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5 Ways To Manage Risk When Expanding Your Business Into A Franchise

Congratulations! You’ve proven your business model and are looking to grow another branch on your company tree. Franchising can be a great option for growth, but there are pitfalls to avoid and lots to consider.

 

Who’s going to run the franchise? What do they need to know? How will you train them? And after that, there are the technical details – like sorting out the licensing, or finding income protection insurance in Australia, should anything go awry.

 

Thankfully, there are guidelines and tips that’ll make the complex process a little simpler. We’re here to tell you 5 things you need to know to manage risk when expanding your business into a franchise.

 

What is a franchise?

A franchise is an agreement, specifically a licence, that allows a buyer to expand a business using your intellectual resources. This includes adopting the business’s name, knowledge, special recipes, trademarks, techniques, designs, and more. What specifically they’ll be buying is detailed during the licensing agreement. In exchange for all this, you will be paid a lump sum upfront, and enjoy yearly payments for as long as they use your brand. These come under the annual licensing fees.

Franchise vs. corporation

The alternative to selling your brand name is to set up your own second store: or to start a corporation. This allows you full control over its management, to receive all the profits, and to work between the stores; operating both.

The downsides are having to manage multiple stores, invest your business’ money into a new site, and engage in long-term commitment. In general, a franchise is a smaller commitment that offers smaller returns but has the added benefit of not being permanent, as franchising agreements expire.

Franchising pitfalls & risks to avoid

So, when expanding your business into a franchise, what are the common risks to be aware of? We’ll cover the top 5 below, as well as how to avoid or combat them.

1. Don’t Rush Into Franchising

Just because your business has stabilised within the last year, that doesn’t mean it’s time to shoot up with a second store. Franchising is a risky manoeuvre that requires knowledge and preparation you’re unlikely to have accrued by owning a small business alone. For example, you’ll have to gather an advertising team that can organise brand identity and details between the branches.

Further, despite the new store being under separate management, don’t think it won’t affect your business. In fact, your reputation, growth potential, and even current sales figures are on the line.

2. Study, Plan, Prepare

If you’re selling the best fried chicken in town, and people are coming from the big city just to try it, a new franchise store in that big city is going to take all those customers from you. Depending on your franchising agreement and your goals for the franchise, this could both be a bonus or a disadvantage.

Knowing where the franchised store will be is something you have to examine in great detail.  Who will it attract? How will the pricing and quality fare against the nearby competition? Will it look good for the brand? The more you study, plan, and prepare, the fewer risks you’ll be taking, and the greater your chances of success.

3. Train Franchisee Staff As If They Were Your Own

Your staff and small business are working well, and that’s something the franchise needs to emulate to a T. They need to know how you work, how exactly you provide the product or service you’re selling, and how you engage with customers or clients.

This also requires you to put down your training expectations on paper – so that future franchises can keep the brand identity and customer expectations in line with your own branch.

4. Don’t Compromise On Quality

The franchisee isn’t just buying your brand logo, they’re buying your business model and its success. The unseen trade-off you’re making is that you’re splitting your customer’s perception of your brand between the two (or many!) branches.

Because of this, the franchisee’s success is incredibly important to your business, beyond the obvious profit sharing. Key values, brand identity, employee onboarding processes, and every other detail that contributes to your business’s current success and makes it unique should be enforced at the new location, to ensure consistency for a customer in whichever location they visit.

5. Choose Your Franchisee Wisely

Think of your first franchisee as your company getting married. You share the same name and goals but remain independent. Because of this, you want the new branch’s owner to be someone who has the same competencies, qualifications, and enthusiasm as you.

Don’t be distracted by the fact that they’re offering to make you money. You’re hiring someone to do the same job as you. Interview them seriously. Read their CV, check their credit, and even get references. If you wouldn’t be comfortable hiring them, don’t sell them part of your beloved small business.

Conclusion

So your business has proven successful enough to attract major investors. That’s no mean feat. The growth of a franchise will see your brand name spread across the city, or even the country. There’s a lot to be proud of.

 

But be sure to prepare just as much as you’re celebrating this milestone, to guarantee your new site the best head start possible. That will allow your brand to keep growing, and reach new heights of success, as you expand your business into a franchise, and manage the risks we’ve covered in this article.