FRANCHISING
What Is Franchising
The term 'franchising' has been used to describe many different forms of business relationships, including licensing, distributor and agency arrangements. The more popular use of the term has arisen from the development of what is called 'business format franchising.'
Business format franchising is the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor..
and to make use of an entire package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis.
The principle is simple - some companies choose to grow, not by developing in the conventional way, but by granting a license to others to sell their product or service. There are clear advantages to this:
- You don't have to come up with a new idea - someone else has had it and tested it, too!
- Larger, well-established franchise operations will often have national advertising campaigns and a solid trading name.
- Good franchisors (BFA members) will offer comprehensive training programmes in sales and indeed all business skills.
- Good franchisors can also help secure funding for your investment as well as e.g. discounted bulk-buy supplies for outlets when you are in operation.
- If aware that you are running a franchise, customers will also understand that you will be offering the best possible value for money and service - although you run your 'own show', you are part of a much larger organisation.
Franchising - How Does It Work?
The Franchisee:
- buys licensed rights to clone the whole business package from the franchisor in a specific territory for a specific period.
- is provided with a ready-made, established and tested business format including name, know-how, training and support services.
- invests capital, time, effort and any relevant past experience to create his business, replicated from the franchisor's business formula / system.
- gets a safer way of moving into independent business.
- gains a new outlet in a new territory with minimum capital investment in setting it up.
The Franchisor:
- expands his network (and sales base) cost effectively
There are different franchising options but the two most familiar types are:
- Product and Trade Name Franchising -
a sales relationship between supplier and dealer in which the dealer is granted the right to use the system in exchange for fees, as well as an obligation to sell only the franchisors' product (Petrol stations, Car Dealerships)
- Business Format Franchising -
characterised by an ongoing relationship between the franchisor and franchisee that includes not only the product, service and trademark, but enables the franchisee to acquire the right to use the franchisor's entire business concept.
This includes the franchisors's name, goodwill, marketing procedures, products and services, administrative and operational systems, and support facilities (McDonald's, Multiserve)
THE BENEFITS OF FRANCHISING:
- Access to capital: commercial banks and development corporations recognise the lower risk profile of franchising and consequently prefer financing a franchisee.
Financiers know they have a cushion in the franchisor who has tested and fine-tuned the franchised system.
- Experience of the franchisor: years of experience and the proven methods of the franchisor help to eliminate many start-up problems, enabling someone with little or no previous experience in a particular industry to become easily integrated.
- Training: the franchisor provides both initial and ongoing training to a new franchisee. This helps to prepare the franchisee in all facets of the business. This method of skills-transfer takes place at all levels i.e. management training, as well as training employees at all levels.
This is a benefit for emerging entrepreneurs who do not have the experience or knowledge of a particular industry, which they wish to enter.
- Ongoing Advice: the franchisor is in a position to provide ongoing research and development in the field of new products and services. Buying a franchise means becoming part of a "family" where all members work together for the good of the whole.
All franchisees contribute to, and share in, ideas to the benefit of the franchise-network.
The franchisor provides the franchisee with ongoing assistance throughout their business relationship.
- Advertising: contributing to a national fund will make effective and extensive advertising possible which would otherwise not have been affordable.
Is Your Business Franchisable?
All sorts of businesses in all sorts of markets now use the franchise method successfully; but not all businesses are franchisable. If your business has one or more of the following characteristics, franchising may not be suitable:
- A product or service which is only likely to have a market for a short time (e.g., toy hoola hoops).
- Gross margins which are too low to offer a return on investment to both you as the franchisor, and your franchisees (e.g. newspaper delivery).
- Skill levels for each operating unit that require very long training periods (e.g., management consultancy).
- Predominantly repeat business customers whose loyalty relates to the individual providing the service and which would be difficult to transfer to a brand (e.g. marriage counselling).
- A geographically defined market that doesn't have the potential to be repeated in many places (e.g. Tower of London).
- A business with audit and control requirements which are too critical to involve franchisees operating as separate legal entities (e.g., a bank).
- A business, which is failing.
If you think your business might be franchisable then you will need to offer franchisees a business format which includes your brand, business system, and support services under the contractual terms of a franchise agreement which will, amongst many other things, set out the financial arrangement.
Considerable development work is required before you will be in a position to draw up offer documents and begin recruiting franchisees.
BECOMING A FRANCHISOR
There are several steps, which potential franchisors should take:
- Seek expert advice from the British Franchise Association (BFA). The BFA Franchisor Guides is invaluable in providing a wealth of unbiased step-by-step information for potential franchisors.
- The BFA can provide introductions to consultants, solicitors and accountants experienced in franchising and accredited by the BFA to meet BFA ethical franchising standards and help you identify whether or not your business is suitable to franchise.
- Research the market to ensure that products and services are competitive and distinctive enough to be franchised and that customer demand is sufficiently widespread.
- Produce a Business Plan outlining proposals in full and including a detailed SWOT analysis.
Protect all intellectual property rights by registering trademarks, trade names and patents with the relevant trademark and patent offices.
- Test the franchise in the form of a pilot operation lasting at least 12 months - ideally longer if the business is in any way seasonal. The pilot scheme should be undertaken at more than one location in order to test the concept in different geographical areas.
A comprehensive pilot operation will prove the viability of strategy and approach, highlight problem areas, and enable the franchisor to fine-tune the package before committing fully to developing a network.
- With the pilot operation running successfully, the franchisor can prepare and launch his network. At this stage the franchisor should instruct a solicitor familiar with franchising operations to draw up a comprehensive franchise contract setting out the obligations of each party - including how the fees, mark-ups on supplies and any other payments from the franchisee are to be calculated.
These obligations should be made clear at the outset of any agreement with a franchisee, to prevent possible conflicts in the future.
- Produce a prospectus to attract suitable franchisees, and to determine the criteria for the franchisee selection.
- Produce a comprehensive operations manual and training programme for franchisees. This will enable the franchisor to set and maintain standards of customer service throughout the network.
- Establish a central management function and possibly field support staff to support the franchise network, and set up a system to monitor the performance of franchisees.
- Finally, develop marketing, sales and advertising strategy to promote the franchise network, especially when competing with rival companies that potential customers are fully aware of the services on offer.
The franchisor will need to commit substantial amounts of time and money before their income stream begins - for market research studies, pilot schemes, promotional material explaining the benefits of the franchise to potential franchisees, the selection and training of franchisees, the production of an operations manual, the formation of a central management team, initial stock and equipment, the launch of the franchise network and advertising.
Once the network is up and running, the franchisor and the central management team need to constantly monitor the performance of the outlets, to ensure that quality levels are maintains and to identify and assist any franchisees that are in difficulties. A franchisor's on-going commitment, through training, product development and other support, is vital to the success of the franchise network.
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