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M.
D. Smith & Associates, Inc. |
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Franchising is one of several methods available to grow your business.
Its advantages are rapid growth and shared risk.
Franchising provides the opportunity to dominate markets by employing
other people's energy, intelligence and money to build your business.
Franchisees consistently deliver higher revenue per unit and provide
superior market intelligence when compared to company-owned units. Across the breadth of franchise opportunities, there are two common types.
There are product franchises that are distinguished by selling the
franchisor's products with limited franchisor controls.
There are business format franchises in which the franchisor delivers a
complete business system within which the franchisee operates.
The business format franchise is the most common.
It delivers a proven method of operation.
It trains the franchisee to run the business.
In every market the business is presented in a common format and promotes
itself with common business marks. The
business format franchise is focused on building brand awareness by developing
solid market share in each market entered. Are You Ready? Your most important
decision before spending a dime to develop a franchise system is personal to
you. If you hold tightly to the
steering wheel as you operate your business, and if control is paramount, DO NOT
START A FRANCHISE. If you enjoy
getting results by building teams and gaining consensus, franchising can be a
great tool for your expansion. The relationship is controlled by a contract.
It often runs ten years with a ten-year renewal option.
Franchise relationship laws virtually guarantee renewal of the agreement
if the franchisee performs. You
can't fire a franchisee, like an employee.
Your motivation skills to obtain the results you desire will define your
success. Building a business
employing franchising is no less work than building a business with
company-owned units. Properly done, franchising is a strategic partnership.
This is not the classic business relationship.
In franchising the partnership connects franchisor to franchisee and
franchisee to franchisee. You must
transfer your vision to each franchisee beginning with the first sales
conversation, through the sale, through training and constantly at every
occasion you meet throughout your relationship.
Each franchisee in a given market must partner with other franchisees to
achieve your vision. Properly
motivated, they will fulfill your dreams. Developing a franchise is not for the
faint of wallet. Depending upon the
scope of your dream, first year costs will range from $500,000 to $1,000,000.
If you are good, you will complete your development activities and sell
enough franchises to open ten units during your first development year.
This will generate between $150,000 and $250,000 to offset your
development costs. This revenue
will occur in the last quarter of the first development year.
After the first ten units are open and running, these franchisees will
help you reach 100 units. If your
program launches well, with profitable franchisees, somewhere between the second
and third years your system will produce its first profits. Can you develop the business slower at
a more manageable rate? Yes, at the
risk of having competitors "me too" your concept.
If you stay in your home market and don't get a lot of press in local or
trade media, you can develop more slowly. You
risk developing mediocre manuals, training systems and support mechanisms
because you do not retain professionals disciplined in the process to assist
you. Maintaining a low profile also
guarantees low unit growth. When
you decide to move into other markets, you will need capital to support your
growth. To step out more rapidly, you need to engage in a
thorough planning process. The
first steps are to review your business, your industry and growth alternatives.
From these steps you can determine your potential for success.
Be thorough and honest in your analysis.
To start a vigorous expansion program with flawed data will only hasten
your demise. Next review your
financial performance. Be sure to
understand the cash flows and the balance sheet of your business.
You can then determine your ability to expand from internally generated
funds. Next do a thorough analysis
of your business operations. Candidly
assess the systems you have in place to support rapid growth.
Determine what systems must be added.
Summarize your findings, obtain consensus from your associates and then
formalize the process in a written business plan. The business plan will form a basis to raise needed capital,
if required, and, it will identify the major areas requiring development for a
successful program. Develop an action plan to detail all of the steps
required to successfully launch your expansion.
Use project management software to detail the implementation steps,
assign the tasks to responsible executives and monitor your progress weekly.
Done well, this process can be completed in six to eight months.
You will have developed: ·
Franchise
offering documents ·
Franchise
sales and marketing plans ·
Operations
manuals for consistent business operations ·
Training
programs ·
Site
selection criteria ·
Pre-opening
procedures ·
Initial
training ·
Getting
started promotions ·
Initial
field support for a quick start ·
Point-of-sale
and back office systems for franchise operations and system compliance ·
Financing
programs ·
Field
support procedures for the initial launch and ongoing operations When completed, your system will launch new franchisees
for early success. The franchisee’s business will be cash flow breakeven no later
than six months from opening. The
franchisee should recapture the initial cash investment between twelve and
twenty-four months from opening. Your work is only started once a unit has opened.
You have an on-going obligation to provide training and field support to
your system. This can be done in
the field or at your offices. It
can be annually at the annual convention or more frequently.
The royalty income stream will define the frequency and depth of your
programs. Advertising fund administration is an equal challenge.
Until the system becomes sizeable, amounts in this fund are fairly small.
You can create strong promotions for local business growth during early
years. Franchisee consensus is
vital during this period. Most franchise systems enjoy solid financial success when
they exceed 100 units, which can take two to three years. Once there, the result is significant contributions to the
bottom line. Copyright 1998, M. D. Smith & Associates, Inc.
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