So, you have this great business or businesses that are making money and you want to know if franchising is the way to go. If you have a business that is only slightly profitable after royalties then do not franchise, as it will be a world of pain.
Franchising only works if you have a proven profitable model, that is transferable, and has growth potential.
Some people say to me that they just want a small business and one that they can manage, which is fine if you have a milk bar. But if you have a good concept that is busting to grow then you may do more damage to it buy trying to keep it small, in other words; if you do not grow it, then someone else will! Franchising is a great way to get market penetration which in itself is a great marketing tool.
Of course there are some great positives, as well as negatives as to whether this is the path for you. Below are some of my thoughts on what you should consider when looking at franchising.
People: The number one positive if you do franchise is that you get like-minded people involved in your business who also have ownership. The good franchises really tap into this great resource to grow their business.
Capital: Another positive is that you can grow your business with limited capital outlay.
Marketing: Franchises pool their resources so that they can market effectively as a group.
Buying Power: With mass orders come great savings. Many businesses need to get to a certain size before they are big enough to make decent money. With a franchise, even though you have one store, you immediately have great buying power, and you leverage the group.
It is expensive to set up a franchise: Legal costs, preparing your training manuals, etc, to set your business up to franchise can cost in excess of $200K. But if you do it right it is well worth the investment.
High risk of litigation: Whenever you are dealing with people and large amounts of money, even if you do everything right, you are still at risk of being sued. Sometimes when all good intentions go wrong, then a franchisee may look at someone to blame. When I was first starting out, my lawyer said to me that the one thing that is guaranteed is that sometime down the track, I will be sued.
Systems need to be tight: If you thought that running a business required you to have good systems and processes in place, well multiply this by 10 as this is the level you will need. There is the Franchise Code of Conduct that needs to be followed, systems for tracking sales, communication, marketing, HR, etc. etc. So your business needs to be in great shape before you franchise.
People: The positives are that you get great people to deal with and have great ideas to share, the negative is that because we are all human, there is always negative people who you also need to deal with.
THINGS TO LOOK OUT FOR
Consultant: Like any industry there are reputable companies and no so reputable companies and the franchising world is no different. Try and get a referral to a franchising expert and if you cannot get a referral then make sure you reference check the company and individuals connected with the company.
Legal: With the new laws there is no getting around the legals. Make sure the law firm you select is a franchising expert. As I mentioned earlier, there is a risk of litigation and the way to minimize this is to ensure you set up your system well and you get good legal advice along the way.
Finance: One of the major obstacles in getting a franchise off the ground is to ensure you have good financial support from a financial institution and that the potential franchisee can get finance. The banks are fairly strict on who they lend money to, and a franchisor traditionally will need to have been running successfully for at least four years and have at least 15 stores that are profitable.
Each bank has their own criteria; it is a matter of ringing around and seeing what they are. This is a large barrier as there are not too many people that have a few hundred thousand dollars sitting in the bank. This does not mean that you cannot franchise as many people have other assets they can use as security.
Additional resources: The other thing to consider is the additional cost of labour that you may need to run a franchise business. On one hand cost of labor can be less as you do not require the same level of staff to run an individual business, that is the responsibility of the franchisee, but you may consider recruiting franchisees internally, instead of an agent and if you are growing, you will need a training team and depending upon your plans you may also consider getting an internal lawyer. Marketing activities should increase and you are now responsible for a marketing fund that needs to be managed separately, which will take resources. So in essence, you need to do a full business plan to work out what you will need and when.
Business training: Some franchisees that come into your business have little or no business experience, which can be why they choose to enter a franchise network. One thing I like to suggest is that all franchisees do a small business course, because a franchisor may teach the franchisee how to run your franchise, but there is a whole section on simply running a business that they will also need to understand.
At the end of the day, franchising is great for certain businesses and certain types of people. Do not rush into making your business a franchise business. It takes planning, good emotional intelligence and capital to make your business a successful franchise business.
Janine Allis, Founder – Boost Juice Bars.
Janine Allis opened the first Boost Juice Bar in Adelaide in 2000. Boost is in more countries than any other juice bar in the world.
Janine’s company – Boost Investment Group – also runs the exciting new concept Salsa’s Fresh Mex Grill, which they arenow franchising. Details: www.salsas.com.au.