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FRANCHISING AN ESTABLISHED BUSINESS

by Dr Callum Floyd
 

In 1954 Ray Kroc acquired the rights allowing him to replicate the McDonald brother’s restaurant concept. Today, McDonalds crosses international borders and cultures with over 24,500 restaurants in 115 countries. Approximately 80 percent of these are franchised. Franchising is increasingly being used by New Zealand businesses as they realise the benefits that can be harnessed from the arrangement. Franchising award winners Stirling Sports and Green Acres are good homegrown examples who have established extensive operations throughout the country. Others, such as Fastway Couriers have also excelled abroad.

To growth oriented businesses such as these, the main benefits of franchising include access to franchisee capital to fuel expansion and, local managers who are more motivated to perform because of their investment tied to the local business. Additionally, fast growth enables some franchised chains to gain cost savings in areas such as purchasing and advertising, due to greater size. Yet, while many franchised chains have grown considerably, plenty have either stalled or stagnated, decreased in size, or failed - some in quite spectacular fashion. Even those who have found success, including McDonalds, have often gone through periods of intense hardship at some stage during their development.

Creating a franchise system of quality is a complex, time consuming and expensive task. Franchisors need to excel in not just one market, but two. First is the market for franchises; second is the market for end-users of the products and services. Therefore, the franchisor must develop a business concept that is attractive to customers and profitable enough to generate sufficient returns to franchisor and franchisees over the long-term. Also, the franchisor must develop a franchise format that is attractive to prospective franchisees, effective in replicating the original business concept, and provides franchisees with the ongoing support and skills necessary to meet the changing needs of customers and the wider market environment.

Hardly surprising then, research tells us that to consider franchising a business should be distinctive in its image and/or operating procedures, have high gross margins and a simple easily-implemented business concept. Before franchising, it should also be proven in a number of locations to ensure the bugs are ironed out and that it is successful because of the concept and not other reasons, such as a great location, or exceptional staff. This process also helps in building brand recognition and a trading history, important for attracting franchisees.

Three critical documents need developing for the franchise. These include the franchise agreement, detailing the rights and responsibilities of the franchisor and franchisees; operations manuals, specifying how the franchise should be run; and, the franchising prospectus, detailing the franchise opportunity for interested parties. Mistakes in the franchise agreement, in particular, are very difficult to change and can make or break a franchise. Thus, obtaining specialist legal advice is essential, and specialist-franchising consultants can also be of great benefit.

The tasks of managing a franchise system are challenging and quite different from managing a centrally owned chain of businesses. The challenges are wide and numerous. Here are some examples of problem areas: establishing and maintaining a support structure to assist franchisees, attracting and selecting suitable and sufficient franchisees, maintaining relationships with franchisees, adapting the business concept and franchise format to changing market conditions, monitoring standards and supporting struggling franchisees.

Thus, franchising is not an arrangement to be taken on lightly. While there are rewards for those with a successful business concept, dreams of success must be tempered with the cold hard reality of planning, establishing and managing a business concept, a franchise format and a network of franchisees.

 
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Dr Callum Floyd is owner and editor of both Franchise-Chat (www.franchise-chat.com) and Franchise Wire (www.franchisewire.com). He has a Masters and PhD researching franchising, and is Co-Owner of Franchize Consultants (www.franchize.co.nz), New Zealandís leading and award winning franchise development company.

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