Franchising your business is a proven route to rapid growth. But becoming a franchisor is not an automatic ticket to success, especially in this challenging economy. Still, many business owners dream of seeing their brand become a household name, with a network of franchisees. When the right concept is franchised effectively, it can be a great expansion strategy that doesn’t require as much upfront capital as growing through company-owned units.
If you’re considering franchising your business, know that the process of becoming a franchisor is usually long and involves considerable cost. Just because you qualify to sell franchises doesn’t mean you will find buyers. Data from the International Franchise Association shows that of the 105 companies that started selling franchises in 2008, more than 40 had not reported the sale of their first unit by the end of 2009.
Becoming a successful new franchisor entails making many thoughtful decisions early on that will affect your business for years to come. There’s also a lot of legal paperwork to wade through to make sure your business complies with national and provincial laws that regulate the franchise industry.
Here’s our guide to the important steps you’ll need to take along the road to becoming a new franchisor.
1. Evaluate if Your Business is Ready
The first question to ask is whether your business is suited to being franchised. Beyond having a track record of sales and profitability at the existing business, there are several factors to weigh here, says Mark Siebert, CEO of the US franchise-consulting firm, iFranchise Group.
Consider your concept
Most good franchise concepts, he says, offer something familiar, but with some unique twist to it. The concept has to appeal both to end consumers and to prospective franchisees. There should be an expectation that more units will create economies of scale and increase profits.
Additionally, the business needs to be something you can systematise and replicate, not something that needs your personal touch to be successful.
“Ask youself, is the concept saleable?” he says. “Can you clone it? Does it provide good returns?”
Check your financials
Most successful franchises take a business that’s already profitable and try to replicate that success in other locales. Franchise consultant, Joel Libava, says he likes to see companies with at least a couple of profitable units beyond the first one already in operation before a company tries franchising.
“Is it just one great restaurant and mama’s wonderful pizza sauce?” Libava asks. “Or did you keep growing?”
Gather market research
Don’t rely on your gut feeling that your business would be a smash hit across the country. Gather market research to confirm there is widespread consumer demand beyond your home city for what your franchise would offer, and room in the marketplace for a new competitor.
Prepare for change
Becoming a franchisor means you’ll be engaged in entirely different activities than you were as a business owner. You’ll primarily be selling franchises and supporting franchisees now, instead of selling pizza or fixing toilets.
“Ask yourself if you’re comfortable having a role as a teacher and salesperson, selling and supporting franchisees,” Siebert says, “as opposed to going out there and doing it yourself.”
In addition, franchising your business will require that you relinquish some of the control you’ve had over how your concept is executed.
“Franchisees won’t do it exactly the way you would, even if they do it well,” says IFA president Matthew Shay. “If you are so married to your concept that you won’t let anyone else touch it, then franchising may not be right for you.”
Evaluate other alternatives
Before you plunge into franchising, you may want to consider other options, Siebert says. Depending on your situation, slower growth, finding debt financing or taking on partners are all alternatives that may prove better ways to move forward.
It also can cost R400 000 or more, so ask yourself if your company has the financial resources. Remember that while franchising allows you to grow fast, it also means giving up most of the franchise units’ future profits, Shay says.
2. Make Important Decisions About Your Model
As you prepare your legal paperwork, you’ll need to make many decisions about how you’ll operate as a franchisor. Key points include:
- The franchise fee and royalty percentage
- The terms of your franchise agreement
- The size of territory you will award each franchisee
- The geographic area you are willing to offer franchises within
- The type and length of training programme you will offer
- Whether franchisees must buy products or equipment from your company
- The business experience and net worth franchisees need
- How you will market the franchises
- Whether you want an owner-operator for each unit or area/master franchisees who will develop multiple units
New franchisors don’t realise how much each of these decisions can affect their future profitability, says Siebert. “If you’re thinking either 5% or 6% royalty, for instance, the difference doesn’t sound big,” he notes. “But five years later, when you have 100 franchises sold, and they each make R2,8 million a year, that’s a R28 million annual mistake. And you’ve signed a 10-year contract.”
Be careful to note whether geographic variables such as weather or local laws may affect franchisees’ success. Territory size is important too, as too-large territories may have to be bought back later at a premium so they can be split up, notes IFA’s Shay.
Inadequate training can leave your franchisees ill-equipped to implement your system successfully.
3. Create Needed Paperwork and Register as a Franchisor
Once you’ve made the important decisions that shape how your franchise will operate, you’re ready to complete your legal paperwork. When you submit it, be prepared for authorities to critique the document and possibly demand additional disclosures before they approve your application.
4. Make Key Hires
As you prepare to become a franchisor, you’ll usually need to add several staff members who will focus solely on helping franchisees. In the case of a solar panel franchise for example, the company sells its franchisees the solar panels they use, so the company may need a full-time hire to staff the order desk. The company also needs to hire a trainer and a full-time ‘franchise advocate’ to answer franchisee questions and resolve any problems.
Other staff include a creative director, a marketing assistant and a franchise process manager who helps franchisees to use company software and systems.
5. Sell Franchises
Now that you’re in business as a franchisor, one of your most pressing activities will be to find franchisees and convince them to buy your concept. Some companies sell franchises by word of mouth and don’t have a sales representative. To help stimulate interest, the company could offer a R4 000 referral fee to anyone who sends the company a new franchisee.
In other companies salespeople are hired to handle franchise marketing. Other common sales techniques include attending franchise fairs or hiring independent franchise marketing firms to help locate investors.
Selling franchises is difficult because of the high risk involved for franchisees, notes Siebert. Your salespeople should know your business well and be able to tell a compelling story about why you’re worth the investment of their time and money.
Siebert boils down the issue this way: “You’re saying, ‘I want you to give me all your money. Then, quit your job, give up your security and benefits, and go into a business you’ve never been in before. And follow my rules.’ You’ll need to establish a pretty high level of trust.”
6. Support Franchisees
As a franchisor, you’ll have gone through a lot to reach this point. But here — at the point where you begin supporting your franchisee network — is where a chain ultimately succeeds or fails. Your training programmes and other support efforts will create quality control, notes Siebert, making sure the brand provides a uniform experience no matter which unit customers visit. With the Internet, this has increasingly come to mean providing ongoing online learning modules for franchisees to use.
“If you’re a restaurant operator and employ 20 people in a unit,” he notes, “you have thousands of new employees going through the system every year. Without ongoing training, it’s pretty easy to institutionalise wrong behaviours.”
At the same time, you’ll need to start marketing the growing chain to drive sales to franchisees. Many new franchisors underestimate how much this marketing and support effort will cost, says Libava. Marketing encompasses everything from radio or print ads to uniforms, logos, fliers, and logo art on company vans.
“Trust that you’re going to need a lot of money for marketing,” he says.