8 Ways to Become a Franchisor
Coffee bars, letting agents, debt management services, fashion retail, vehicle leasing...the list of industries in which franchising has been applied is extremely broad. Here, Stuart Anderson examines eight situations in which franchising can be applied to help a company achieve much more rapid national growth at highly reduced risk
Over 100* companies launched franchise opportunities in the UK last year. These companies recognised in franchising a vehicle to expand into a multi-unit national network within a shortened timeframe and without requiring a large scale investment.
With a fair return provided through the management service fees paid by a national network, franchising done right and successfully is a lucrative endeavour, and more companies are investigating whether their concept is suitable for franchising all the time.
The key here to developing a successful franchise is that the core business must have a proven track record of success, as this more than any other aspect is what franchisees are investing in. Simply put, a franchise is a cloned business... and for the clone to be successful the original business's DNA must be high grade.
Operating in a wide range of industries, new franchises are developed from a variety of backgrounds - each franchisor's background story is different. Here are eight ways in which a franchise could be developed:
FRANCHISE AN EXISTING BUSINESS
A business that has charted out a launch strategy, tackled the teething problems, set out its systems and procedures, and is trading profitably, may choose to fund its own expansion allowing the owners to retain 100 per cent equity in the operation and prevent income streams from being diverted to franchise owners. However, instead of pulling together the capital investment required to open a second company-owned outlet or office through business loans or from the business's own cash flow, under a franchise agreement the franchisee provides the capital and takes on the risk. The initial investment paid by the franchisee covers the costs of training and providing support, and the franchisor receives fair reward for the value of the intellectual property and concept through the management service fee.
Company-owned expansion from the pilot through to national coverage will rarely achieve completion as quickly as franchising. This is because a franchisor will not need to build up huge staff and premises costs - rather the franchisor's capital can be committed to developing a small central organisation with a few highly skilled staff.
By doing this the franchisor cuts overheads and, unencumbered by staffing and administration issues, can focus more time on developing the business. By speeding up expansion the business network achieves higher economies of scale earlier, stronger brand awareness, is much sooner able to challenge for national contracts and, in the case of a fledgling market, is in a much better position to capture early market leadership and establish a dominant position over its non-franchising competitors.
STARTING FROM SCRATCH
Many franchises are created by founders who conceive and develop an idea with franchising in mind from the start. Business models developed with 'franchiseability' in mind from the start can avoid a whole swathe of adaptation difficulties and costs when it comes to transferring the systems and procedures to the first wave of franchisees.
However, before thinking about developing a franchise package and writing a contract, the business model must be proven. This means test marketing and establishing a profitable pilot operation for at least 12 months.
PURCHASING A FRANCHISEABLE BUSINESS
Rather than starting from scratch, a business developer with a desire to create a franchiseable business may have already identified a suitable model in another business. By purchasing an established business, the developer fastforwards past the difficult development and pilot stages period and can begin adapting the business to one suitable for transferring to a franchisee.
The development of a business model into a franchise needs an experienced hand at the tiller. The developer could have previously been a Franchise Director and decided to invest in his own business to develop rather than continue lining someone else's pockets. Alternatively the developer might be the owner of another franchisor business that has reached network completion.
Of course if the developer has no experience of developing a franchise, this can be outsourced with the appointment of an experienced Franchise Consultant.
NEGOTIATE THE RIGHTS TO FRANCHISE A BUSINESS
Rather than purchasing an entire established business which, if successful enough to be franchiseable, will probably require a significant capital investment, the developer may succeed in negotiating for the rights to franchise it only. In this situation the original business is left with its present owners to trade as normal, while the developer is granted the exclusive rights to develop the brand, product and business model via franchising nationwide.
An important point in this type of agreement is setting down the territories. The original business has up until now been free to trade with customers across the UK, and will have to be compensated for giving up the rights to existing customers to franchisees. This becomes even more complicated if the company has developed successful internet trade.
ENTER A JOINT VENTURE WITH AN EXISTING BUSINESS
Rather than offering to purchase the rights to franchise a business, the developer could offer to create a joint venture with the company to develop the franchise. By creating a continued earning opportunity for the original business owner, the developer will enjoy its continued cooperation.
This method also brings in efficiencies in having continued access to the original business. For example the business may have a valuable Research and Development department which would need to be replicated if the franchise development rights were removed from the original business.
Also, the early franchisees will benefit from the continued access to the original business, not only in terms of enjoying the support of the original experienced staff but also in being able to use its services/supply to win larger jobs early on while they develop their own capacity.
OFFER TO FRANCHISE YOUR EMPLOYER'S BUSINESS
A variation on entering a joint venture, a developer may recognise franchise potential in the business of his own employer. This places him in a strong position to present a franchise development proposal to his employer, head up the creation of a franchise development department and take equity in the company.
BORROW A BRAND
Rather than purchasing another business, its franchise rights or entering a joint venture, a franchise developer may start from scratch and still link up with an established company to fast-track the success of the business. In such a situation the developer may identify a method of furthering the sales and distribution of another company's product through a franchise that does not interfere with the company's normal operations.
Examples have been Cadbury (see page 46) and Pringles (see page 80), both of which have granted permission to developers to pioneer the franchising of their well known branded products to new markets.
INVEST IN A MASTER FRANCHISE
Most likely the quickest route to becoming a successful franchisor, by investing in a Master Franchise for an established overseas brand the developer obtains a proven system, product, brand and franchise concept which need only adjustments to the UK market. In addition, the developer can expect structured training and support from the international franchisor, including product development and international marketing initiatives.
Once the business is ready to begin recruitment of franchisees, profits will not be immediate. Although franchisees pay initial investment fees, these are not pure profit for the franchisor but rather recompense for the management time and capital outlay required to properly support the launches of the franchisees' businesses. However a good concept with a fair agreement and good faith on both sides should build into a thriving business nationwide.