In the coming months, we will take a comprehensive look at franchising. To guide businesses through the process, we talk to experts in the franchising industry – Here, in the first of our special features, we look at how to determine the right time to franchise your business.
It is common for owners of successful businesses to dream of opening multiple outlets and conquering their market sector. In the past, without large amounts of capital, this was a dream that usually went unfulfilled.
The phenomenon that is franchising has changed all that, with national, and even international penetration within the reach of any business, providing you plan correctly and have a solid business proposition.
Franchising has undoubtedly revolutionised the small business market in recent years. Nowhere has the impact been greater than in Australia, which has the highest number of franchises per head of population in the world.
For businesses looking to expand, franchising has many attractions. Firstly, franchising enjoys a small business success rate more than two-and-a-half times greater than standalone small businesses.
Other benefits to the franchisor from selling franchise licences include rapid market penetration without major capital investment and risk, lower costs of stock afforded by mass purchasing for multiple units and revenue gained from the sale of franchises and ongoing royalties.
The calibre of businessperson drawn to become franchisees is generally very high. They are often entrepreneurs with the vision to spot a good opportunity, and may be superior to the managers a company could afford to hire to run a branch.
The demand for franchises is at an all-time high, with the upward trend set to continue in the next five to 10 years. Much of this demand is likely to come from employees in their 40s and 50s who have fallen victim to downsizing of major companies. With many of these people finding that new and challenging jobs are scarce, a great number of these individuals find that the route to entrepreneurship lies in a franchise.
So how do you decide when your company is ready to franchise? A small business should operate for at least five years before even considering the prospect of franchising. This way it can establish that it has a viable concept, ongoing market demand, replicable systems, and a logistic, management, marketing and training structure capable of supporting franchisees in a variety of locations.
During that five-year period, or however long your business chooses to take before trying to become a franchiser, your business will not be standing still. You should open and operate additional outlets to determine whether your business is a viable franchise.
You must ask yourself what sort of return your franchisees are likely to get for their investment, as the less attractive the returns, the more difficult it will become to attract the brightest, or indeed any, franchisees. Owning and operating additional outlets prior to franchising will provide you with the information on how well outlets perform, which you can then demonstrate to potential franchisees.
In order to operate as a franchiser, the company concerned must have the right people in place to provide support, training and management to franchisees. Potential franchisers must have such experienced personnel in place before becoming a franchiser, either by providing additional training to current staff, recruiting from outside the company or a combination of both.
The staff of the franchising company will act as consultants to its franchisees and must possess skills such as leadership, planning, team building, decision making, problem solving and delegating.
Any business that is considering becoming a franchiser should own and operate at least one pilot outlet to test its viability. This gives the potential franchiser the opportunity to test and refine the concept of the business to be franchised.
Operational systems and controls, decor, designs, layouts, equipment, training methods, advertising and marketing programs, products and services, job requirements and descriptions and financial models should all be examined at this stage.
By doing so, problems can be identified early, enabling the company to develop solutions before embarking on a full-scale franchising venture. It ought to provide the business with a clear indication as to its suitability to becoming franchised.
The business that you are looking to replicate must also be a success as a standalone outlet, as well as being distinctive and easily replicable.
Get professional advice from a number of quarters – solicitor, banker, accountant, franchise consultant – and have your franchise agreement written by a solicitor experienced in the area.
Also take time to write an operations manual, have first-class training, choose your franchisees very carefully and maintain good ongoing relationships with them, focusing on their satisfaction and profitability, as this will impact on your own.
Code of Conduct
Any business wishing to become a franchise will also need to abide by the rules as set out in the Franchising Code of Conduct.
Implemented in July 1998, the introduction of the Code gave Australia the most stringent national regulations for franchising to be found anywhere in the world.
The Code was primarily introduced to outline the rights and responsibilities of franchisors and franchisees. It is enforced by the Australian Competition and Consumer Commission (ACCC) and includes particular requirements for disclosure of information, the provision of a cooling-off period, and unconscionable conduct.
No registration or approval is required to operate a franchise in Australia, although compliance with the Code is mandatory, with quite severe penalties meted out to those who breach it.
Finally, for any business looking to become a franchisor, the Franchisor’s Manual is an excellent starting point for intending franchisors to develop a working knowledge of what is involved in the franchising process.
The manual is produced by the Franchise Council of Australia (FCA) which represents franchisees, franchisors and service providers to the sector.
* Now that we have demonstrated what a business has to do before becoming a franchisor, in the next issue of Hands On Retail we will examine what has to happen during the franchising process in order for a business to realise its goal of creating a successful franchise.
Not everyone takes the well-trodden path on their way to owning a franchise business. One person who has taken a less direct route is successful franchisor Peter Elligett of Cookie Man.
Elligett certainly had a career history building up to great things in franchising. Starting out as a radiographer, he gave that up in 1982 to work at McDonalds. “I guess no academic qualifications could give me the experience McDonalds gave me. They are an extremely good employer. They taught you how to systemise your business, they did not, however, teach you how to be an entrepreneur.” Elligett worked his way up to a franchise consultant looking after 18 franchises, then eight-and-a-half years later left to join Autobake.
The Cookie Man franchise system had been in operation long before Elligett came on the scene, it was started in 1958 by Autobake.
“I had never heard of it when I answered the ad, but at the time they had 50 other sites. It was privately owned by a husband and wife team.” At the time, Autobake had three divisions: the engineering division, the contract manufacturing and Cookie Man. Elligett says the job gave him the opportunity to get involved in the hands on aspect of franchising, everything from interviewing franchisees and dealing with existing stores. “It was a fairly early concept of franchising.”
Two years later he was offered the opportunity to put his ideas into practice and become a franchisor for Amber Tiles. “That was quite a big risk, Amber had no idea where they were headed.” With two children and a large mortgage, “taking a punt like this was a significant step for me”. Weighing up the risk, Elligett decided it w
as worth it, because in his mid-30s he figured if he failed, there was still time to recover.
The risk paid off, in two-and-a-half years, the business went from having a turnover of $1.2 million to about $3.6 million, and when an unsolicited offer for the business came through he accepted. He then took six months off to spend with his children.
Afterwards the call came from the owners at Autobake asking him to come and run the Cookie Man division. “I said I would give them a couple of years. It was the first time in my life I saw no real challenge at the time. When I got back there I was back in the deep end again. The business had declined somewhat due to the illness of one of the owners. I suggested that they divest the operation and concentrate on manufacturing.”
From there the company has expanded.
The Cookie Man has a thriving contract manufacturing arm and franchisees and concessions running throughout Australia, with expansion not curbed by borders. There are now licensed operations in China, Greece, South Korea, Norway, Israel, Chile, South Africa, Mexico, Egypt, Bahrain and India.
He says the business is complex, with overseas franchises, domestic franchises and sales in its contract manufacturing division outstripping those in the Cookie Man retail outlets.
“We now manufacture for two major supermarkets, two major biscuit companies and two airlines.”
This is despite major obstacles. Just over three years ago, the Cookie Man’s factory burned down in a fire that burned for three days. “It was a terrible two years of rebuilding the business. We went into a holding pattern during that time while we dealt with insurance issues.”
That may have slowed down the growth, but it certainly doesn’t alter the fact Cookie Man is firmly on track. “When we purchased the business, the turnover was $1.8 million.” This year, it is about $16 million. Not bad for a franchise business that was floundering four years ago. It just goes to show, when you want to franchise your business, success is just as much about management, as the business itself.
* This interview was conducted as part of the Mentor Program which produces CDs containing one-on-one case studies with entrepreneurs. Each month, a new CD is issued which includes interviews, business tips and inspiration information. For more information on what’s coming up, visit www.thementorprogram.com.au