The following are some key activities that we believe should be performed prior to you launching a franchise system. Some things you may do by yourself, others will need some expert assistance but all should be thought about in-depth.
Figure out what the strategy is for your business’ growth. The following are a sample of questions you should be asking yourself during the strategy planning process.
- Do you really have a sustainable competitive advantage?
- Do you really understand your customers and your value proposition to them?
- Do you want to use franchising as a rapid growth tool?
- Do you want franchising to be a complement to your other business activities, or do you want it to be your primary business?
- How quickly do you want to expand?
- Do you want to sell the business soon or in 20 years?
- Are there other issues that might affect your ability to grow such as supplier capacilty, skill gaps with your current personnel, funding to build the support infrastructure for a growing business
2. Operating model
Just because your current business may be successful, it does not necessarily mean that you will franchise an exact replica of this business – so you need to identify what the operating model will look like. For example: you might currently have 2 cake shops, 1 in a shopping centre and 1 in a shopping strip. Based on your experience, you might decide that your operating model for the franchise channel will be that franchisees must be in shopping strips, they must offer home delivery and that they are not allowed to produce wedding cakes (as this will be done out of the central commercial kitchen). Ensure you have a clear strategic rationale behind these decisions as franchisees will often ask why they have to do something or indeed why they’re not allowed do something.
You will also need to determine how you will support this model i.e. will you need additional staff and resources to support franchisees? This might be expanding your manufacturing capability or hiring new employees. These should be estimated in line with your growth projections.
3. Financial viability
Franchising needs to work for both parties – the franchisor and the franchisee. Make sure you assess the financial viability by forecasting the likely revenue and expense streams once franchising commences. Building a detailed financial model will assist you with more accurately setting the typical franchise fees such as royalties, service fees and marketing levies – as you will be able to very easily see the impact changing any of these fees has for both you and your prospective franchisees.
4. Network expansion and territory planning
It is important to plan the expansion of your business. This includes where you want to expand and when you want to do it. For example you might decide to get 3 units on the ground in Victoria for the next two years; then move into NSW with another 3 units per year. This will assist in giving you focus and it will also aid you in planning your resourcing requirements.
Once you have determined your network expansion plan, you will need to determine your territory structure. Although reasonably common, you do not necessarily need to grant territories (you might simply give your franchisees a site) – you will need to weigh up the pros, cons and suitability for your business when determining the territory structure. Many franchise networks come underdone in the territory planning phase. Franchisees are either granted too much space or too little with both of these having potentially business-breaking impacts – and as previously mentioned, you don’t even need to grant territories at all! The aim is to maximise your market representation whilst also ensuring that franchisees have a large enough opportunity to be successful.
Don’t just go with gut feel when you’re performing territory and site planning. Franchisees expect a more scientific approach and there are specialists who can assist you with geographic market information and that are familiar with franchising.
5. Legal documentation and regulation
Franchising is governed by the Franchising Code of Conduct. Under this legislation you are required to produce a Franchise Agreement and Disclosure Document that meets the very strict specifications as set out in the legislation.
Within these documents you will outline how the franchise relationship works from a financial, operational (supply, pricing etc.) and location-based perspective. The legislation also regulates many aspects of your dealings with franchisees. You need to understand this in detail, otherwise you may face significant penalties and the possibility that the agreements you enter into with franchisees are void.
You will need a lawyer to produce these documents and we recommend very strongly that you use a lawyer that specialises in the franchise sector. The legislation is complex and getting things wrong could have HUGE implications – so don’t take any chances!
6. Franchisee marketing and recruitment strategy
Attracting and recruiting franchisees is a major focus of franchisors. You need to be able to find the right franchisees to help grow your business and you will have a lot of competition! Concentrate on developing a strong marketing package to assist you with recruiting franchisees. Franchisees are making a significant investment, so you need to sell franchisees on you, your business and the franchise proposition. Consider using a marketing business to assist you with developing professional recruitment collateral – remember first impressions last!
When you are recruiting, ensure that you are finding people that you believe will grow your business – don’t be swayed by the fact that people might wave money in front of your face – they need to also be good operators! Develop a check list of minimum franchisee requirements (e.g. must have sales experience, preferably owned a business before, must be enthusiastic etc.) – this will assist you when you’re assessing candidates.
Once you have everything in place, it is prudent to launch a pilot (or two!) to determine whether the way you have structured your franchise business actually works in reality. Learn from these pilots and make changes if necessary as it’s much better to make changes now before you have lots of franchisees on the ground.
Above all, do your research and ask lots of questions. Other Franchisors have probably experienced most things over the years, so make sure you connect with them and relevant advisers so that you can learn from their experiences.
About Greg Hodson
Greg is the national leader of PricewaterhouseCoopers' franchising practice and has been a partner with PwC for 20 years. Throughout the majority of his career, Greg has been focussed on the privately owned business market. He has vast experience in advising companies on distribution channels, franchising and licensing strategies and in advising clients on compliance and growth issues.
Greg advises franchisors in relation to establishment, improvement to processes, growth strategy, international expansion, and exit and acquisition strategies.
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