Duplicating growth

If you have a strong business that can be reproduced again and again, then franchising may be the right way to go

If you are a business owner who has developed a profitable business, perhaps with multiple locations, and you are seriously considering alternative approaches to generating growth, then this information is for you: franchising can provide you with a distribution channel to build brand identity, maintain your competitive advantage and attain market dominance quickly.

Developing the franchise is a totally separate business from the sale of goods or services that your business provides to its customers. When you develop a franchise, you are creating a business to sell the operating business you have developed - over and over again.

Many elements are fundamental to building a successful franchise, but here are the most important ones:

A good concept. It must be profitable, unique and able to stand the test of time. It should be something that will interest other people so they will buy your franchise.

Successful prototype. You must have a working prototype of the idea somewhere, even if it is in only one location. With each unit that you add, you prove the validity of your systems and concept. The return on investment must be attractive, and you need to enable your franchisees to break even at breakneck speed to keep them truly happy.

A good system. The purpose of a franchise is to have all the problems and mistakes erased from the system so that the franchisees will become profitable as soon as humanly possible. Franchisees will expect a training class and set of operations manuals to make them skilled and efficient. Money. You will spend it on a franchise consultant, franchise lawyer, operations manuals, franchise brochures, advertising and management staff. A company should start with a minimum of $50,000 plus a strong cash flow, or $75,000 with a medium cash flow. (You will need to be able to support yourself and your staff from other sources for a year or so.)

A dedicated management team. You will need help to build the support structure required for your franchisees and you will need to be dedicated to their well-being. If you work to make them wealthy and happy, you will be handsomely rewarded with higher income and fewer problems.

Once you have these ingredients and have decided to franchise, you will need a franchise developer to put together your systems and package them for sale to franchisees. You will want someone who will lead you through all the steps and educate you as to why decisions are made and actions are taken, so that you and your staff will be knowledgeable and not dependent on outside consultants in the future.

Next, you will need to perform a financial analysis to see if you will make money. How will you know what to charge for an initial fee and the royalties? How do you know how much support you will be able to afford? These questions must be answered through a careful computing of costs for setting up the new franchisee, as well as training, support and other necessary services, such as accounting and quality control. Franchising is not a "get rich quick" scheme - in most situations it will be several years before you see any profits.

Once your systems are defined and you have all the basic functions ready - systems, manuals, operations, quality control - it is time to hire an experienced franchise lawyer. Your franchise consultant will write instructions for the lawyer, who will write the disclosure document or, if you plan to offer in the US, the Uniform Franchise Offering Circular (UFOC), to fit your company (rather than you organizing your company to fit the lawyer's boilerplate document). The UFOC is the required disclosure document in most states; the remaining have state-specific requirements. In Canada, Alberta has had legislation regulating franchise sales disclosure for several years now. Ontario passed a new franchise act in 2000 and its regulations came into effect in January 2001.

The shift from a multi-unit corporateowned environment to a franchisor environment requires a significant change in management focus. The old business of providing the goods and services on which you have built your customer base is delegated down to the franchisees for whom you now provide support. Your new, demanding and ultimately rewarding focus becomes the sale of the franchises. You want to develop systems that can be taught quickly and effectively to franchisees; develop standards that provide a common look, product and service level across your many locations; and establish quality controls that can be easily managed and enforced. You will develop new products and forge new relationships with suppliers and customers.

Planning will take on many new dimensions as you develop a process that property focuses the franchisees on their annual workflow and integrates them into your longer goals and strategies. Your head office staffing and support structure will also change dramatically as some functions disappear entirely, delegated to the franchisees, and others require increased resources.

And what about your franchisees? Will your franchise help them to get the business up and running quickly and without error? Will your franchisees make at least $50,000 or more a year? If not, selling the franchise will be difficult. The single most important attribute that persuades people to buy a franchise is that the other franchisees are making considerable money. If you can deliver that ability time and time again, you will have a winning franchise company.

Each potential purchaser of your franchise will talk with at least three other franchisees who will tell your candidate the truth about everything, including their income. If your franchisees are happy, you will make the sale; if your franchisees are complaining, you will not. If you ensure that your systems and assistance are what your franchisees expect, your franchise sales will continue to be strong.

You will want to identify the type of person who will buy your franchise, and make sure that person will have enough money to make the purchase. Once you develop the purchaser profile, it is beneficial to assess other franchise opportunities to which your preferred purchaser will compare you. Such factors must be considered before you go to the trouble and expense of becoming a franchisor.

So, first things first. Make sure your business is strong, duplicable, and that the future looks bright. Then set up your systems in annual form, position your company for franchising, position your sale toward the right person, and set up your training.

This is a lot of information to digest, but we hope it helps. Franchising can be one of the most successful ways to deliver growth to a company.

Rob Sproule, FCA, is a franchise consultant who specializes in finding the right business for people who want to become business owners. His company, FranNet, works with more than 80 different franchises.

Technical Editor: Grant Robinson, FCA, Robinson & Company, Guelph, Ontario

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Steps toward setting up a franchise

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STEP 1 FINANCIAL ANALYSIS - WILL IT MAKE MONEY?

Financial reviews and analyses need to be completed before the decision to franchise is finalized. The studies may include: franchisee earning potential; size and criteria of territory; number of territories/franchises that can be sold; training costs to the franchisor; royalty fees and/or percentages to be charged; field support personnel and financial requirements.

STEP 2 OPPORTUNITY ANALYSIS - WILL THE CONCEPT SELL?

A comprehensive analysis of the industry, competition and prospective franchise must be undertaken: MARKET ANALYSIS - A thorough review of the competition, market and growth potential, both in the company's industry and of other comparably priced franchise choices, to make sure that enough buyers of the right type will be attracted to the franchise and choose it over competitors.

FRANCHISEE ANALYSIS - Analysis of the personality type(s) that will succeed in the business, the financial requirements of the business, and availability and financial depth of possible franchisee candidates.

STEP 3 STRATEGIC PLANNING PROGRAM - THE SWOT ANALYSIS

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A candid review of the Strengths, Weaknesses. Opportunities and Threats to the business needs to be completed:

* Strengths of the concept, such as the viability of the name, image and identity, management and personnel abilities. What makes us special?

* Weaknesses of the concept as it relates to the market, market share, competition and trade secrets. Where are we vulnerable?

* Opportunity for growth of the concept internally, as well as future market share growth. Where can we go from here?

* Threats to the concept - what may happen in the marketplace or in the industry that will threaten the growth and viability of the concept. What can hurt us?

STEP 4 BUSINESS STRUCTURE DEVELOPMENT - THE ACTION PLAN

Based on the SWOT analysis, this plan is the foundation for all future development and activity. It will enhance the strengths, correct the weaknesses, ensure maximum access of the market opportunity and guard against threats to the concept.

STEP 5 FORMALIZATION OF SYSTEMS

Pricing, systems and a plan for training must be devised. Manuals, technology needs, quality control systems, distribution systems and support systems need to be determined, documented and put into place.

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STEP 6 LEGAL COMPLIANCE - THE FRANCHISE OFFERING CIRCULAR

Based on the numbers, systems and long-term goals, the parameters are established and then turned over to a lawyer for final preparation and registration.

STEP 7 FRANCHISE MARKETING - FINDING THE RIGHT FRANCHISEES

One of the major reasons for failure of franchise companies has been their inability to reach, select and bring into the franchise family the most appropriate individual for the concept. Consultancies such as FranNet can add a high degree of market awareness in developing the marketing program, franchise package and sales process.

STEP 8 FRANCHISE TRAINING & SUPPORT - CLONING THE CONCEPT

A critical element in expanding the system is to ensure that each franchisee has the training, tools, systems, and support necessary to build an excellent business. An initial training class plus ongoing programs should be designed to maximize the franchisees' earning potential. Field personnel and quality standards must be established as an integral part of the successful franchised business.

[Author Affiliation]

Cheri Carroll is a franchise consultant who assists companies to become franchisors and consults with existing franchisors to improve their operations and sales systems.