So You Want to Be a Franchisor?

Should you franchise your business? A simple enough question with a not so simple answer. In the current economic environment in Australia, there has been a plethora of media exposure for both franchising as a topic and the businesses within the sector. This has given many business owners and senior executives plenty of food for thought in terms of the appropriateness of franchising as a strategy for their business.

The appropriateness of franchising is a difficult and important question to answer that DC Strategy is often asked. This article does not seek to be a step-by-step guide of how to get into franchising. To do so would commoditise the process which is one of the issues currently facing the sector. Instead, the article seeks to outline the questions that need to be asked, the process that has provided the foundation for some of the most successful franchise systems, and the pitfalls of obtaining bad advice.

Franchising has many definitions ranging from business model to marketing system to human resource strategy. This indicates the growing diversity with which small business owners and large corporate groups are adopting franchising as a strategy. In recent times the growth of the likes of Boost Juice, Gloria Jeans, Healthy Habits, Harvey Norman, ANZ Mortgage Solutions and the recent entry of Escape Travel, to name a few, indicate the continuing diversity and success of franchising.

The businesses that are entering franchising can, in the opinion of DC Strategy, be loosely categorised into two broad groups. Firstly, those who build a strong foundation with a view to building a sustainable business for the franchisor and franchisee. Secondly, those who are seeking to make money from selling franchises (transactional franchising) and are more focused on franchising than the value proposition to the end consumer.

For the first time franchisor, corporate or small business, there are many steps involved in becoming ‘franchise ready’, however franchising offers the committed business operator many opportunities.

Concept or Business?

The first point to clarify is the basic precondition to franchising. The business must be in operation. People have in the past, and will continue in the future, to franchise what is nothing more than an idea. The primary reason a concept is so difficult to develop as a franchise system is that there is no track record to develop the foundation of the franchise system. Important questions such as the financial policies and commercial structure of the business are inappropriate to design based on no evidence or the evidence of other businesses. The business should have a track record of operation demonstrating profitability and relevance to the end consumer.

Where to Start The catalyst for many business operators considering franchising is an enquiry by a prospective franchisee, or in the case of a corporate, a competitor adopts a franchising strategy. At its most macro level the basic investigation and development steps include:

- Investigate the franchise sector - Develop the franchise program - Develop the business infrastructure - Develop the legal documentation and structure - Commence the growth of the franchise system Experience suggests this is where the fork in the road appears between progressing into franchising as a sustainable business and what can be referred to as transactional franchising, the path focused on selling franchises.

Controversial as this may appear one need only cast their eye across the statistics in franchising to understand the number of franchise systems that have very small networks. Size of itself is no indication as every successful franchise system starts out with only a few operations. The important issue is the length of time the business has been franchising, the success of the franchisees and the growth trajectory for the business.

Investigate the Sector A useful starting point is to spend the necessary time investigating the franchise sector including its operators, franchise systems, advisors and experts, and the Franchise Council of Australia (FCA). This is a sector where specialist advice is extremely important both from a commercial and legal perspective. Franchising operates against a comprehensive backdrop of regulation and structure including the Franchise Code of Conduct (Code) which is a mandatory Code introduced in 1998 within the Trade Practices Act. Anecdotal statistics suggest over 850 franchise systems operating in Australia which has created many commercial experiences and legal decisions that contribute towards one of the most sophisticated and stable environments in the world for franchising to flourish. There are direct and relevant experiences that a first time franchisor can access to ensure any decision made with regard to franchising is fully informed.

Useful tips:

- Identify successful franchisors and speak to the owners or management - Research information about advisors and existing franchisors on the internet (FCA website www.franchise.org.au yellow pages, industry articles and publications

- Attend FCA events such as franchising conferences, expos, or breakfasts - Research and speak to franchise experts thoroughly to ensure you are getting quality advice Develop the Franchise Program The development of the franchise program is the foundation of the franchise system. There are a number of key decisions that are made during this phase which are absolutely critical to the future success of the business. This is an area where expert advice should be sought to ensure the franchise system is developed to a quality standard that will provide the foundation of the business. The development of a franchise system can take up to 5-6 months and the investment is between $50,000 to $200,000 depending on the nature and status of the business. There are some schools of thought that this area is a commoditised process where some groups choose not to seek advice. This is a judgement of the individuals concerned but research of the most successful franchise systems will unearth a common trend which indicates the importance of a quality foundation to the franchise system.

The key areas of a franchise program development include, but are not limited to:

- Economic Feasibility – identifies the structure of the business for the proposed network, the value proposition for the franchisee and franchisor, key financial policy decisions such as royalties, marketing levies, franchise fees, equity structures, and the capital commitment to build the network over the coming years - Commercial Policies – focuses on the development of the commercial policies detailing the ‘nuts and bolts’ of how a system operates for the duration of the contractual term - Recruitment System – focuses on the development of a sustainable screening and selection process the franchisor can utilise to recruit franchisees over the coming years - Operations Manuals – details the operating and management procedures for the business with cross referencing to the appropriate legal documentation Given the variety of businesses and industries the key areas outlined have many complex and interactive considerations. Often the benefits of the decisions do not become apparent for years to come when they are relied upon in the franchise system.

Develop the Business Infrastructure The development of the franchise system should focus on the broader development of the business infrastructure that comprises the core intellectual property of the business. This could cover such areas as the style of fit out, information technology, branding, training capability, marketing collateral, head office services, supply chain, product or service offering, or performance management practices. The development of the business infrastructure is an ongoing activity that is a core part of operating a business. However, in the context of the franchise system development, this is one of the key reasons there is such a varying degree of success in the implementation of the franchise system and the successful growth of the business overall. There is potential to underestimate the impact this activity can have on the growth of the business as often it contributes to the competitiveness of the network and the relevance of the business to the end consumer.

Develop the Legal Documentation The legal landscape in Australia, as detailed earlier, is one of the strongest platforms in the world given the Code, the depth of franchising, and the level of interpretation of previous decisions. The legal documentation process should not be the starting point for developing the franchise system as it is a sub set of the commercial decisions in the franchise program development.

The legal documentation is a critical component of the franchise system and again some schools of thought indicate a commoditised approach to the preparation of the documentation. In my opinion this commoditised approach is equally incorrect in the legal area. The Code requires a franchisor to have a Franchise Agreement and Disclosure Document which is the basis of the contractual relationship with the franchisee. Outside of the Code requirements is the potential for other advice such as structural, OH&S, payroll or supply advice depending on the franchise system. The investment in legal advice can range from $20,000 to $45,000 depending on the business.

Commence the Growth The development of the business, franchise system and legal documentation, whilst critical, must be leveraged as a foundation to commence the growth of the business. A franchisor that grants 3-6 franchises in the first year is a solid start. The solid start must then progress to a second year of growing company operated and franchised operations in manner that is consistent with the planned growth for the network. The strength of the overall foundation is a big indicator of how successful second and subsequent years will be.

Getting the Right Advice?

The quality of the development of the franchise system, business and legal documentation is very dependent on the quality of the advice. The research and due diligence the franchisor completes at the outset is extremely important. I am of the opinion there are too many people entering franchising for the wrong reasons. One of the main contributors is the insincere motivation of ‘expert’ advisors and bad advice. A more sound assessment of the business and the appropriateness of the franchise strategy may often reveal franchising is not the best strategy.

Useful tips:

- Research, research, research and speak to people in the sector to gain a peer view of the advisors - Ask advisors for extensive references from the past couple of years to get some feel for the depth of experience the advisor has and the results the advice has created. The real measure is consistency of outcome which ultimately is the number and success of the franchises granted and the business growth - The legal documents are not the starting point for entering franchising they are a subset of the franchise program development - The transactional route of selling franchises is not the foundation of a sustainable business - There are many reasons for not getting involved in franchising which need to be addressed in the context of the particular business in question - There are cheaper means of getting into franchising but there is the potential for the adage ‘get what you pay for’ and what can only be described as bad advice - Experience suggests the commoditised perspective of developing franchise systems is not appropriate as it fails to address the key issues and more problematically erodes the broader foundation necessary for sustainable growth Adrian McFedries is the Strategic Director of DC Strategy.

DC Strategy (formerly Deacons Consulting) is widely recognised as the region’s leading Strategy, Franchising and International consulting group. DCS has developed the networks and brands of many of the region’s most successful businesses. Contact Adrian McFedries at adrian.mcfedries@dcstrategy.com

www.dcstrategy.com



So You Want to Be a Franchisor? - To learn more about this author, visit Adrian McFedries's Website.

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