Masterminding national growth: How to franchise your business
If you recognise potential in your business to expand nationwide, franchising could provide a vehicle to achieve countrywide development. Stuart Anderson explores the steps companies take to launching a franchise opportunity
The UK business community is increasingly recognising the benefits of franchising as a superb method of achieving rapid nationwide expansion. There are over 1,000 businesses operating franchised systems in the UK according to The UK Franchise Directory.
In this pro-franchising climate, a local-level businessman would be well-advised to check out whether franchising is suitable for his business. To do this, he must first understand whether his business is suitable for franchising. Does the business operate a proven concept that has charted out a launch strategy. Are the teething problems ironed out, and systems and procedures in place? Is it performing to replicable growth standards with a professional national-standard brand identity and corporate image?
Assuming the business has fulfilled these requirements, how does he go about franchising his business? No short cuts should be entertained, advises Franchise Development Services (FDS) Managing Director Roy Seaman. 'Franchising only works where a company enters with the right levels of funding, management infrastructure and motivation. Where that exists, good franchise practices result and I suspect that many of those well-intentioned franchisors who fail have taken short cuts to franchising - trying to save money on the kind of professional consultancy which could have steered them away from miscalculations and injudicious moves.'
Professor John Stanworth of the International Franchise Research Centre echoes this sentiment: 'In the early days of developing a franchise system, rather than a net flow of money into your business, you can expect a net flow outwards. Support staff have to be paid and new franchisees recruited and trained. Franchisees themselves can cost thousands of pounds each to recruit and will require substantial support whilst still generating little business and paying little by way of fees.'
So how much capital is necessary for a prospective franchisor developing franchise? The investment required will differ from industry to industry, but one indication is given by the NatWest/British Franchise Association UK Franchise Survey which finds that the average investment needed to launch a franchise concept in the UK is £170,000. This includes expenditure in the following categories:
- Legal agreement
- Resourcing staff
- Market research
- Pilot scheme
- Other new technology
Purely masterminding a professional infrastructure for franchising a business, estimates Roy Seaman, normally requires between £25,000 and £50,000, 'depending on the complexity of the business and the style and rate of expansion desired.'
The first investment is commissioning a feasibility study, and in many ways this is the most important investment in the process of setting up a franchise. The study's twin goals are to analyse the business and its market, and identify what modifications may be required to ensure its smooth transfer to a franchise concept. The study must identify the operation's systems, corporate strengths and relevance in other markets. There will be aspects that are vital to the success of the business which must be built into the franchise concept, there will be elements that must be removed or amended to ensure that the franchise relationship is fair and profitable, and there will be elements that will not affect the franchise either way - the study will recommend whether the latter be included or removed depending on the competing costs involved.
FRANCHISE ACTION PLAN
If the business is found to be suitable for franchising, then a franchise action plan must be developed and implemented. This will:
- Identify the competition.
- Identify the ideal franchise expansion method (area development franchising, direct franchising, multi-units, defined territories).
- Analyse and define the franchise package component needs.
- Ascertain the true market value of the franchise package.
- Set out a detailed franchise development business plan.
- Develop the requirement of an initial training programme capable of fully preparing a franchisee for the launch of the business.
- Set out ongoing support structures such as a franchisee telephone helpline, intranet facility, marketing support possibly including personalised internet sites, etc.
- Financial support packages to assist franchisees in meeting the investment requirement and tailored insurance packages.
For a business seeking to obtain membership of the British Franchise Association, and this is certainly recommended, the construction of the franchise must be performed with the requirements of its charter in mind.
With the franchise package in place, now comes the time to set it down in paper. There are a number of UK lawyers specialising in franchising, many of whom are affiliated members of the British Franchise Association (a selection of their practices are showcased on page 160), who will be able to produce the appropriate franchise agreements.
Additional documents must also be designed and developed, including manuals, marketing and promotional materials and intellectual property rights, before the final document is produced: the franchise prospectus. This will lay out the franchise package, the business concept, the history of the franchisor company, the goals of the franchise development programme and the profile of desired franchisees. This document will provide an in depth look at the franchise proposal for serious franchise candidates to refer to while considering making an investment.
OUTSOURCE OR DO IT YOURSELF?
Developing a franchise is a challenging undertaking, and only advisable when armed with a wealth of practical experience. So the business must hire an experienced franchise manager or bring in a consultant to perform the job. This would seem obvious, but it is surprising how many budding franchises consult help only after expending a substantial investment on failing to build a workable franchise package themselves. 'Most new franchise systems fail within five years, especially those without considerable prior experience of franchising,' observes Professor Stanworth. 'The only safe alternative is substantial investment in professional services to cover consulting, legal and accountancy fees.'
Accessing the franchise wisdom of more experienced parties is an insurance against having to retread these steps further down the line - a costly and difficult endeavour if franchisees are already signed up, especially if the franchise agreement needs amending. There are a multitude of weaknesses to avoid, such as a lacking in professional presentation and behaviour, weak brand profile, undercapitalisation, a weak infrastructure for training and support, lack of commitment to franchising, unproven systems, an inability to adapt to changing markets, lack of continuity in key management and poor communication with franchisees.
'Overall success in franchising is not based on just a couple of factors, but a combination of many criteria - applied at the right moment, in the right way and in the right place,' emphasises FDS Southern Franchise Consultant Gordon Patterson. 'Those who win in the long term do not do so by chance. They recognise the criteria that are most important, apply them and keep striving to deliver their best for both franchisees and customers. Above all, there must be a balance of interests between franchisees and franchisors where both parties to the partnership win unequivocally.'
Text: Stuart Anderson