Let’s just make the assumption that you are a vibrant business person with a brilliant idea that is popular with your customers and that you have proved to be profitable and successful running it so far.
It is not true that the expense of expansion in terms of time and energy, as well as financial costs, is generally sufficient to put off a business owner to purchase, develop or lease property, buy mass amounts of stock, hire/train new employees, put management in place and monitor everything that’s going on. See, all of these things cost money and drink financial resources you might have built up through your current success in business.
If you don’t have enough capital to cover all of those expansion costs, then you will need to obtain capital by either seeking a loan or approaching an investor. This can be life-changing and more often than not, is the cause of many company expansions causing the complete collapse of a company.
Expansion Options To Consider When Growing Your Business
You could be interested in hiring more workers, but there are a number of considerations when thinking about taking on new staff as part of expansion plans:
- Can you afford to pay them?
- Can you count on them?
- Would they abandon you in your hour of need?
- Will they be trustworthy?
Opening new locations, warehouses or by placing more vehicles on the road to cover more service areas all costs money. When opening new locations or expanding your service area, you will first need to consider:
- How much will you need to invest?
- Is your businesses USP strong enough?
- How copyable are your products & services?
The last thing you would want is another entrepreneur stealing your idea and using their high net worth to push their competing business ahead of yours.
Perhaps what you do is new, fresh, exciting and enticing to the marketplace. You want to capitalise on that and get the ‘first-mover advantage,’ but if you don’t have the money, there’s a chance someone else will come in and steal your limelight.
Are There Benefits To Franchising Your Business?
Franchising, when done well, will help you get the most out of the business concept that you have, and to develop, grow and enjoy the experience with some very interesting people (some of them can be difficult though!) and, over time, produce increased revenue and eventually a successful exit.
The immediate benefit of franchising is that after you have made the initial investment – all the costs of setting up new outlets/areas etc. are incurred by the franchisees, who not only pay for the right to sell and use their resources to set up and grow a business but who will also contribute to ongoing costs.
Of course, the net profits will be lower, so there needs to be an income that would be appealing to your franchisee, so you’ll take a smaller slice, but it’ll come from what we consider to be a larger cake.
The long-term effect is the expansion of the company at reduced expense, with the trading risk shifting from the franchisor to the franchisees, and the long-term stability given and secured by the franchise agreement.
The benefits of group purchases, including volume discounts, would allow the franchisee to deliver attractive rates that increase market share and increase the return on investment of the franchise, as profits would be produced from a much smaller capital investment.
Potential franchisors are often worried about the loss of control of the company or reputational risks to the company’s name, but evidence shows that the franchisor who has invested in resources will generally take better care of the business than any employee whose main interest is their paycheck at the end of the month.
The franchisor will profit from the passion, enthusiasm and dedication of the franchisees of their business and its standards, and they’ll be responsible for managing their own employees.
Assuming that caution is taken when setting up a franchise and that there is a comprehensive ongoing monitoring and support system, the risk of harm to the credibility of a brand by a franchisee is generally very minimal.
Examples of Successful Franchisors
Substantial brands such as McDonald’s, Hilton Hotels, Bang and Olsen, Tax Assist, CEX, Signs Express, Dyno-Rod have all achieved national/international reach through franchises that have enabled them to grow effectively without any brand risk. You can do the same thing.
In addition to this, expansion can be accomplished with a smaller and more cost-effective team. The recruiting, training, encouragement and retention of qualified workers are all tasks performed by the franchisees rather than the franchisor.
Quality control systems provided by the franchise system, diligent training of the franchisees and maintaining adherence to the system through a good quality ongoing relationship with the franchisees is assisted by an appropriate franchise agreement that must be drawn up by an experienced franchise law firm. (You wouldn’t trust a family law specialist to draw up a franchise agreement for you)
Why Do Banks Like Franchises?
The willingness of major banks to lend to franchisees reflects their confidence in the franchise industry, where the default rate is considerably lower than that of independent start-ups.
In every other section of this page, you can see a reference to the popularity of franchises as a whole, which should inspire you to investigate at least, and there is no initial financial commitment.
Why Franchise A Business?
There are several reasons why a growing number of companies are turning to franchises, but here are just a few:
When you are franchising a company, you bring in the financial resources, commitment and labour force of a local franchisee to move the business forward in their territory.
This allows your network to expand much faster and much cheaper than ‘normal’ growth.
You, the franchisor, have few expenses because the franchisor pays for all the facilities and set-up costs as part of the franchise fee.
Are Franchises Recession-Proof?
No industry is recession-proof. However, franchisees have been shown to be less likely to struggle in a recession than others.
A survey conducted by Bfa and NatWest highlights the reasons why a company should be franchised:
“4 out of 5 franchisees claim that being part of a franchise has given them a competitive advantage over the last year compared to similar non-franchised companies”.
“The recession seems to have had a small negative effect on profitability, turnover, jobs and company failure”.
One reason for this level of stability is that franchisors prefer not to be subjected to high levels of debt and overheads that may be involved in non-franchised enterprises.
However, the main reason we think it’s a good idea to franchise a company is that every company in the franchise network will likely be run by a committed franchisor who works hard to protect his or her investment in their branch of your business.
Is Franchising Less Hassle Than Internal Expansion?
In the franchise, the day-to-day operating responsibility is met by the franchisees. This helps the franchisor to concentrate on building and growing its franchise network.
Staffing, for example, is a specific field of administration. With franchising, the workers are paid by the franchisees, so any issues are to be resolved by the franchisees!
Of course, the franchisor needs to be on hand to provide help to the franchisees as needed, but this is much less of a challenge than attempting to do it on your own.
Is Your Business “Franchisable”?
The clear and truthful response here is to seek advice from a Franchise Consultant accredited by the British Franchise Association. A successful one is going to carry out a comprehensive franchise feasibility analysis and be frank with you about the results.
Your lawyer, accountant and bank are all a great source of advice at this point. Be sure to talk to a bank with a dedicated franchise unit-HSBC, Lloyds Group and RBS / NatWest are all sponsored by the British Franchise Association-as are the best franchise consultants.
How To Move Forward With Franchising Your Business?
You will need to determine what has made and currently makes your current company successful and how the same could be achieved in various geographical regions, not to mention in someone else’s hands.
If your company depends on skills that are completely special to you, then how will anyone else be able to duplicate what you did without those abilities? If your company offers a product or service that is unique to the area in which you work, then you need to consider whether there is a legitimate demand for it elsewhere. Some very popular franchise brands have struggled in new markets because the product did not suit.
Things to Consider When Franchising Your Company?
Ensure your company is going to stand the test of time.
If your company is considered a ‘fad’ then how can you give your franchisees the assurance that they’ll have the opportunity to achieve growth within their business for at least the first five years of their franchise agreement?
The best advice we can pass on to you is to use all the knowledge and resources available to you through the franchise itself, and not try to cut corners.
Franchising is all about creating a stable network in the long run – that’s where the real benefit is. Invest in creating the right framework to establish a successful franchise brand that can attract and retain the best talent.
A “Franchisable” Business Would Need To Be:
- Credible – the idea needs to be proved by a strong track record and an accomplished management team. It wants a great local press and popularity.
- Profitable – Franchising is not a way of saving a company that is under-performing; a business needs to be profitable and produce enough gross profit margin to allow you and your franchisees to make money.
- Unique – The company needs to have a specific point of sale that enables it to be distinguished from its rivals. This sustainable competitive advantage will allow it to compete effectively on its national market, with potential for international expansion.
- Transferable – you need a company where processes, practises, experience, knowledge and know-how can be passed to others.
- Teachable – you need to make sure that all processes are in place and that the principle operating systems are recorded in manual form. It should also be reasonably easy to train others to use your systems and procedures in three months or less.
- Supportive – you need or ought to be able to obtain the opportunity to offer continuing support to your franchisees.
- Affordable – if the franchise is very costly, there would be very few people who can afford to buy in so keep this in mind.
How To Turn A Franchise Idea Into A Unique Business Opportunity
The first argument that needs to be made here is that you can not turn a concept into a franchise. You can turn the concept into a company and then turn the company into a franchise.
Franchising or business model Franchising to give it the full title is a business arrangement where one party (the franchise owner) grants the right to another party (the franchisee(s) to duplicate their existing business structure and trade on their behalf. In return, the franchisees will pay both initial and continuing payments to the franchisor.
It is true that all companies could be franchised, but not every company should be franchised.
Here’s the recipe for success when considering franchising your business and creating a great business opportunity for an investor in your brand:
1. Proven Successful Format
The franchisor will offer rights to prospective franchisees to duplicate the original company. The franchisor would therefore like to see a company that has been around for a while (at least a minimum of one year and hopefully more) and has proven to be effective in terms of both turnover and, more importantly, in terms of net profitability.
If this isn’t the case, then why would anyone try to reproduce it? Since the first year of trading in many companies is not especially profitable and often results in losses due to starting up costs, it is often advisable to wait a longer period until the company matures and expands before embarking on a franchise. Ideally, the franchisor should also be looking to run a ‘pilot.’
That would be the same company, from a second location either owned by a franchisor or preferably purchased by a third party. The goal of the pilot is to show that the performance of the company is dependent on the product and service being supplied and the demand for that product or service and not simply on the sales capacity or personality of the franchise owner.
2. Can Be Easily Duplicated in Multiple Locations
The ‘company franchise format’ model is focused on the premise that the franchisor would earn a relatively small percentage of the gross sales or profit of each franchisee’s business.
Therefore, in order for this model to operate, there must be a sufficient number of franchisees to contribute to the profits of the franchisor, enabling the parent company to provide financial support to the network and to generate a reasonable profit.
Consideration must also be provided to the ‘global’ appeal of your product/service, as your profits as a franchisor will depend on having several locations around the UK, or indeed around the world. For example, although the ‘haggis’ franchise may do well in Scotland, it may have limited appeal south of the border.
3. Relatively Easy To Master
Naturally enough, in any start-up, the owner would want to make turnover and revenue as soon as possible. This will also refer to the franchisees. However, the franchisor will still want to be sure that the incoming franchisees have undergone adequate training to run the company in the manner that the franchisor requires.
Therefore, the amount of time taken to train incoming franchisees is important. Practices and procedures in almost all popular franchise models are reasonably easy to understand. Indeed, one of the key advantages to the franchisee is that they will be ‘taught’ about how to run their company reasonably quickly and will thus be able to start selling and earning in a short timeframe.
Simple, however, should not be used to indicate that it is so easy that everyone can do it. The franchisor will still be able to select the franchisees with the right skill set. Many franchisees are looking for franchisees with business development and marketing skills (which are important in any company) to be the owner of the business. In turn, the franchisee can hire workers with the necessary’ hands-on’ expertise to do the job. One example will be hairdressing, where many salons are operated by ‘business owners’ rather than trained hairdressers.
4. It Should Be Able To Generate Enough Profit to Satisfy All Parties
Unlike a ‘stand-alone’ company, a franchised company must be sufficiently profitable for both parties (franchisee/franchisor) to generate income.
The franchisees, who will still earn the most profit, must believe that even after paying a monthly charge (and a marketing royalty if there is one) to the franchisor, there will be enough revenue left in the company to make the franchise attractive enough for them to invest in.
Franchisors, on the other hand, need to ensure that their management service fees produce enough revenue to fund the support system set up by all the successful franchisees, as well as the generation of profits.
From a franchisor’s point of view, management fees, certainly in the early days, are unlikely to offset the increased costs incurred in the franchise process. However, as the network expands, it should be the case that ongoing payments cover both the operating costs of the franchise operation and the production of revenues.
5. Has strong ‘reasons to belong’.
Taking into account the idea that all good franchises should be relatively easy to run within a relatively short timeframe, one might ask, “Why don’t individuals simply start their own company rather than become part of a franchise? “Will I be ‘Bill’s Burgers’ as opposed to McDonald’s, for instance?
There are a number of main reasons why it is better to be part of a franchise:
The system has already been proven-all good franchise systems have been developed, modified and enhanced before the first franchisee begins to operate. The franchisor has absorbed development costs and, in many situations, has learned from expensive errors. By implementing this already tested method, the franchisees escape the development costs and repeat the mistakes made by their franchisor.
Franchisor Knowledge-Most business knowledge is acquired by experience. As a franchisee, you have the ability to tap into your franchiser’s expertise. Particular attention should also be paid to the length of your franchiser’s experience in running the core business. No matter how good the franchisee’s company is, if it’s only been in service for a few months, then as a franchisee, you’re not really ‘buying in’ a wealth of experience.
Brand name-A strong advertising tool that can stand for product or service quality. ‘Bills’ Burgers’ might have the best or the worst burger in the world; the brand doesn’t tell us anything. But with McDonald’s, you know exactly what you’re getting. New franchisors do not usually have the advantage of a reputation in their immediate vicinity. Potential franchisees must also determine if the brand name and any associated logo would be a valuable (and transferable) business tool.
Launch plan-Reputable franchisors almost always offer a robust launch plan. This can range from a ‘turnkey plan’ where everything is shipped, and you simply have to ‘turn the key’ and enter your new company, to a truck-based franchise, for example, where the franchisee buys or leases a van, but the franchisor brands and equips it. The launch kit should not only include ‘tools’ to do the job but should also include training, corporate stationery and marketing materials.
Ongoing support – Franchising is frequently characterised as ‘working for yourself, not by yourself,’ and this argument is supported for the continuing support that the franchisor should be prepared to give the franchisee over the duration of the agreement. Such help can take the form of centralised services such as invoicing, payroll and training. It would almost definitely contain suggestions and programmes on corporate marketing. For most active franchise operations, there is also a field support aspect involved, which may be both hands-on help (such as a member of the franchise team working with franchisees on a sales drive) through more technical discussions on topics such as regional marketing strategies, review of sales statistics or even staffing issues. Again, the franchisee depends on the franchisees’ prior knowledge in certain circumstances to help direct them.
Bank support-One, last justification for being part of a franchise, will be the fact that franchised companies are preferred by banks and, more importantly, they value them. Due to the very low rate of failure of franchises, it should be easier to access capital in order to buy a franchise than it would be if you started a stand-alone company. Also, this will depend on your financial situation.
Benefits of Franchising Your Business
For a well-established and profitable organisation, franchising a business model can be an extremely efficient route to growth. What they’re not going to do is help a company in trouble crawl back into profitability with someone else’s money.
The common belief among successful franchisors is that a franchisee is more committed to achieving business success than a salaried manager because of their personal interest in making a company a success.
There are a variety of explanations for this view. A franchisee would have chosen to apply for your franchise out of the practically hundreds available and will essentially make a minimum 5-year commitment to you.
The recruiting selection process should be several times more stringent than that of a manager, so the calibre of the franchisee should be incredibly high. They’ve invested in your model with a mixture of their own money and bank financing, and they’ll only make a profit if they make a success of the venture.
With all this and more at stake, ensuring your recruiting and selection strategies are effective, franchising should give your brand the best chance of success in any territory/area.
What Are The Downsides of Franchising A Business?
As well as the upsides of franchising your company, there are also downsides or pros and cons as we like to call them, here’s a few things you should mull over:
The Costs That Are Involved
You need to be uber-realistic about the costs of setting up a franchise network by the time it takes for you to see the return on your investment and ask yourself if you can afford it.
Loss of Control
Normally when you own it, you control it, but when you’re franchising, it’s the franchisee that controls his / her unit and, to some degree, running it their way. It’s here where the operating manual comes into effect, if the franchisee sticks to your programmes, then it’s as if you’re running your franchise.
Note that every franchisee is a business owner in his or her own right, so you don’t have “hire and fire” power over them. However, you need to track closely what the company does and recognise areas of poor performance.
You need regular contact to make sure that the franchisee does it correctly and sticks to the processes and policies to achieve their objectives. Potential failures may have catastrophic consequences for the network as a whole. You will need to defend the company from franchisees who might try to copy the idea and steal customers/clients.
Finding The Right Franchisees
In the early stages, it can be tempting to simply hire those with the money needed to help get the franchise scheme going.
This can be disastrous, as the wrong franchisees will destroy the foundations of your franchise and cause the entire network to collapse.
You will need to spend time and resources in recruitment strategies and how to find franchisees that are highly motivated with the potential to be competitive.
Having a broad franchise network can be a good place to be in, but you need to be sure that you have the support staff needed to fulfil the needs of your franchisees.
It is also best to be over-staffed at times so that you can adapt to any issues that may arise from old or new franchisees, which may include changing the culture of your company to one that is support-oriented. If they don’t get the required support, they will find it difficult to achieve their goals, and your company will suffer.
The Conflict Between Franchisee & Franchisor
The main drawbacks of franchising are the disputes between the franchisee and the franchisor, which, as a worst-case scenario, although not rare, can lead to legal proceedings.
If franchisees make money, they’re happy, but if they’re not, they’re usually at the door of the franchisor. Allegations, rightly or wrongly, include lack of funding, insufficient preparation, territorial issues, misappropriation and even fraud. Frequent contact, sufficient resources, rigorous market analysis and a robust Operations Manual, will help to overcome this.
How To Franchise Your Business – Step-By-Step
It’s true that almost every company can be franchised. However, not all companies can be successfully franchised. One of the first things you’ll need to do is take a step back and critically determine if franchising is appropriate for you. A franchise-ready company should be reliable, viable, informable, innovative and profitable.
If you’re looking at how to franchise your business, you need to start by looking critically at your company. Are you prepared for the franchise? The success of the franchise opportunity is dependent on the satisfactory achievement of key requirements in five separate business areas. these are the following:
Consider the competitive climate in which your company operates
- Can your operating strategy and experience make it possible for you to grow a profitable franchise?
- Products or services – are they appropriate for franchising?
- Branding, Sales & Promotion – is your Brand sufficiently powerful and is your strategy sufficiently well established to offer a competitive advantage to a franchisee?
- Finance – is your financial situation good enough to sustain a franchise network and is there ample benefit to satisfy both parties?
- Administration – is your business system tested, stable and ready to learn?
If you believe that your company can be franchised, there are a range of clearly defined steps to take to get the franchise up and running. We have split them down into five simple stages:
Step 1 – Franchise Development Plan
You need to write a franchise business plan.
The development plan will look at topics such as the structure of the franchise, details about franchisee applicants, how to decide on the territories to be assigned to the franchisees, the effect on your personnel resources and the planned support system for the franchisee.
You’ll need to address:
- How’s the franchise systems going to work?
- What is your job, and what should be the duty of the franchisee?
Asking these questions will allow you to set your franchisee operating guidelines.
You should then start looking at the type of Franchise Package you’re going to give to a franchisee.
Consider – what is it that your franchise is going to offer them?
Remember to ask yourself if you would buy into the opportunity!
A complete financial report will be required to enable you to produce financial forecasts for both your own company and that of the franchisee.
These may go in to:
- How profits build up over time
- Profit margins
- Cost profiles
- Management service fees that could be paid by a franchisee.
- The cash flow of the company
- The impact of negative cashflow or insolvency
If all this adds up, you need to set up an Action Plan to fulfil the franchise opportunity.
Step 2 – Pilot Operation
Some reports claim that the average stand-alone small business has a 75% probability of failure in its first five years of service. Prior to franchising, every company should run a pilot venture, with a minimum period of one year from the main business, to show that it has a viable franchise model.
In fact, it is highly advantageous for the prospective franchisor to open a range of outlets using their own resources in which they can assess the adequacy of their franchise systems, processes, training, etc. Lessons learned during this process will reap dividends after the successful launch of franchise operations.
Step 3 – Operations Manuals
You will need to read a Franchise Operations Manual that lays out a detailed description of the company structure and how to manage it. This is a time-consuming job that should not be underestimated!
The Manual should be used for the following purposes:
As a day-to-day reference tool to be used by the franchisor and his / her employees when running the company.
- As a teaching tool for you as you teach franchisees
- As a recruitment tool for the franchisee to train workers
- As a basis for the growth of companies
The Manual is the mechanism by which the terms and conditions of the franchise agreement are strengthened to ensure continuity and integrity across the franchise network. It includes explanations and descriptions of the duties of both you and the franchisee under the franchise agreement. Practice-based on the knowledge and experience of running the company should be advised and the procedures laid down in the Manual.
Step 4 – Franchisee Recruitment
This is the stage at which new franchisors are most susceptible. You invested time and money on building a framework and need to get your investment back! Unfortunately, many franchisors make a mistake by signing up bad franchisees and never recover.
Careful preparation of recruiting procedures, promotional campaigns and interviewing strategies is required to avoid making costly mistakes.
Stage 5 – Support Systems
Your initial training and support for franchisees must be first class. The input needed from your senior management team can not be underestimated – be willing to invest the time.
Make sure the company processes and procedures have been standardised and that they are as quick as possible. This is all for a profitable franchise.
What is The Cost of Franchising A Business In The UK
There are no fixed costs for franchising a business since each company is different, and the creation of a franchise system can be customised to the individual requirements. Certain companies are more complicated and need more outsourced technical advice and guidance, while others are easily organised, and with the right help, a large part of the work can be performed by the owner to minimise future development costs.
As a guide, I would estimate the cost of creating the franchise, which includes:
- Analysis of viability
- Write a Procedures Manual
- Establish a training curriculum for franchisees
- Effective support structures
- Preparation of a formal agreement and other documents
- Protection of trademarks (registration of trademarks if required)
- Identification of target franchisees
- Establish a recruitment method
- Examining effective recruiting channels
- Developing a prospectus for the franchise
- Financial Modeling
- Preparing a paper on company growth
All of the above would be between £15k and £30k based on several factors. In addition, you will need to budget at least £1.5k a month for the recruitment of franchisees, such as ads, exhibits, etc.
Although, hiring freelancers, experienced franchise owners, franchise consultants or doing some of the admin yourself could bring your costs down significantly, it’s not recommended if you have never franchised before, especially if you have longevity in your business plan!
Additional Costs To Consider
Your current company may incur additional costs in setting up a support system, which may include the recruitment of additional workers and the construction of a franchise location.
These development costs need to be incurred before recruiting your first franchisee, so there is a significant capital outlay before you can begin franchises of this sort. Banks can often assist with these costs of growth; however, if your credit rating is not up to scratch, you may need to work on that before trying the bank approach.
Turning your business into a franchise, if feasible, is an awesome way to expand your business and grow your capital because franchisees are more likely to be more committed to the success of their branch and moreover your brand. We feel this is probably better than having to hire and train dependable managers to run and operate expansion branches you open independently.
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