Something like one-and-a-half times every day, 365 days a year, someone contacts my business with a version of one of the following questions. Either, “I have a business which I want to grow into a national network – can it be franchised and if so, how do I do it?” or “I have a business and I’ve been approached by someone wanting to set up something identical using my name in a foreign country. What should I do?”
The good news is that these people are looking for professional advice rather than going down the do-it-yourself route to either domestic or international franchising. As someone once said, “Franchising is simple but it isn’t easy” and engaging experienced advisors will save rather than cost money if indeed franchising turns out to be a good idea.
In my view any business which can be operated as a branch network and which wants to grow should at least consider franchising as one of the options. However there is no ‘right way’ to franchise a business so simply copying what someone else is doing may not work. There may be a ‘right way’ for the business in question so the first job for the consultant is to establish whether the operation can be structured in such a way that franchising might indeed work in this case.
Whether considering domestic or international franchising the process is pretty much the same. You need to have a detailed business plan and budget; you need to have agreements and manuals; you need to have an attractive franchise offer package; you need to have a clearly defined franchisee profile and recruitment process; and you need to have processes for training and continually monitoring and supporting the franchisees.
Making the decision
There is a reason why the items above are presented in that order. The first part of a project for a potential franchisor has to be what we call the franchise development plan (FDP). In short, this involves building the financial models for the franchisee, then the franchisor. As well as P&L, balance sheet and cash-flow forecasts, this includes producing a blueprint listing all the things that will have to be done, who will do them, when they need to be done by and what they will cost.
In essence, using our respective experiences, we use the client’s and our best guesses about how everything will look – and the client then decides whether the inevitable investment for both themselves and the subsequent franchisees will be worthwhile for all parties. While all FDPs have a similar structure, the input and the output are completely bespoke for each client.
Enquirers often don’t know that every report has to be bespoke, nor do they immediately understand its relevance. Typically, they might say: “We don’t need all that. There are loads of businesses in our sector that are franchised so ours must be franchizable. We just want to get on with it so we need an agreement, a manual, a website and a stand at an exhibition.”
My response is: “There may be several of your competitors which are being franchised but they are not all doing it successfully. Even the ones that are successful may not be doing it in a way that will suit your business so you can’t just copy their fee structures and so on.”
In my view any lawyer or marketing agency that proceeds with a potential franchisor without checking that they’ve accurately worked out the financials is acting irresponsibly. It’s worth pointing out that there are two potential break points where the decision might be taken to abort the process. The first plan to be established is that for the potential franchisee. Sometimes, no matter how successfully the current business is operating, it becomes apparent that no way can be found to structure things in such a way that will be acceptable to the sort of person likely to be the franchisee. The investment of money and time may be too high, the likely returns too low. Whatever the reason, if it looks unlikely to be successful for a franchisee then it will never be successful for the franchisor, so all bets are off. There is no point continuing with the second plan.
However, if things are looking good for the franchisees we need to ensure that it will work for the franchisor. Can he recruit enough of the right franchisees quickly enough to make it worth investing all the resources necessary to create and manage the network? Although franchising is often referred to as using someone else’s money and effort to grow your business, there is no doubt that you have to invest plenty of your own to get the whole thing going. Believe it or not it’s possible that there could be a network of, say, thirty franchisees out there, all making money, while the franchisor is still not making a profit on his operation of the network. The number of franchisees at which it does become profitable, and therefore the time and money the project will require, is different for every business, as therefore is the funding requirement for the project. Some businesses have more resources and more patience than others so the decision is based on “Are we willing to wait that long and can we survive until we get there?”
Implementing the plan
The franchisee recruitment process, whether for domestic or international franchisees, can start as soon as the decision to proceed is taken. None of the necessary legal and operational documentation will yet have been produced but these can be prepared in parallel with recruitment, all being ready when required.
Some businesses attempt a DIY version of an FDP, which is better than nothing but one of the biggest mistakes is to overestimate the rate at which franchisees will be recruited and to underestimate the cost of doing so. With the best will in the world it may take up to six months to get the first franchisee signed up and most franchisors will not have the resources to recruit and train more than three in the first year, alongside continuing to run their existing business. Many DIY plans have between ten and twenty starting in that period and many show all the franchisees starting at the same time at the start of the year. The observant reader will spot serious flaws in the cash-flow forecast which may or may not have been prepared!
The average marketing cost of recruiting a single franchisee is north of £5,000 according to franchise sector research and the average conversion rate is sometimes higher than 100:1. Therefore to recruit, say, five in year two will need a marketing spend of £25,000, much of it in year one. It might then be necessary to generate 500 enquiries, all of which need someone with the time and skills to process them. Most new franchisors don’t have those skills in-house, so to avoid costly mistakes it would be sensible to get professional advice from accredited recruitment consultants.
What about master franchisees?
The process described and the advice given above applies equally to a franchisor creating an international network of master franchisees. However, the figures will change and the franchisor will want to prepare a further business plan to demonstrate that, now, three parties can all be satisfactorily rewarded. Is there enough profit in the system for each of the franchisor, the master franchisee and the unit franchisees to make a living and build their respective businesses? Finding master franchisees to effectively become the franchisor in a distant country will inevitably take longer, cost more and require local professional advice. Those master franchisees will in turn need their own local franchising advisors to guide their footsteps both in operating the business and in the franchising skills required to grow the local network.
In short, it would seem the sensible answer to the question posed as the subject of this article is “Find an experienced advisor with whom you are comfortable, who is part of a network of similar practitioners around the world to which you can be introduced”.
Brian Duckett is Chairman of The Franchising Centre
