1. Deciding the purpose of franchising your business
Firstly, you need to decide why you want to franchise your business. What solutions will franchising provide to you? Whether it be to accelerate growth, access capital, gain economies of scale, or achieve output quality, franchising provides solutions, so you need to be clear about your objectives and how franchising would meet your needs.
2. Evaluating whether franchising is a feasible path
The next step is evaluation. There are several prerequisites to determining if franchising your business will be feasible:
- Do you have an existing business? You can’t franchise an idea; it needs to be an operating business. We call this ‘proof of concept’.
- Is your existing business profitable? Is there a trading history available for analysis?
- Do you have the mindset to become a franchisor? Franchising is a unique kind of business relationship; it’s a partnership where both franchisor and franchisee are invested and interdependent. Do you understand this, and do you have the right mindset for such a relationship?
- Is your Intellectual Property protected? Under your Franchise Agreement you will be granting franchisees the right to carry on business under a system or marketing plan, and often this is based on intellectual property that is covered by a trade mark or symbol.
- Do you have a unique, appealing product or service and a defined market for it? Your products or services need to be relevant, saleable to customers and appealing for franchisees to invest in. Confirm you have a defined target market of customers and franchisees wherever you plan to open.
- Is your business replicable? Can you open up branches and move your business interstate?
- Do you have the money to invest in setting up as a franchise network? You will need to invest considerable financial resources, in particular to create operating platforms that are scalable, to create legal documentation, and to market the concept to potential franchise partners.
3. Determining if your franchise business will be viable and sustainable
Having met the above prerequisites, you then need to analyse whether franchising your business is feasible.
If your existing business was to operate as a franchise, would it be profitable? If so, how will you structure the arrangement so that it strikes the right balance to ensure you and your franchisees are financially viable in the franchising partnership? What fee will you will charge for the sale of a franchise, and what will be the ongoing royalty fees? You need to ensure you are not reliant and under pressure to continually grant franchises, but instead that the franchise system is structured so you will be sustained by ongoing royalty fees. Striking that balance is key to financial viability and sustainability.
Key to being financially sustainable and profitable will be having a business that is scalable to suit both the size and the geographical dispersion of your market, and that reflects the complexity of your product or service offering.
There are also significant managerial implications of running the system under a franchise model. Do you have the right people in your office to manage your franchise system? They will need to be competent to handle a wide range of tasks across your franchise network, such as leases and the management of third parties, and therefore need to have the right competencies.
Importantly, what are your long-term objectives as franchisor, professionally and personally? Be clear about why you want to grow your business this way, and ideally, determine your exit strategy.
4. Designing your franchise system
The next stage will be to design the franchise system – the business foundations.
Strategically, at the heart of your system will be culture, based especially on your vision, mission and values. With culture at the centre, you would then build your:
- Strategy: this includes setting the direction with strategic business planning. Innovation, research and development, resource allocation and leadership are also integral to setting strategy.
- Brand: this is about laying brand foundations and creating brand value. Consistent delivery of the product or service offer will create the brand heritage that aligns with your target market for the long term.
- Model: this is the financial and operating framework for the franchisor and the franchisee, which needs to strike the right balance between both parties and enable the franchise system to be profitable. For the franchisor this includes how many units to grant, the term of the agreements and (as relevant) their location. It also determines how the franchisee will run the franchise unit.
- Support functions: including systems, auditing, business management documentation, induction and training.
- People resources: the structure and skill sets of your franchise support office team.
- Finance: including the management of all income streams arising from franchise sales, royalties/fees, and renewals.
You may already have some of these foundations in place, but you need all of them if you are to properly divide the obligations between yourself as franchisor and your franchisees and succeed over the long term.
5. Creating legally compliant setup documentation
Once you have done the prework to determine business feasibility and foundations, you need to understand the legal framework of franchising your business. Central to this is complying with the Franchising Code of Conduct and the Competition and Consumer Act, as well as with employment laws and industry-specific laws. You will need core documents, such as a Franchise Agreement and a Disclosure Document, as well as any required ancillary documents. Your documents should be developed by a lawyer experienced in franchising. Many would-be franchisors underestimate their legal obligations, so getting specialist legal advice on the key documentation is essential.
You will need to put in place compliant documentation for business management, particularly your Operating Manual (Technical/Clinical or Production and Systems). These manuals must be compliant with your Franchise Agreement and the Franchise Code of Conduct.
Other business administration documents, such as those governing your human resource management, must also be compliant, as must the documents governing franchisee acquisition.
Depending on the structure of your franchise business you may also need your lawyer to draft compliant documents for company incorporation, a Shareholder Agreement, and an IP Licence Agreement.
Then comes training. This means creating a process for onboarding your franchisees; the content and resources to ensure your franchisees have the competencies to run the business ongoingly in a fully compliant way.
7. Identifying and recruiting your franchise partners
Finally, you are ready to find your franchise partners – your franchisees. You need to carefully profile who you want as your franchisees and start the process of recruitment. s
Article by Sussan Campbell, Principal, Franchise Right. Franchise Right is a Melbourne-based consultancy run by Sussan Campbell that helps clients with the practical knowledge and skills needed for franchising success. Visit franchiseright.com.au