the store level apply to the franchisees. Remember, the name of the game is growth, in sales and in units. Your best salesman is a successful franchisee. After all, who are your prospects going to talk to first? The answers to the questions-do you get good support and are you making money, must be a resounding YES! Therefore, you must also be committed to investing in building an infrastructure of talented people to create, implement, and police the policies, procedures, and systems needed to achieve that YES!
The greatest challenge is in maintaining the peace. The relationship between franchisor and franchisee is too often contentious when it needn’t be. Having been a franchisor and a long time director of a territorial franchisee, I have the benefit of having sat on both sides of the fence. My observation is that it’s the breakdown in communication that causes this distress in a system. Franchisors fail to communicate the “why’s” of their actions upon implementation and adopt the Nike “Just do It” approach. Franchisees feel bullied and out of the loop. Franchisees however, within 1-2 years, have invariably figured out a way to do it better and forget why they bought “the system” in the first place. In my seminars, I counsel future franchises on that very topic. I say “the day you stop following the system is the day you start losing money”. Franchisors have to do a better job of communicating with franchisees on future plans, R&D, highlights of successful programs run by other franchisees and the like. When franchisees buy-in to a plan or at least understand the “why” of it or even the fact that it’s coming, they are more likely to adopt it. It’s as simple sometimes as a monthly newsletter. If there is a common goal then you must all play as a team with the franchisor as the coach. Otherwise, the whole team loses and falls apart-and we all know what happens to the coach then!
Making the decision to franchise is not made lightly. It does sound easy in theory I admit. Truth be told though, it is a different and additional business from what you presently operate. There’s a reason it’s a specialty. The best advice I can give you, and it holds true for any business decision, is: be smart enough to know what you don’t know and hire an expert in that field who does. Now at least, you know what you don’t know!
Lori Karpman & Associates Ltd., a full service franchise consulting and law firm providing any array of personalized services to the franchise community. 514-481-2722