Advice for Growing Franchisors
Emerging franchisors generally come to the table with an entrepreneurial burn that can light up a room. They are usually talented and have great pride in the concept they want to expand. Almost always they don't understand (more than at a surface level) what franchising is all about, and they often come to the table with myths that can surprise you.
Every one of them has been told by someone that their business would make an outstanding franchise. Frequently, the person encouraging them to develop their franchise has represented themselves as an expert on franchising. They just want to help them obtain their Great American Dream, regardless of the company's readiness to franchise. (The number of professionals who are really no more than franchise packaging firms--legal, business, and brokers--has grown, a disturbing reality in franchising.)
We are fortunate that most of our clients come from referrals from the clients and professionals we work with. Most of the prospective franchisor clients believe they should franchise; viable or preferable alternatives are often not even considered. Because of this, we start every franchise development engagement with a few hours of basic franchising knowledge. Then we conduct a threshold analysis, which examines if they are candidates for expansion and, if they are, whether or not franchising should be included in their expansion strategy.
We are fortunate to have the capability and experience to work in many downstream expansion strategies. Most of our clients today commonly include other expansion methods in addition to franchising, depending on opportunity, market, and other determinants.
In our initial work with clients, we help them focus on four principles we want them to understand as the goal of the design and development of their franchise program. By doing so, they improve our ability to help them create a sustainable franchise system. These four principles are:
- Brand standards. These must be established, agreed upon, properly enforced, and the franchise system must be supported throughout all of its downstream channels.
- Growth and economies of scale. The franchise system needs the capacity to grow, and economies of scale have to be achievable and leveraged so that efficiencies can be continually improved upon for the benefit of the internal and external stakeholders.
- Culture of change. This must exist to allow for continuing communication between the franchisor and franchisees. The goal is for the relationship to be positive, respectful, and supportive, and to ensure that franchisees are involved in the evolution of the brand.
- Unit and system economics at each level, to be sustainable, must be affordable, and at least meet the economic hurdles expected by the investors, including the franchisor and each class of franchisee operating in the system.
It is important both for us and for the long-term viability of our clients' franchise programs that they internalize these principles. Sustainability will never be achieved without a solid foundation in fostering a strong franchise relationship; over time, the franchisor and franchisee in an out-of-focus system will come into conflict and problems will surface. We have found that this approach allows our clients to be better able to fully participate in the design and development of their franchise program, and that ownership of the process pays dividends to them over the long term.
In conducting the threshold examination, we employ about 15 criteria, depending on the industry. We look at a host of variables, including the client's culture, their management's capabilities, and the likelihood that they will be able to attract and support franchisees.
We also look at whether the client has the necessary financial resources for the long haul; at developing preliminary financial metrics for the anticipated franchisor; and, most importantly, at each class of franchisee we expect will be attracted to the franchise system. The projections need to support the economic hurdles we establish in advance, which include return on investment for each stakeholder in the system.
The bottom line is that without first running economic models you can't responsibly establish the economic and other elements of the franchise system. The projections, including an analysis of the ROI, need to be developed for each class of franchisee anticipated to be attracted to the offering, the franchisor, and their affiliates involved in supporting or supplying the franchise system. An effective fee structure is dependent upon the investment required and the costs necessary to support the franchisee in delivering on the franchisor's brand promise to the system's customers. The fees also must be based on a pricing strategy that supports the franchisor's brand positioning from a competitive viewpoint. Lower fees are not always a competitive advantage, and higher fees often make a franchisor more competitive. Setting fees requires some professional rigor.
Becoming a sustainable franchisor is not an accidental achievement. We have all seen great concepts fail because they were franchised too early or packaged, instead of designed and developed properly. Most of the time, as professionals in franchising, each of us can guide our clients based on our experience and expertise. Looking at whether or not they have the capabilities to franchise should always be our first objective.
Michael Seid is managing director of MSA Worldwide a franchise advisory firm providing guidance to new and established franchisors. Contact him at 860-523-4257 or firstname.lastname@example.org.
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