Understand the concept and the risk.
Franchising is a dynamic and sophisticated way of doing business. It presents a very real opportunity for growth and survival in the current challenging economic environment. It can be a highly effective business model but it needs care and understanding to function properly and not become a disaster. Usually there are two participants to the relationship, which means there are two perspectives to understand, the franchisor’s (the person who creates the opportunity) and the franchisee’s (who buys into it). This article discusses how to create or find a “first choice” franchise opportunity. The central issue is one of credibility.
Some see franchising as the ultimate business network and the best hope for independent business in a competitive environment. Others see it as an opportunity to rapidly expand their business using someone else’s capital. That can be a distinctly attractive proposition when credit is tight and capital precious. There are others who see the potential collective buying power and potential marketing force as providing an extremely competitive edge.
Still others see it as simply taking an unnecessary risk! It does involve risk but so does all business. The real issue is whether the risk is acceptable. If franchising is properly understood particularly by the franchisor and the franchise system is managed well according to good quality franchise practice, then it can significantly reduce risk in business. It can be far better than trying to survive alone. In fact it can be very powerful and generate success for everyone involved especially in the current troubled financial climate. The challenge for the prospective franchisee is to discern if the franchise option chosen is trustworthy and does reduce risk. For the franchisor the challenge is to deliver these things. To do that, one must search for credibility and explore several areas.
Is the Reason for Franchising Credible?
A franchise model should be adopted for the right reasons. It is a marketing concept designed for business to effectively penetrate and compete in the market. It should not be used by a business simply to get out of financial difficulty. In the current economic conditions, prospective franchisees should be particularly alert to this dangerous possibility. Many undercapitalised businesses abound. Franchising is not the solution to that difficulty.
The franchise model should not be used simply to stroke someone’s ego by rapidly expanding their brand and profile. It needs to expand for good reason. Is there opportunity for market growth with the particular goods and services involved or is the market saturated and possibly even in decline? It could be even worse if one is buying a new franchise opportunity when the existing franchise network itself has reached saturation point A good understanding of exactly where the market is going is crucial. Even more important is where the franchisor is going in that market and why.
Is the Business Credible?
Does a business of value definitely exist? The franchise model certainly should not be used to enthusiastically take some great idea to market as a result of some cerebral exercise without first establishing a proven and credible business around that idea. That can put others at risk and is simply exploitation. If a solid profitable business is not first established then franchising the business can seriously generate fundamental problems A person running their own business may take calculated risks themselves but they should not as a novice franchisor unduly put others at risk and mess up the life of the franchisee and their family by taking an unproven business to market . This is particularly pertinent when it is the franchisee’s capital (and possibly their home) they are risking on the line. If the particular business of selling goods or service is soundly based and can be replicated, then a good starting foundation for franchising will exist.
Is the Franchise System Credible?
A credible, dependable and trustworthy franchise system should be proven. When expansion through franchising is being considered, a successful pilot test franchise should usually be established first. Undertaking the business of franchising is hugely distinct from running the business upon which it is based. Success in one direction does not necessarily mean success in the other. There are many additional factors to consider when one is engaged in the business of franchising. Some businesses make the transition well but many don’t.
The right structure for the franchise should be carefully considered and clearly demonstrate an acceptable profit potential for everyone. Many franchise operations run into difficulty simply because not enough prior thoughtful consideration has been given to the structure, new cost centres that will arise as a result of franchising and generating an adequate return to both franchisor and franchisee both in the short and long term.
The characteristics of a quality franchise should be evident from the beginning. This includes comprehensively documented and up to date systems and procedures. A robust franchise agreement should exist. There is good reason for this including to protect the integrity of the brand and the system for the benefit of everyone. It should be tailor made to the particular business but it should also be fair to both parties. When all said and done it is a working relationship of mutual trust that is being created and the agreement should fairly reflect the mutual interests of the parties.
The important intellectual property base upon which the system is based should be well protected and enforced otherwise everyone is at risk. Sound communication and information gathering systems should also exist and actually function. Good dispute resolution policies and procedures should be evident so that relationships can endure. Conflict will inevitably come in such a close working relationship. It needs to be both anticipated and managed carefully so that the relationship can survive the conflict .The vital brand reputation also needs to be preserved through the conflict The brand value can be delicate and easily damaged by the conduct of a few or even just one franchisee. When that happens then everyone’ business value is affected.
Is the Franchisor Credible?
The franchisor needs to be a credible “franchisor”. They should understand and demonstrate the importance of the franchise relationship. They should walk the good talk. It is a warning of danger however if they talk too much as part of enthusiastically over selling a franchise at the pre-contract stage. One needs to be wary of misrepresentations. If they talk cautiously with realistic expectations and challenge a prospective franchisee to do their own homework and perhaps develop their own business plan, then that is a very good early indicator of a prudent franchisor at work.
It has been said many times that franchising is like a marriage. Building trust, transparency and integrity in the relationship are vital. These are qualities developed over time through attitudes, conduct and character. The franchisor needs to be seriously committed to an on going attitude of win/win for each party (the franchisee should commit to the value of this as well) and aspire to best franchise practice. If they don’t know what that means then they should start by being educated by and associated with the Franchise Association of New Zealand and its significant membership. One expects franchisees to be teachable but in my view it is even more important for a franchisor to be willing to learn as well. They hold too many peoples lives and businesses in their hand to do otherwise.
The franchisor’s success and return on their investment should generally be entwined with that of the franchisee’s business and revenue expectation. There should be a demonstrated recognition of the importance of the shared economic interest that each party has in the relationship. Good franchising is not about a franchisor making money up front by simply carving up New Zealand and selling off territories. Aligned with the mutual financial interest of the parties there should be an effective and responsive support structure available to franchisees so that reasonable help is available. At the same time that should not detract from the franchisee’s primary responsibility to perform to reasonable expectations in their independent business.
The franchisor should know where they are going with the franchise, have a plan to get there and be keen for all the franchisees to get there as well. The franchisor should also tap into the knowledge, experience and local market awareness of its franchisees and then through its own wisdom and experience be continually adding value to the system for the benefit of all. A quality franchisor facilitates that process well.
Will the Franchisee be Credible?
It should not be forgotten that the franchisor for its part is always looking to select the right franchisee. That is a person who is themselves credible both in the short and long term, by being prepared to walk their own talk. That includes demonstrating such important traits as teachability, hard work, commitment, trustworthiness and a team player attitude.
Whether you plan to expand an existing business by developing a franchise or plan to buy a franchise, it is imperative to do your home work thoroughly first. In the commercial world where everyone today is vigorously communicating some message, it is important to establish or check out the credibility of both the message and the messenger. Creating, selling or buying a franchise is no exception. In order to dig deep into credibility issues it is vital to obtain informed and experienced advice. This includes legal advice that is immersed in a thorough understanding of the commercial realities and risks of franchising. Disaster and liability can rapidly beckon if you get it wrong. But when you get it right, real value and strength can unfold and a credible franchise option blossom that does indeed meet realistic expectations.
For more information and help with Franchising, please contact David Munn on +64 9 414 9800 or Michael Bright on +64 9 303 3764.