Despite the possible benefits for your business, knowing the best time to franchise or buy into a franchise can be difficult. Bill Lockett and Greg Nathan examine important steps in how and when to go about it.
Franchising can be seen as the most functional method of achieving predetermined commercial objectives through the voluntary cooperation of others.
Without franchising, many small investors would never have the opportunity of owning their own business. However, the franchise relationship can be a difficult one, and systematic, close evaluation of the proposed franchise system is essential if the franchisor and their eventual franchisees are to make an intelligent long-term investment decision and avoid pitfalls.
Much will depend on the information the franchisor is able to provide for prospective franchisees about all aspects of their franchise, before they make any commitment. It is in the prospective franchiser’s interest to spend time and money initially in taking their concept to the market themselves to gather as much information and independent advice as they can before committing a willing franchisee’s hard-earned capital. The key question to ask is whether the franchisee can make a ‘reasonable’ return relative to the investment required of them.
Important Questions
There are other questions the franchisor should ask, such as:
• Is my business profitable now?
• Is my business adaptable?
• Is my business methodology and culture easily transferable to others? And can someone else with less experience learn it in a reasonable time?
• Does my proposed business system have a point of difference from competitors?
• Are there good financial controls in place, clearly defined so that a franchisee can benefit from following them?
• Has my business been established long enough to have credibility?
• Do I have a good credit rating?
• Do I have integrity and a commitment to the franchising concept?
• Does the franchised business require unique, hard to get facilities or personnel—so hard you currently have great difficulty in obtaining the right facilities and personnel?
• Do I honestly expect greater returns for all parties from franchising than from what I’m doing now?
• Do I know my competitors? What are they doing that is better?
These questions constitute a filtering process to find those entrepreneurs with a genuine business concept and long-term focus and commitment to work on their business. From here, there are four essentials in realising franchise potential:
1. There must be a profitable business concept capable of replication.
2. It must be a fair and equitable system.
3. The potential franchisor should have a team with the expertise to:
• operate a single unit of the specific business concept
• manage a chain of these units
• manage the franchise system.
4. The potential franchisor must have the capital and the other resources required to undertake the expansion program and deliver the services promised to the franchisees.
You must also have a method to attract qualified applicants to your system; a method to assist your franchise owners to be successful; and for those you can’t assist, a method to handle any problems in a timely and effective manner.
The timing in regard to the readiness of your business to become a franchise will depend on a variety of factors, such as:
• the amount of time that the business owner has to spend in the business rather than working on it
• the lack of capital to expand a company-owned chain
• the inability to service an ever increasing number of clients
• strong demand from people who want to share in the growth
• lifestyle issues facing the business owner
• the complexity of day-to-day staffing matters.
—Bill Lockett is a director of franchise consultancy, Franchise Systems Group. www.franchisesystems.com.au
Working Relationships
In the early stages of a franchise relationship the feelings of excitement and hope on both sides for a happy and prosperous future are similar to what people embarking on a personal partnership feel. In fact, franchising is in many ways similar to the other interdependent relationships we have in life, such as marriage.
The work of Professor Kim Halford from Griffith University, who reviewed hundreds of studies on marriage and partnership breakdowns to identify any consistent principles or trends, was particularly interesting.
His research showed that during the first year, half of all married people have some doubts about their decision and wonder whether the relationship is going to work out. Of this half, 20 percent experience relationship problems. And so, 10 percent of legally committed relationships develop problems quite quickly.
This figure is similar to research by the Franchise Relationships Institute where, at any one time, around 10 percent of franchisees will feel they have a serious disagreement with their franchisor they would like to see resolved. Naturally these figures will differ depending on the conflict resolution systems a franchisor has in place, and the business challenges a particular franchise system may be facing.
One of the most common reasons why difficulties occur in interdependent relationships is the expectations of one or both parties have not been met. Because expectations and assumptions exist in the mind they can be difficult to manage.
What makes this especially difficult is that people tend to have different perceptions of events and situations. Whatever the facts may be in a situation, a person will behave according to the information he or she has at the time. In other words, when perception meets reality, reality comes out second-best.
The problem of differing perceptions and expectations can largely be prevented in the early stages of the franchise relationship if people are clear on what they are looking for from each other, and keep their discussions very specific.
Consider This
Before entering into a franchise relationship, potential franchisees should consider the following 15 questions. Research shows these are the areas where people can get themselves into trouble.
• Are you clear on why you want to go into this business? Will the business satisfy this need?
• Would you be happy to work in this business for long periods without a break?
• Are you proud to tell people that you will be running this business?
• How does your family feel about you going into this business?
• What is your gut feel about the people who own or run the franchisor company?
• Are you comfortable selling to customers and networking with new people to promote your business?
• Are you happy to participate in forums and group activities which could involve travel away from home?
• Are you happy to invest the money and time to continually learn new knowledge and skills?
• When you disagree with someone about something you feel strongly about, can you talk it through without exploding or giving up?
• Can you cope with stressful events and financial pressure?
• Can you supervise and motivate other people?
• Are you happy sharing your business information with other people?
• How much money will satisfy your minimal lifestyle needs and how much do you hope to make? Can this business realistically deliver this income and is the return worth the investment?
• Are you happy to abandon your own way of doing things and follow someone else’s systems?
• If things don’t work
out, are you prepared to take full responsibility for your decision to buy this business?
Do Your Homework
Here are some other tips to consider before you buy into a franchise.
• Be sure to complete thorough profitability and cashflow projections on the business. Have these checked by someone with good business skills and ensure they are based on sound assumptions.
• Although you may wish the franchisor to review these with you, understand that they are not legally allowed to make representations on sales or profits. The franchisor may, however, be prepared to provide you with some objective financial models they have developed from existing franchises.
• Be clear on how much money you wish to draw from the business to support your lifestyle. Check with the franchisor as to whether they believe this is realistic.
• Be sure you have enough working capital to support you and the business should sales be slower than projected.
• Read relevant material on franchising, and buy a copy of a relevant franchisee guide that contains useful checklists. Interview as many people as possible about their franchise experience and ask specific questions about the day-to-day obligations and commitments involved in running a business of this type.
* Greg Nathan is managing director of the Franchise Relationships Institute. The material from this article has been drawn from his best-selling franchising book, Profitable Partnerships, available from www.franchiserelationships.com
