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GOOD SMALL BUSINESS

Franchising Your Business
Getting started
If your business has suitable branded products or services and you are looking to grow it with relatively low risk then franchising could provide a worthwhile route. The process can involve considerably less capital investment by you than other approaches to growth, because the franchisees you appoint will invest their money as well as time in creating new outlets under your organizational umbrella. You will, however, need to undertake a considerable amount of planning and research to ensure your business is suitable for franchising and to enable you to create a successful franchise network.

FAQs
What is a franchise? A franchise is basically a legally binding agreement between you (the franchisor) and another business (the franchisee) that enables it to use your trade name and trade mark, and supply your branded services or products under license. The franchisee will pay a fee in return for your granting them a franchise license, and they will have to comply with any terms and conditions set by you in the agreement. Another definition of franchising, put forward by the European Franchise Federation, describes it as a system of marketing goods, products or services, based on a close and ongoing collaboration between legally and financially separate and independent undertakings. What is a franchise network? This is an association of independently owned businesses selling a range of products or services developed by an umbrella organization. They are linked together by common brand identities and the support activities they share, such as marketing, advertising and training. How will I make money from franchising? There are two sources of income from franchising: fees and the profit you could make from supplying materials to your franchisees. The fees come in the form of a one-off initial paymentthe franchise feefor granting a license, and annual management charge for the support services you provide, which should include training and development. The latter fee is usually calculated as a percentage of your franchisees turnover. In order to attract suitable franchisees it is accepted practice to keep the
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franchise fee low, and to provide good value for your management charge. Where the supply of materials is concerned, you can make money by buying in bulk and then reselling to your franchisees, but you must avoid breaching regulations forbidding oppressive commercial practices. What are my obligations to franchisees? You will be expected to provide a range of support services for your franchisees, in addition to a protective framework that will involve monitoring the quality and standards of your network. Your ability to fulfill such obligations could be crucial in attracting good franchisees. The support services should include:

Product and service development. Marketing, advertising and public relations. Purchasing, financial and administration services for the network. Communications between franchised outlets. Quality control. Training. Protection of intellectual property (such as brand names, patents, copyrights and trade marks).

Most franchisees will expect you to help them raise capital for their outlets. One of the best ways to do this is by putting together some sort of support package with a bank. You should also consider putting together a franchise handbook that will set down specific rules and approaches to things like local marketing, use of brand names, and so on.

Making it happen
Ensuring your business is suitable for franchising Not every type of business is suitable for franchising, as this usually works well where a wide variety of products or services are involved. This is the case where there is a strong demand being created for new or innovative goods targeted towards niche or specialist markets. If your business offers products or services with a broad appeal, or which satisfy a common need, franchising may be an appropriate method of going for growth. This would apply, for example, if you have an existing and profitable outlet supplying branded items that have a high profile and a strong reputation with customers.

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Franchising is likely to be inappropriate if your business supplies products or services with a short market life, or with low profit margins. Similarly, if you offer services that involve high skill levels and prolonged training, such as accountancy, or which rely on repeat business from customers with a strong sense of loyalty, franchising is unlikely to be the right option. Another factor that may militate against this process would be a business which is dependent on a geographically defined market, as would be the case with a tourist attraction. Also unsuitable would be an enterprise with high levels of audit and control requirementsa financial institution such as a bank, for exampleas this would preclude operating outlets as separate legal entities, which is essential with franchises. Preparing your business for franchising As part of the careful research and planning you must undertake to prepare your business for franchising, you should identify the elements of your operations that can be adopted in each franchised outlet. You cannot franchise a concept or an idea, so you should have a business format that has been tried, tested and shown to have a good track record in a particular marketplace. Your brand name should be sufficiently strong to be able to attract suitable franchisees. Where appropriate, you should have proven manufacturing processes or distribution systems. Among the things you will need to develop is a new accountancy system and a business plan for your franchising activities. It will be of great value to conduct SWOT (strengths, weaknesses, opportunities and threats) analyses for each geographical area in which you would like to establish an outlet. Support services for your franchisees will need to be devised and set up, as will initial and ongoing training programs that will enable even relative novices to learn about the various facets of your business and how to then run their own franchises successfully. There will be technical issues in all of these aspects of franchising your business, so you should be prepared to call in professional advice at each stage of the process. It may be advisable for potential franchisors to run a pilot operation for at least 12 monthspreferably at more than one locationto test the business concept in different geographical areas. When this has been successfully carried out, and fine tuning has been done, you can then prepare a prospectus to attract suitable franchisees. How to recruit franchisees It will be important for you to be able to attract franchisees of the right caliber to ensure your network is successful. Therefore you should be wary of badly run franchise recruiting agencies, and you should put in place a thorough vetting process for candidates. In order to attract highly motivated applicants you could consider:

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Attending franchise exhibitions. Advertising in newspapers and trade magazines. Setting up or adapting your business Web site to promote the franchising opportunities. Registering yourself with franchise centers and brokers.

You should give consideration as to whether or not you will be granting exclusive geographical licenses to franchisees, and how big the respective areas will be. Furthermore, will you allow them to pursue other business interests, possibly competing ones, at the same time? Advantages of franchising One of the chief advantages to be gained from franchising is that it provides you with an opportunity to expand your business for minimal investment. Other major advantages include: a predictable income stream from franchisees; a centralized system that spreads the costs over a wider network thus reducing the individual costs for each franchisee; and the fact that you will be able to concentrate on developing and growing your business because there is no need for you to be involved in the management of individual outlets. Disadvantages of franchising Because you will have no direct control over the running of individual outlets, one bad franchisee could damage the reputation of your entire network. You will need to train or recruit specialist staff to conduct the training of franchisees and carry out the central management of your network. The process of starting your franchising operation will be complicated and you will have to rely on expensive professional or specialist help and advice.

What to avoid
Unrealistic expectations Dont overestimate the early growth rates of your franchise network and dont assume the franchise fee will generate profits, as it is usually the annual management fees that produce real returns. You will need to have a realistic idea of what your initial costs will be, resulting from such things as the need for professional advice from lawyers and consultants.

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Franchising as a panacea for other problems If your business is experiencing financial or other potentially fatal problems, franchising is highly unlikely to provide a solution. Franchising is a way of growing viable businesses, and a variety of conditions need to be met to enable this to succeed (as explained above). Appointing unsuitable franchisees Dont be afraid to reject applicants who fail to pass your vetting process. A ratio of ten enquiries to one successful applicant is normal, while ratios as high as 100:1 have been experienced.

Bloomsbury Publishing Plc 2004