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For those of us experienced in franchising, we are often amazed
when companies considering the establishment of a new franchise
system, even large, well established, international companies, begin
the process at the end - the development of the legal agreements.
Presented with a lengthy questionnaire by their legal counsel, they
are asked to provide information necessary to prepare franchise
agreements and disclosure documents. The problem though is that
the questions are often their main guide to how their franchise
system should be structured.
As a potential franchisor you may not fully understand all of the
questions or have an independent frame of reference to know what
all your available options truly are. The attorneys, knowledgeable
in the law and prior agreements often will provide you with advice
and direction. However, without the benefit of being able to evaluate
business alternatives, conduct research and fully explore the strategic
considerations that most of these decisions require, the franchise
system will often end up operating as a legal vehicle for expansion
rather than what it truly should be, a business structure for expansion.
Since the franchising process began with the development of legal
documents, new franchisors may view their franchise system as a
legal devise governed primarily by the rule of law. Experienced
franchisors understand that while the law is an element of franchising,
it truly is a minor portion of the way franchisors manage their
business, make decisions on its direction or how they interact with
their franchisees.
If you think about legal agreements taking the lead in the franchise
development process, it would be similar to an attorney asking you
questions necessary to draft leases on a residential building before
the market studies are conducted, the location is selected, the
engineers have completed their site review, the building is designed,
the financing is in place, the permits are obtained, the builder
has been selected or even the costs for construction and management
are known. Only in franchising, especially if it is your first time
developing a system, the issues are more complex and the risks extend
not only to your company and its stakeholders, but your future franchisees
Keep in mind; while you may have an operating business with a long
history and experienced management, you are developing a new business
- a franchise system. It should be the structure of that business
that you focus on first, not the structure of the legal agreements.
Therefore, before you begin to develop your legal agreements, before
you invest in the creation of a franchise system, before you print
brochures, hire your franchise staff and start selecting franchisees,
the first thing you need to do is understand that franchising is
a business. All the legal documents should do is describe the business
and the terms you are offering to your franchisees.
The process of basing your business strategy on legal questionnaires
is simply insufficient for the design, development, long-term growth,
management and financial well being of your franchise system.
In the beginning
So, where should you begin?
The first issue is to determine if your business is ready to expand
and whether franchising is an appropriate strategy for your company.
Before a single franchisee exists, there has to be a franchisor.
And before a company begins what can be a costly process of developing
a franchise program, it's prudent to have a franchise feasibility
conducted.
Only after the feasibility examination is conducted should you
begin the work on developing the franchising strategy. The development
of the legal agreements is one of the last elements of that process.
A franchise feasibility examination measures a company against
recognized benchmarks typically used in franchising. It is designed
to assist a company's management in making a determination whether
they are ready to expand and whether franchising is the correct
growth strategy. It also explores other methods of expansion that
may be available and better suited for the company.
But, even before conducting a feasibility examination there is
a simple test used to determine if a business is not franchisable
or ready for expansion. If the existing business:
- Is only a concept and has not commenced operations;
- Has only a limited operating history;
- Is not profitable at the unit level; and,
- Does not currently achieve a reasonable return on investment,
at the unit level
It's not franchisable - at least not yet.
To be franchisable, the business has to be a business and that
business must at least be profitable and achieving a reasonable
return on investment.
Think of the elements in a franchise system that you should be
offering to future franchisees. One of the principal elements is
your experience in operating the business to be franchised. If that
experience doesn't exist, or is so minimal as to be negligible,
all that you are really offering potential franchisees is the opportunity
of being a guinea pig. While legal counsel could develop franchise
documents sufficient to offer franchises for a business that never
existed, and, you might even find individuals willing to buy your
franchise, the risk of failure for both the franchisor and franchisee
will be high. Unfortunately, with the abundance of franchise packaging
firms (both consultants and attorneys) existing in franchising today,
those "opportunities" exist.
When conducting a feasibility examination we review business and
financial benchmarks. The benchmarks used depend on the industry
segment, the company and other determinants but broadly fall into
a few interrelated and interdependent buckets including: the underlying
business; its products and services; how well the business can be
systematized for new and existing franchisees; the skills required
by franchisees to operate the business; the organization and support
required to manage and grow the system; the potential for expansion;
and, the underlying business economics.
It's not possible to discuss in depth here all of the elements
that require review in a feasibility examination. Even in Franchising
for Dummies, we touched on the issues of feasibility only in one
chapter. But, let's examine some of the highlights.
The underlying business
As we said before, you need an operating business before you begin
to franchise. But, is it really enough to have only one location
before you begin to expand? In a practical sense, two would be better
but probably more are required.
Several locations in different neighborhoods or areas will give
you an indication of whether your business is a single unit local
market phenomenon or something that has wider consumer appeal. Possibly
more important though is how long you have operated the business.
Understanding how it operates in different seasons, whether it can
be successful against the competition, who its customers are and
what they really think of the concept may be more important than
the number of locations you presently operate. Keep in mind that
others are going to have to follow in your footsteps - will they
be able to based upon your experience and knowledge of your industry?
What you are trying to develop is a chain of businesses using the
same name, usually the same look and almost certainly the same methods
of operation. To secure and maintain a "brand personality" that
consumers recognize and can rely upon every time they hear your
brand mentioned requires consistency. Having a business that you
can model for successful duplication is essential in determining
franchisability.
Let's not forget about the product or services your franchisees
will be offering to the public. Are they any good? Are sales based
upon a well-established consumer demand or only a passing fad? How
are your products and services different - and hopefully better
- than those offered by the competition?
Understanding who your competition is, and what actions they are
likely to take in the marketplace not only allows you to make a
determination of whether your offering is sufficiently competitive,
it enables you to begin to be proactive in responding to the expected
market changes. You will also need, in examining your options for
expansion, to determine whether consumers will want or need your
product or services tomorrow. Understanding their buying patterns
and changes in the marketplace is essential in understanding the
long-term popularity of your product or services.
Do you understand the competitive landscape? Is it likely that
other companies will be able to absorb your product and services
into their consumer offering? If you don't think it is possible,
look what happened to the frozen yogurt market when every ice cream
stand and green grocer added frozen yogurt machines. Notice the
impact on the bagel franchises when Dunkin Donuts added bagels?
Do you wonder about the future strength of the smoothie market as
other chains add it to their menus? They will likely have to change
from a single product offering simply to survive, but will that
cause them to lose their competitive distinction.
What will changes and improvements in technology do to your consumer
offering? Will it make your product or service unnecessary or necessary
less often? Remember when cars needed a tune up every 15,000 miles?
Well today, it's closer to 100,000 miles and requires equipment
and expertise not thought of 15 years ago. Notice the reduction
of specialized tune up shops. Remember when the automotive dealers
did a poor job, had miserable service and charged more for an oil
change than you paid for the car? More customers today are going
back to their dealer for routine maintenance. Improved technology
and changes in customer service certainly had an impact on the franchised
automotive aftermarket and many franchise systems had to evolve
from their original concepts.
Understanding your true competitive position, not only against
other franchise systems but also against everyone who offers your
product or service is critical. Understanding how market conditions
will affect your offering is essential in looking at the feasibility
of expansion and franchising.
The systematization of the business
When consumers walk into any branded location, they have expectations
of what their experience will be like. Interesting thing about branded
locations. Before consumers ever walk through the door, based upon
their experience at other locations or based upon recommendations
of others who have shopped at other locations, they have expectations
about how you operate. Making their expectations into a shopping
reality requires that the business operate consistently from location
to location.
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FRANCHISE
DEVELOPMENT - DOING IT RIGHT
