Ulster Bank has many years experience of working with Franchises in the Irish market. This second article on Franchising explores the concept of growing your established business through Franchising.
You’ve built up a business, its now profitable, generating an income, employing some people – you’ve successfully come through those first years of starting your business, you’ve made mistakes along the way – and learned from them. You now look back with relief, but you know that you need to look forward and decide where to go from here.
So what is your future strategy?
Perhaps you are asking yourself questions like, do you consolidate your business and continue at the level you are at? Should you consider an exit, and golf in the sun? Or should you be expanding your business?
If you are planning to build a bigger business, essentially you have three options:
- Grow organically – expand your company with new branches, employ more staff
- Grow by acquisition or partnership with an other business
- Grow by franchising
Some really well-known brands across the globe have successfully developed a Franchise model as a means of expansion, and not just well-known casual-dining giants. Franchising occurs across a wide range of sectors including Retailing; Building Services; Transport and courier services; Domestic services such as kitchen and bathroom renovation; cleaning services, Consumer services such as car repairs; Business support services such as printing, computer supports; Educational and Coaching services; and Healthcare.
So why not just expand?
You could adopt a traditional expansion strategy; open branches, employ more staff, and invest significantly in expansion of your business. However, here are some reasons why you might want to consider Franchising as another option.
Lower Capital Commitment: Your brand can benefit from the capital investment, resources and personal commitment of your Franchisees, so following your initial investment in developing the Franchise model, you may need to invest less capital.
Another Income Stream: When your Franchise brand is up and running, and your franchise pilot has proven its success, you can start selling Franchise Licences – Up-front fees are typically paid by Franchisees to buy into the Franchise network (to cover their initial training and support costs), and ongoing Royalty fees will be payable to the Franchisor (you). Royalty fees may be a percentage of Franchisee Sales, or could be a flat monthly fee.
Expansion Speed: Once you have an effective Franchise model in place, you can potentially expand your network quite quickly. Your growth will be limited by your ability to recruit, train and support your Franchisees, so it will be important to invest work and funds into getting an effective model in place to manage and support your network.
Network Performance: As your branches will be run by owner-operators, if you recruit effective Franchisees they should be more motivated to drive business results than paid employees.
Standardised Management: A well planned and developed Franchise model should include a consistent management process and metrics which will apply across the network, this will allow you to identify areas of under performance and step in to support early.
Shared Learnings: As Franchisees are all owner-managers in differing locations, they have a vested interest in sharing good ideas, and working with the network and the Franchisor to introduce good system improvements. Operating an effective Franchisee Forum should mean your Franchisees work together to “lift all boats”.
But, bear in mind:
Franchising does not “fix problems” – if your business is not working as a stand-alone business, Franchising it won’t necessarily make things better. Franchising is not intended to be a way to get money in to plug a “gap” in your ailing business.
You will have less direct control over franchisees than you would have in a company operated solely by you.
You won’t make as high a percentage of profit from the Franchise outlets as you would from company owned branches – you and your Franchisee will need to share.
Weakest Link – Your Franchisee gets the rights to use your trade mark and business system, misuse by a Franchisee can impact your brand and other Franchisees. Franchisee selection and an effectively drafted Franchise Agreement will be of great importance.
Will Franchising work for my business?
All successful Franchises have characteristics in common – they started from a business which was proven to work and common traits include:
- The business model is proven
- The business management team is strong enough to manage a network of Franchisees, and help the Franchisees develop their businesses
- There is a continuing demand for the product/service
- The business is profitable, and makes high enough margins to offer value for money returns to both Franchisor and Franchisee
- The business is transferable from one location to another
- The business model is clear, documented,
- A clearly differentiated business brand has been developed (or can be developed)
- An outsider can be taught to operate a replica of the business to the same standards and processes
- Protections (such as trademarks) and a Franchise Agreement (Legal agreement) can be put in place
So if you think the business is franchisable, the next step is to explore with a Franchise development advisor – talk to the Irish Franchise Association or the British Franchise Association for recommendations.
Steps involved in setting up a Franchise?
- Research the market – ensure there is a real need for your products and services, and that customer demand is not too local/narrowly focused, and that your offering is distinct enough to brand
- Develop a strategic business plan
- Protect your Intellectual Property – register trademarks, patents, trade names
- Test the franchise – develop pilot Franchise outlets, it should be piloted for at least 12 months and prove the concept and profitability
- Instruct a legal advisor to develop a Franchise agreement (which sets out the rights and obligations of both the Franchisor and the Franchisee). Professional legal advice will be essential here.
- Develop and document the business operations “manual” and franchisee training programme
- Set up the franchise management function, to ensure the right management controls and franchise supports are in place – this will typically be separate to the day to day business management team for the trading business.
- Establish the franchisee recruitment rrocess – Develop a franchise prospectus, introduce an effective franchisee recruitment processes.
As with any investment, do take independent legal and financial advice when developing your Franchise.
- Before you go very far, make sure that Franchising as a growth strategy will make you money – if it doesn’t enhance your businesses profits, its not worth developing a franchise.
- Budget for your franchise development costs, and ensure you have the capital available to fund this – it will take time and money to develop an effective Business Format Franchise.
- Establish your Franchisee Licence pricing strategy – consider both how much it will cost you to develop and support the Franchisees and what is a realistic price for Franchisees to pay, which will give them a realistic return on their investment.
- Determine your ongoing “royalty” pricing strategies – the profits a Franchisee outlet can realistically make, need to allow for your ongoing “royalty” and still make an effective return for their efforts.
A well-established, reputable Franchise, which has a proven track-record in opening and operating successful outlets, can offer significant benefits to both the Franchisor and the Franchisee, so do consider Franchising as a growth strategy for your successful business.
Orna Stokes is Senior Manager in Ulster Bank’s Customer Experience & Products Team. Orna.stokes@UlsterBank.com or on 087 6222182.