Entrepreneurs looking into innovative growth strategies may consider adopting “franchising” in the development of their business. The following indicates some issues and decisions associated with the initiation of this strategy.
What is franchising?
Franchising is an established business expansion strategy that has been proven to provide dynamic development – with likely reduced risk. Some stellar examples include MacDonald’s, Singer and Coca Cola.
Typically, a franchise company (a “franchisor”) licenses its brands, copyrights, processes and consolidated business model to “franchisees”. These franchisees use that business model, including branding, and then operate in new markets. The franchisor’s business model identifies itself as both a “support” and an “operational” model, and market share, brand recognition and revenue grow accordingly.
For franchising to be successful, there must be mutual benefit.
Franchising is a long-term partnership and companies wishing to be successful must recognize the true nature of the relationship and the responsibilities of each partner.
Typically an affiliate will pay the franchisor:
- a license or purchase fee
- a percentage of sales or profits
- an annual fee
In return, franchisees will typically receive:
- initial training
- operating manuals
- a starter package
- a “territory”
- ongoing support
- national and / or regional marketing support (possibly including contacts / opportunities)
- a trademark license
Depending on the type of franchise, the agreement may also include the supply of products, raw materials or supplies.
Franchising is not affordable for all types of companies. The following guidelines will help you identify if a franchise strategy might be a good fit for your business.
Typical characteristics of a company that is NOT suitable for franchising
If your company has one or more of the following characteristics, it is good to take them into consideration before embarking on a franchising strategy.
- a product or service that is likely to have only a short-term market
- a company that caters to a limited niche market that exists only in a limited geographic area
- a business that generates low gross margins
- a company based on the person, which is therefore based on customer loyalty and loyalty towards the individual and not towards the brand
- an activity governed by regulations and laws, which could represent a problem for affiliates
- a commercial activity that thinks about the franchising model to address and solve the current corporate cash flow problems
- a business with limited capital and limited access to credit
Typical characteristics of a company suitable for franchising
Brand: the heart of a successful franchise operation is the brand. Franchisors must have a brand that people want to buy and associate with. The brand should be recognizable, respected and appropriate for use in different geographic territories. There should be a strategy for continued brand investment.
A Convincing Sales Proposition: A company should have a clear sales proposition that is understood and easily communicated. Whether it is price, quality, service, availability or otherwise, the proposal must be able to be consistently available.
Business Processes: a company that has developed quality, consistent, documented and tested processes for the creation or sale of its products and or services.
Consistency of Product and Service: the products or services themselves do not necessarily have to be unique or even best in class, but must be consistent in the quality v price v availability v desirability they possess and which are reflected in the brand.
Repeatable Model: Franchisors do not just sell a product or service, but a way / method in which the business is carried out, compared to a proven business model. A company that does not make decisions or does not implement activities consistently with the agreed working methods and established standards, will find it difficult to satisfy the needs of a franchisee. Like such start-ups, some companies that are creative or have not developed their business processes in detail will have a hard time finding and managing franchisees.
Proven Record: While not impossible, selling a “concept” to a potential affiliate / franchisee is a rather complex task. Desirable franchisees will likely want to see a product or service that is proven, approved and accepted by the market, before investing their money.
Geographic Location: if a company is already able to operate independently in different places, while using common processes and methods, then there is the basis for extending this model to a franchise operation.
Franchising is a proven business model that can enable accelerated market penetration. However, it is a suitable strategy for companies that clearly understand the basis of their business and success, and are able to repeat that pattern over time. For companies whose success is based on brand development, consistency and organizational and process excellence, franchising could be the right strategy for growth.