Franchise Your Business

Are you planning to franchise your business in Malaysia? Many owners of successful (and even some of not so successful) businesses ask themselves a series of questions along the following lines:

  • Is the business "franchiseable"? If the answer appears to be “yes”, they ask:
    • what are the advantages of taking this step?
    • what are the disadvantages of taking this step?
  • What does the typical franchise package consist of?
  • Is assistance by professionals essential?

Let us look at these issues one by one.

Is the business "franchiseable"?

Franchising your business can be a very successful way of expanding your business, provided that you have a business to begin with. Many of today's well-known brands have used franchising to accelerate the growth of their existing businesses, building national or even world brands in the process. However, franchising should never be seen as a testing ground for a brand new (and unproven) business idea but as a means of expanding an already successful business.

Not all businesses are suitable for expansion through franchising but over time, most business concepts can be turned into franchiseable entities. This requires the presence of the following characteristics:

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    • The company must have a good track record and an experienced management team.
    • The brand should be memorable, registered and capable of being expanded into different parts of the country, eventually perhaps even into other countries. Ideally, the company should have enjoyed some good local press and/or other forms of public acclaim.
    • To ensure consistency of delivery throughout the network and brand integrity, and to enhance franchisees’ ability to maximise profitability, this know-how needs to be carefully documented. This will facilitate skills transfer, more often than not to individuals with no prior experience in the industry sector.
    • Franchising is a numbers game, meaning that unless at least 25 to 50 units can be set up over a period, the network is unlikely to succeed.
    • Investors with deep pockets are rarely willing to work behind the counter of the store. This means that the unit will be manager-operated, with all the problems this move entails. This route is not recommended. 

Credibility  - The concept needs to be proven

Profitability - To franchise a business is not, and can never be, a means of funding a new business, or rescuing a business that is in trouble. For a business to be franchiseable, it needs to offer more than mere potential. It needs to have a proven record of success and generate adequate gross margins to allow franchisees to make money after they have paid their franchise fees.

 Aspect of uniqueness  - The business to be franchised needs to have a unique selling point that will allow it to differentiate its products or services from those of its competitors. This sustainable competitive advantage would allow it to compete successfully in its markets nationally, with possible potential to eventually expand internationally.

Robust demand pattern - The mere fact that a business located at an upmarket shopping centre is selling big ticket items to a well-heeled clientele does not necessarily mean that it can be franchised successfully. The franchisor needs to ensure that demand exists in different areas, and that the product has staying power. Fads do not form a sound base for franchising.

Highly developed set of skills - The business needs to have a set of systems, procedures, expertise, skills and know-how that optimises every operational step. This, in a nutshell, is the purpose of the operations and procedures manual.

 Portability of skills - In itself, the availability of a carefully developed set of skills is insufficient. It must be possible to train prospective franchisees lacking experience in the sector within a reasonable period. This is important because to permit new franchisees to operate a business under the network’s brand before they are adequately trained would be a recipe for disaster.

Practical considerations dictate that franchisees cannot afford to spend long periods in training. Most franchisors recognise this and aim to train their franchisees within three months or less. However, there are exceptions. This needs to be considered when working out the total cost of the franchise the prospect incurs (which needs to include the lack of income during training.)

Support infrastructure must be in place - The franchisor must provide intensive initial and ongoing support to franchisees. This requires manpower, facilities, a veritable set of skills and absolute dedication to the creation of win/win outcomes.

The franchise opportunity must be affordable  - There is no point creating an outstanding opportunity if the target audience cannot afford the investment.

 

What are the disadvantages?  

  • can I afford it?
  • do I have the foresight and patience to wait for returns?
  • The franchisee owns the business unit and will expect to have a say in the way it operates. It is here that the operations and procedures manual comes into play. As long as the franchisee adheres to the systems as set out in the manual, it will be almost as if you were to manage the franchise centrally.
  • The franchisor needs to remember that each franchisee is a business owner in his or her own right and respect that. A franchisee cannot simply be fired, however, it is the franchisor’s responsibility to monitor the franchisee’s activities closely, identify areas of poor performance and insist that they are rectified.
  • Close cooperation between franchisor and franchisees, supported by an excellent communications infrastructure, are essential.
  • Franchisees need to operate in the interest of the brand, and meet monthly targets. Failure of just one franchisee can impact negatively on the network as a whole.
  • The franchisor needs to protect the network from past franchisees who may try to replicate the concept for their own benefit, thereby taking business away from other members of the network.

The initial costs involved - You need to be realistic in assessing the cost of establishing a franchised network against the time it will take for you to see a return on your investment. Ask yourself:

 A certain degree of loss of control - Usually, when you own it, you control it! In franchising, this credo applies to a certain extent, but there are limits.

 Franchisee selection  - New franchisors may be tempted to recruit franchisees on the basis of them being able to come up with the investment. This is understandable, but it can have disastrous consequences for the network. Admitting the wrong people can damage the foundations of the network and eventually lead to its failure. The franchisor needs to develop a franchisee profile and invest time and money in recruiting the right people.

Managing growth - Having a large franchise network can be a nice position to be in, but the franchisor needs to put the necessary infrastructure in place to adequately serve the needs of the network’s franchisees. It is better for the division responsible for franchisee support to be over-staffed at times, as this makes it possible to react to any problems that may arise from old and new franchisees. Unless franchisees receive the necessary support, they may find it difficult to achieve their aims and the brand’s reputation could suffer. This requires a culture change. Quite simply, a successful franchise organisation needs to be support-oriented.

 Handling conflict - Conflicts between franchisees and the franchisor are the biggest negative in franchising. On occasion, this leads to legal proceedings, although this would be the worst-case scenario. When franchisees are making money, they are usually happy, if not, they blame the franchisor. They will make allegations along the lines of over-promising but under-delivering, lack of support, inadequate training, territorial problems, misrepresentation and even fraud. Even if these allegations are unjustified, once they have been made, trust tends to go out the window. Frequent communication, enthusiastic practical support, thorough market research and a comprehensive operations and procedures manual can help to prevent problems of this nature from arising

What does the typical franchise package consist of?

The franchise package is the sum total of the intellectual property and practical assistance the franchisor provides to franchisees. It can be categorised as follows:

  1. Drafting of a business plan and help with obtaining finance.
  2. Site selection advice and assistance with lease negotiations.
  3. Specifications for the fitting-out of the unit.
  4. Access to preferential sources of supply.
  5. Initial training of the franchisee, plus possibly key staff, in all facets of operating the business successfully.
  6. Advice regarding the composition and quantity of initial trading stock.
  7. Help with the recruitment and training of staff.
  8. Supply of a comprehensive system for the administration and control of the business, plus training in its use.
  9. Access to a troubleshooting hotline.
  10. Regular visits by competent franchisor personnel.
  11. Access to local, regional and national meetings arranged by the franchisor and designed to drive the business forward.
  12. Access to group purchasing schemes.
  13. Spin-off from network-wide marketing drives and support with local marketing initiatives.
  14. Market research and product development.
  15. Development and testing of new products, systems and equipment.
  16. Assistance with staff recruitment, motivation and control.
  17. Guidance in terms of statutory obligations.
  18. Assistance with goal setting and periodic updating of the business plan.
  19. Regular review of business performance, linked to confidential feedback on deviations from group norms – advice regarding possible improvements.
  20. Periodic auditing of franchisee’s operation.
  21. One-on-one counselling sessions.
  22. Motivational meetings.
  23. Franchisee awards.
  24. Lifestyle enhancement issues.

Access to the franchisor’s intellectual property - This includes the right to use the network’s brand, logo and corporate image as well as access to operational know-how. The latter is usually documented in the network’s operations and procedures manual.

 

Assistance during the pre-opening phase - Depending on the nature of the business, the franchisor is expected to assist franchisees in the following ways: 

  1. Extensive ongoing operational support  
  2. Franchisee motivation and control

Is assistance by professionals essential?

Generally, the answer must be a resounding ”yes”. Seeking input from qualified outsiders will bring an extra perspective to the business to be franchised and help the prospective franchisor understand the intricacies of this step. Initially, the consultant will help the franchisor to decide whether franchising is right for the business and its culture. If so, he or she will advise on developing the franchise package. Several professions can become involved, most often a franchise consultant, an accountant and a lawyer. 

Franchise consultant - Generally, the services offered by franchise consultants include:

  • Help with the feasibility study.
  • Help with the franchise plan, essentially a document not unlike a business plan but with the focus firmly on the development of the franchise.
  • Guidance for the creation of a professionally compiled franchise package (in this order):

·          

    • the drafting of the operations and procedures manual
    • the drafting of the disclosure document
    • the creation of a brief to enable a qualified attorney to prepare the franchise agreement
  • Advice on access to funding sources, both to fund the franchisor’s operation and to create a funding mechanism for future franchisees.

Prospective franchisors should look for a meeting of minds between the consultant and the company. Ideally, the consultant should be:

  • a member of MFA and prepared to conduct the work in accordance with MFA’s Code of Ethics and Business Practices
  • prepared to offer the franchisor an initial short assessment without cost or obligation
  • able to provide references from previous clients, preferably within the same or a similar sector
  • willing to give an estimate of costs involved, linked to performance criteria including progress markers and points of disengagement.

Accountant  - Perhaps the franchisor’s own accountant is able to help with creating the financials needed to plan the franchise – up to a point:

  • Unless the accountant has proven expertise in franchising, he/she should limit his/her involvement to supplying financial information pertaining to the core unit, then hand over to a professional with franchise expertise. Alternatively, the consultant will be able to assist.
  • The important point is that as part of this exercise, projections showing what franchisees’ financial performance will be like over time, and whether they can afford to pay franchise fees and still make a profit, needs to be compiled.
  • These projections need to take the prospective franchisor’s projected costs of providing franchisee support into account. Unless the franchisor can make money from franchising, the business is not franchiseable. (An exception would be a business where the franchisor is the supplier of a key product. However, relying on this alone could create problems with the Competition Board).

Attorneys - The franchisor and every prospective franchisee must take competent legal advice. Contrary to what some inexperienced prospective franchisors might think, an effective franchise agreement cannot be compiled in-house, and no, copying another network’s franchise agreement won’t do either. Precisely because South Africa does not have a body of laws that governs franchising, it is vital that the attorney you consult has experience in these matters.

 

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