18th October, 2021
For new franchise owners, taking your business to the next level can be daunting, but having a clear view of the road ahead can make things easier.
Franchising can be an ideal method for growing an existing successful business, provided that a business owner is prepared for the journey ahead.
It might not be suitable for scaling all types of businesses, and not all business owners are suited to franchising either (especially those who find it frustrating dealing with employees will find it just a challenging dealing with franchisees), but for those who are, franchising can be incredibly rewarding — both financially and for your career development.
There are two basic pathways to franchising: a proactive pathway, where franchising has been considered among other growth options, and found to be the most desirable; and the reactive pathway, where a business owner receives flattering compliments about their wonderful products or services, and unsolicited interest to duplicate their business across other locations.
Jason Gehrke, director for the Franchise Advisory Centre explains the key differences between these pathways to franchising.
“The reactive pathway into franchising is surprisingly common, and also the most dangerous,” said Gerhke. “Businesses owners who find themselves unexpectedly drawn into franchising will experience a vortex of twists and turns, costs and headaches they never imagined, and which their business may not survive.
“There is precious little research into the survival rate of startup franchise systems in Australia and New Zealand, but studies overseas indicate that startup franchisors have very unrealistic expectations about how quickly they will grow to the point of covering their costs of franchising, and often fail as a result.”
Perhaps, unsurprisingly, Gerhke views unrealistic optimism as a contributing factor in the collapse of many small businesses before they’re able to scale.
So how can aspiring franchisors better prepare for the journey ahead? The first step is to consider the five major stages of franchising a business as follows.
In this stage, the business owner considers the overall potential of the market for their products and services, and different ways of providing these to the market. Is it better to open outlets across the nation than to sell products to customers directly online? How simple or complex are the services to be offered, and what other ways can a customer access them?
“For most startup franchisors, this will involve a feasibility study,” explained Gerhke. “Typically these are conducted by external consultants, cost a lot of money, and invariably come back with the same result – yes, you can franchise your business.
“However, a feasibility study only indicates what is possible, not what is viable.”
If a business is to be franchised, Gerhke suggests there needs to be sufficient capacity in the market to justify the effort of franchising, and for all parties involved (as in, the franchisor and the franchisees) to make money. If not, any amount of feasibility won’t be met by viability.
After appropriate investigation has been done, the aspiring franchisor should reconfirm the validity of their business concept, by opening a second, third or even fourth location at their own expense to prove that the business concept works outside the bubble in which its foundation outlet operates.
“The confirmation stage is essential to demonstrate proof of concept, as the initial outlet may only be successful due to characteristics so unique to that location that they cannot be found elsewhere.”
The confirmation stage also requires the development of systems, policies and procedures to ensure uniform operation of all outlets, which will be central to the brand’s values and customer experience.
The preparation stage expands on the development of systems, policies and procedures, as outlined above. While at first this might seem to delay the commencement of franchising, it’s necessary to ensure a better launch for the new franchise.
At this point (although ideally this would be done even before the business started thinking about franchising) all of its intellectual property assets (things like trademarks, domain names, etc) will be registered, and the business structured accordingly.
“This stage will also require the development of monitoring systems and key performance indicators so that franchisors and franchisees can easily identify if outlet performance is falling below required minimum performance levels,” said Gerhke. “Ideally, this level of visibility will include full transparency of individual outlet profitability, which is possible via solutions such as MYOB’s Connected Franchise offer.”
Also in this stage, the franchise offer itself is developed, the markets in which outlets to be established are more accurately determined, and a franchise agreement is developed (which should only be drafted by a lawyer with suitable franchising experience).
At this point, the benefits of franchising become most obvious, and the aspiring franchisor begins actively looking for franchisees who stake their own money to pay for new outlets to be opened, and then apply their own labour (using the systems provided by the franchisor) to operate those outlets.
Franchising offers very rapid growth in ways that company-owned chains that must fund the cost of their own outlets just can’t achieve.
“The rate of acceleration achieved is a function of the market demand for the goods or services, as well as the scalability of the startup franchisor, which in turn depends on the extent to which they prepared for growth in the first place,” explained Gerhke.
“At a practical level, if a new franchisor builds scalable systems in the preparation stage to cater for at least 100 franchisees from the outset, then they will have created ideal capacity for rapid acceleration.”
“After every growth spurt, a business should pause to reflect on its progress to date and lock-in the gains it has achieved,” Gerhke recommended. “This might sound like common sense and yet so often startup franchisors become so focused on growth that they overlook the need to consolidate their position, which is when problems occur.”
Once the business has begun successfully taking on its first franchisees, franchisors should review their policies, procedures and systems to confirm they are sufficiently robust to sustain the addition of another 50, 100 or more franchisees in the future.
“More importantly, the franchisor needs to ensure that the existing franchisees are satisfied with their businesses, are making solid profits, and are committed to the brand,” said Gerhke. “If franchisees are unsatisfied, unprofitable and disengaged with the brand, address this first before seeking to achieve further growth.”
Once the consolidation stage is mastered, you’re in a position to start at the beginning again by investigating new markets in which to grow, before working through these stages again to chase further growth.