Is your business franchise material?

16 tests to a successful franchise
Copyright by Nolan Clark (www.silverlizzard.co.za)
Extracted from his book 'So you want to start a business?'

Many businesses consider franchising a magic route to expanding. This is however not always the case.

Many businesses can easily be franchised very successfully while others are better suited to company expansion or even dealership agreements.

Let's look at a few of these options available to a business owner other than franchising.

Agency

You would rather open up an agency when your business only has the potential of two or three franchises throughout the whole country. With an agency you would sign an agreement with someone to open another business like yours in an area far from yours in order for you to expand your business reach. The agency will then be a business of its own, making its own independent decisions, but use the same name. Both businesses will then work side by side and pool their knowledge and buying power. The agency could be set up in such a way that one or both parties put up the capital to start the business and you collect a percentage of profits.

Company Owned Stores

Your business puts up all the cash to open the stores. You simply employ people to run and manage these stores on your behalf. Although this route costs huge amounts of cash to set up, the potential profits are also huge as you don't have to share it with a franchisee or partner. The manager of the shop is however usually offered a certain percentage of the profits as part of his remuneration package as an incentive to perform.

Dealership

In a dealership arrangement other business owners, trading under their own names, buy your products from you at a discounted ‘dealer' rate and then sell them on to their customers. Each dealership is independent of your business and you obviously have no say in how they manage their affairs.

Partnership

A partnership is similar to an agency except that you own the biggest percentage of the business. Yet the partner gets to take home a bigger percentage of the profits. In this arrangement you still have the controlling say in how the business is run, but your partner gets to keep more of the profit as he is doing all the work.

As you can see there are more expansion options than franchising. You will have to sit down and decide which is best for your business and for those that will be involved in the expanded business (franchisees, partners, etc.). Always just bear in mind that in the end it must be a win-win situation or it won't work for very long.

There are a few tests you can do to see if your business will succeed as a franchise.

They are :

Test 1 – Time in business

The Franchise Association of South Africa (FASA) requires that a business must have been running for a year before it can franchise. I don't agree. Ninety Percent of businesses fail within their first three years. To try and franchise a business while it is still in this red zone is highly irresponsible and unfair toward the franchisees.

If your business has been running for less than three years we at Lizzard will not take on your franchise project.

Test 2 – Is your business able to run successfully
anywhere in the country / world?

If you are selling ‘Welcome to Durban ' memorabilia to tourists on the Durban beachfront, then your business may not be franchise material as your product is too localized. You are not going to sell much of your product in Cape Town . You may however be able to run a franchise in Cape Town selling ‘Welcome to Cape Town' memorabilia similar to your Durban ones. Do you have the capital and the means to produce these new products on a consistent basis?

Your business must have a product that appeals to as wide an audience as possible, eg. Nobody is going to buy your custom shark nets in Gauteng , but your super duper alarm system should sell well anywhere.

Test 3 – Does your product have enough profit margin?

Here we have to look at two concerns :

Is there enough profit margin to share with the franchisee?

If you are producing children's books for R2.50 and are selling them for R3 then you will have to look carefully to see if it would be worth it financially for the franchisee, and yourself. The franchisee must be able to sell the product and earn a reasonable salary after paying you your royalties.

Also

Bear in mind that you may easily be selling 100 000 units per month in Gauteng , but a franchisee in Knysna may only sell 5000 units per month. Will a franchise in Knysna still be profitable?

Test 4 – Are the royalties you will receive from the franchisees
enough to make it worth your while?

It is pointless if your monthly royalties from each franchisee is R2000, but it costs you R3000 per month to employ someone to service that franchisee. The industry standard for royalties charged ranges from 3-10 % of turnover. You can work it out from there.

Test 5 – Can you supply?

If you produce custom made pens and sell them through your franchised stores. Will you be able to produce enough to supply 5, 10, 20, 100 stores each month?

Test 6 – Do you have the capability to expand with the franchise?

If your factory can only produce 100 000 units per month and you are already selling
20 000 of them yourself, you will soon need new equipment, possibly new premises, extra staff, etc. when the franchise takes off. Do you have the ability and the means to do this? It could take 20 years worth of royalties just to pay off the new equipment needed.

Test 7 – Are there enough customers to go around?

If your target market is big corporations and there are only say 100 of them. You are already selling to 20 of them. That then only leaves 80 more to share between yourself, your franchisees and your competition.

Another way of looking at it is to ask yourself how many franchises can I sell without them competing with each other? If a franchisee needs 100 customers to be profitable and the town has a potential of 200 customers, then it doesn't mean that you could open two franchises in that town. They will end up competing with each other and the end result will be that one or even both of them will end up closing.

Test 8 – Logistics 1

You may sell the best palisade fencing in the world and make a fortune selling them out of your factory shop in Bloemfontein , but if it costs just as much to ship your fencing down to Cape Town as your profit, then it would be pointless opening a franchise there.

Test 9 – Logistics 2

Another scenario is where your customers require next day service and it takes you two days to get the product to the franchisee. You will have lost your competitive edge and the franchise is doomed.

Test 10 – Logistics 3

Can you create the infrastructure to deliver your product to your franchisees, it may be better to franchise locally at first until you are able to.

Test 11 – So what makes your business / product so special?

I always get blank stares of horror when I ask this question, but it must be asked and answered satisfactorily before even bothering to franchise.

You may be selling hordes of your African pots in Gauteng , but at the coast every second person is selling similar ones at next to nothing.
Or
Your fried chicken store may be pumping and extremely popular in the Caesars casino complex because it is the only store there selling chicken. Would it do as well at the V&A Waterfront in Cape Town with KFC and Nandos, etc., just around the corner?

The bottom line is you need to have something that makes your business / product stand out from the crowd. In our chicken store example Nandos and KFC are both only selling chicken. The chicken is the same as anywhere else, nothing special, but Nando's sauce has a unique zing and KFC sure knows how to coat the skin just right. Often it is simply a case of doing things different to your competition. Cash Crusaders is an example of this. They are still selling other peoples second hand stuff, just like the thousands of other pawn shops, but they have made the shop look good so you don't feel so bad walking in there.

Test 12 – Mindset

Of all the test questions this is probably the hardest to answer, but the most important.

Managing a franchise network is way different to managing your business. In your business things go your way and if they don't you can bulldoze them in that direction if you want to. You can't do that with your franchisees. You need to change your mindset and way of doing things.

You start this mindset change by realizing that even though the franchisee's shops look just like yours, you have effectively sold them a copy of your business. It belongs to them. Even though you tell them how to run the business, how much to charge for their products, etc., you cannot just walk into their store and start ordering people around like you can at your own store.

You need to be able to stay calm and diplomatic when your franchisees and their employees are not doing things right, and believe me this will happen regularly in the beginning. You need to realize that your franchisees have put a lot of faith in you by buying your franchise. They have possibly even given you their life savings to buy your franchise. So you better be prepared to deliver on that trust. Unhappy franchisees can sink your business.

You need to realize that your role will change from manager to mentor the minute you sign your first franchise agreement and that is how it will remain for as long as you have franchisees.

The franchisee / franchisor relationship can in many ways be likened to that of parent / child with the main difference being that instead of blood, it is a legally binding contract tying you together.

Test 13 – Are you committed?

Franchising is a long term commitment. Franchise agreements typically run for anything from 3 to 20 years. Signing just one franchise per year for the next three years will tie you to the franchise for the next six years at least. Once you have started to franchise it is very difficult, if not impossible to say ‘This is not for me'. The decision to franchise cannot be taken lightly.

Test 14 – Can your business handle the extra franchisee work load?

Here we are not talking about the actual product, but auxiliary work like franchisee training, franchisee mentoring, extra customer complaints, extra administrative work generated by the franchise, etc.

Test 15 – Are you willing to be more restricted?

Currently you can bring out a new product in a heartbeat, redecorate your shop, change your prices, even suck a price out of your thumb if you want to. When you are in a franchise situation all that changes.

You will need to test new products in your store first before sending them on to franchisees. Your prices must be standard across all stores. You cannot just chop and change things like you used to. You may be able to afford that cool new look every year, but can your weakest franchise?

All your future decisions will impact on the entire franchise so need to be carefully considered. This takes some getting used to.

Test 16 – What is the lifespan of your product?

Can your product stand the test of time? Your rock art walls may be in vogue now, but what about in 10 years time? Will they still be selling or will you be able to adapt and stay on top / in front when the trends change?

You need to be realistic when answering this question and even if you are not franchising your business, you need to be constantly asking yourself this question anyway. Another question to constantly ask is : what will the next trend / technology / innovation be to affect my business and how can I prepare for it?

Wow, those are a lot of tough questions to answer, but believe me you need to answer them now otherwise they will just pop up later on when it is not so easy to respond to them.

These questions force you to thrash through the what-if's and catch potential problems before they occur.

After going through all that, it makes one wonder if it is all worth it?

In my opinion, You Bet !

What is it like starting and running a franchise?

It is really a huge amount of work setting up everything, reorganizing your business, etc. before the franchise can even go live. Once that is finished most of the hard work is done until a franchise is sold.

Then it is lots more hard work to ensure that they are trained, set up and running properly. After that each consecutive franchise becomes progressively easier and easier to set up and get going. It is like a gradual snowball effect.

Once a franchisee is up and running your main aim is keeping them happy and profitable through your systems of mentoring, training and operation as set up before the franchise went live. You will then also be constantly fine tuning and streamlining your systems all the time as you gain experience as a franchisor. This also helps to make it more attractive for potential franchisees and better and easier for existing franchisees.

So, although it is a lot of hard work in the beginning, it becomes easier and easier as you progress.

Is it possible to franchise your business without the help
of a consultant or franchise expert?

Of course it is, it is possible to do anything if you put enough time, effort and resources into it. We eventually franchised our business without the help of a consultant. Not because we wanted to though. Here is what happened to us.

In 1999 we chose a franchise consultant, but they turned out to be pretty much useless with no real clue about franchising. They pretty much made every mistake in the book and because we didn't know any better just went along with what they were doing. The mistakes they made cost us tens of thousands of Rands and left the franchise dead in the water. They messed up so bad that, luckily, we never even sold a single franchise despite getting hundreds of enquiries.

It cost us taking the whole franchise off the market and opening an in-house ‘franchise' which we ran, tested and learnt from for three years before opening the franchise up to the public again. We had lost thousands and 4 years of our time.

This then begs the question - is a franchse consultant a requirement when franchising?

If you are prepared to put in countless hours of extra work into researching the franchise concept, as we had to, and then learning by trial and error, with the resultant costs, it can be done. It took us three years of in-house testing to get everything right before we felt we ‘knew' how to franchise our business and had perfected the system. Then we still had franchise contracts, operations manuals, disclosure documents, etc. to set up. Was it easy? No Way ! Was it the best way? Of course not, that is why we tried to use a consultant in the first place.

If we had used a consultant that knew what they were doing we would have been up and running four years earlier and had way more franchisees than what we have now.

Final Analysis

So, in the final analysis if I had a choice I would much rather use a consultant as the money and time wasted in doing it all ourselves cost us just as much as, if not more, than the consultant did. The biggest loss was the time factor as we could have signed on quite a few franchisees in that time which means that we would have got a return on our investment years earlier.

If I could wind back the clock and decide whether or not to franchise again, how would I decide?

I would definitely franchise the business again. It has been a very exciting and rewarding road which I have never been sorry we took. I would however, just as franchisees should chat to other franchisees first, chat to customers of the franchise consultant before handing over my hard earned cash to them.

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