Grid Law founder David Walker begins a new series with an overview of the key aspects to successful franchising to help small business owners decide whether the model is right for them.
Franchising is a great business model. Personally, it’s one of my favourites and for the right business, it provides some excellent opportunities for growth.
We’re all familiar with some big-name franchises, such as McDonald’s and Subway, but franchising isn’t just for big businesses. Small business franchises can be very successful too.
So, what is a franchise business?
Basically, if you franchise your business, you (the franchisor) are giving someone else (the franchisee) the right to run their own business using your brand and system. However, to the outside world, it often seems like it’s just one big business.
There are essentially four elements to successful franchising:
A strong brand
A franchise business has a strong, easily recognisable brand and it’s essential that this brand is well protected with a portfolio of trade marks.
A strong brand is a key element of a franchise, so if you’re thinking of franchising your business and you haven’t registered any trademarks yet, this should be a priority.
If you start the trademark process and find that you can’t register your brand as a trademark (for example, because it’s descriptive of what you do rather than being distinctive) you may have to consider a rebrand before you go any further.
Registered trademarks are essential for two reasons:
First, as part of the franchise agreement, the franchisor will grant a formal licence of the brand to the franchisee. Licencing a registered trademark is far simpler than trying to licence an unregistered trademark.
Second, the franchisor must take enforcement action to protect their brand against infringements. The last thing anyone wants is an “unauthorised” franchisee competing with legitimate franchise businesses.
A replicable business system
A franchise business is built around a system and this system must be capable of generating consistent results.
The system can’t be too complicated because the franchisor must be able to teach it to the franchisee and record it in an operations manual. The operations manual contains the day-to-day instructions for the franchisee to follow while running their business.
Support and control
If you’re franchising your business, a significant part of your role as a franchisor will be to support the franchisees. You will know your system inside out so if a franchisee encounters any problems with their business or the system, they will turn to you for answers.
Generally, the more support you give them, the more successful the franchisee will be.
One of the attractive features of a franchise from the customer’s perspective is that they know what to expect from the business. This means, you have to keep control over the franchisees to maintain this consistency.
The franchisees should be following the system and the operations manual. They should be doing things your way, not experimenting to find their own way.
Sufficient profits for the franchisee to pay the franchisor a franchise fee
When you franchise your business, you’re providing the franchisee with a strong brand and a proven system to generate profits. This is valuable and gives the franchisee’s business a much greater chance of success. In return, they will pay you a licence fee for the right to run a franchise business.
However, there must be a sufficient profit margin to enable them to do this. If margins are too tight, or it takes too long for the business to start generating a profit this will make your business less attractive to potential franchisees.
If your business fulfils the four criteria above, there’s a very good chance that you can franchise your business.
The next question then becomes: “Should I franchise my business?”
Often, this is a personal choice so perhaps a better question to ask is: “When shouldn’t you franchise your business?”
First, don’t franchise your business just to grow. There may be better options. For example, you could reinvest profits and grow organically, opening a steady stream of new branches yourself. Alternatively, you could appoint a network of agents or distributors (as we discussed in last week’s article).
Second, as a franchisor, your role within the business will change dramatically. You must be ready to take on this this role and be ready to support your franchisees.
As I said above, they will undoubtedly have problems and issues and will look to you to solve them. If your business is still in its infancy and you’re still developing your own systems, you may not have all the answers. In this case, it may be better to wait until all the teething problems in your business have been eliminated.
Third, if your business is too complicated it may be difficult to produce a system that generates consistent results. So, if you can, it may need to be refined and simplified.
If your business falls into any of these categories, it doesn’t mean you should never franchise your business. It might just mean that you shouldn’t do it yet. With some planning and preparation, franchising is something you could aim for in the future.
If you have any questions about franchising your business please feel free to email me at email@example.com and I’ll happily answer them for you.
Sign up to our newsletter to get the latest from Business Advice.