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by Michael H. Seid

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During the feasibility examination, ensuring that consistency is possible requires a few assessments to be made including:

  • Whether the business, at the unit level, can be defined and broken down into clearly defined steps that can be included in operating procedures and manuals; and,
  • Whether franchisees and their staff can be taught within a reasonable period of time, and at a reasonable cost to execute those steps.

These determinations also necessitate an analysis of whether the prospective franchisee or their future staff requires any specialized skills or licenses before they become franchisees.

Available franchisees

Depending on the skills or licenses your franchisees or staff requires may reduce the pool of available candidates and have an impact on the ability of the franchisor to find people able to meet their expansion goals.

Just as when we said earlier, " Before there is a single franchisee there has to be a franchisor". Well before there is a franchise system there has to be someone willing and able to become a franchisee. Are they out there?

It's not sufficient to guess whether a pool of potential franchisees exists. Simply knowing whom your potential franchisee might be is not enough. You also need to know whether the pool of candidates available to purchase your franchise will be sufficient to meet your expansion goals. Even if you determine that the pool of potential franchisees is adequate, are you certain that they would be interested in your franchise. If they are, will they be able and willing to make the required investment? Answering questions about the marketability of your franchise offering and the extent that it can be marketed is essential in determining whether your business is franchisable.

In determining whether there is likely to be a sufficient pool of franchisees to meet your expansion requirements, at a very basic level, requires you to determine:

  • What basic skills will your franchisees will need?
  • Will they be able to hire employees with the needed skills if they may not have them?
  • If they can't hire skilled staff, will your training program give their staff the necessary skills?

You can't wait until you begin to offer franchises to have answers to questions about your system's marketability. You may find out that you have all of the documents required to invite people to come to your party but nobody shows up to help you blow out the candles. One of the reasons so many new franchisors experience little if any growth in their systems is that the pool of candidates was never adequate for their purpose, and a feasibility examination might have determined that before they began the development of the system.

The support system and fees

It's simply not enough for you to simply sell franchises to call yourself a franchisor. Expansion of the system is only one goal. The management of a growing and profitable system is your long-term objective.

Good franchisors today provide support and other services to their franchisees sufficient to give them a sustainable competitive advantage over the competition. Will you be able to provide the necessary support? During the feasibility examination you will need to determine:

  • The types of headquarters and field support services that will be required and how and when you will provide those services, and
  • The cost of developing and providing those services

Establishing fees and other sources of revenue will be a significant focus when you begin to design and develop your franchise system. But, during the feasibility examination, making certain that sufficient income will be available is essential in determining whether your business can expand through franchising.

It is important to remember that ultimately the fees and other sources of revenue will need to meet two tests:

First, they will need to provide the franchisor with sufficient income to provide the services required while providing for a reasonable return on their investment for developing and operating the franchise system.

Second, when paid or incurred by the franchisee, the franchisee will have sufficient revenue to be profitable and there will be sufficient residual income to ensure a reasonable return on their investment.

Setting appropriate fees is one of the most difficult decisions a franchisor will have to make. If you set your fees too high, your franchise may not be marketable against the competition and your franchisees may not be profitable. If you set them too low, your franchise may be marketable but you may not have enough revenue to provide the services needed to your franchisees. Neither alternative is satisfactory.

However, we often find in discussions with clients who are already operating a franchise system that their franchise fees were set primarily by profiling those of their direct franchise competitors. When you think about it, even if franchisees offer the identical product or services as their competitors, their investment, sales or cost of operation will not be identical to those of their direct competitors. Even if the franchise system looks the same as others, the same cost structure, growth strategy, exit strategy and a host of other variables will not be the same. Establishing fees based primarily on those of the competition is not only foolish, it's potentially dangerous since the fees need to be based upon the reality of the business being franchised.

Unfortunately, many new franchisors who do not strategically develop their franchise system and who do not sufficiently understand the system's economic realities simply review the listings contained in publications like the Entrepreneur 500, determine what the competition is charging their franchisees and set their fees lower. If all you have to offer a franchisee is lower fees, do you really have anything worthwhile to offer? If the fees you select are too low or too high, the impact on the future franchise system can be dramatic.

As an inelastic method of distribution, that is one that is governed by long-term contracts where changes in the fee structure during the term will be difficult if not impossible, franchisors will have to live with the fees they set initially, at least for those franchisees that enter under that contract. In addition, setting ongoing fees simply as a percentage of gross sales may be routine for most franchisors, but it may be the wrong structure for your system. Changing how you charge royalty fees will be equally disruptive.

The feasibility examination should provide some assurances that once developed, the franchise system will be able to meet the financial expectations of the franchisor and future franchisees. During the strategic process, when all of the variables are examined in detail and the costs are better known, the final rate and structure of the fees can then be determined.

Your ability to expand

By definition, the reason companies enter into a franchised method of distribution is to expand. What are your goals for expansion? Are they realistic and achievable?

Few franchisors come out of the box and successfully develop into a national chain overnight. Many, because they do not have a market development strategy, allow the phone calls to determine their expansion strategy and find themselves with one location here and the next one a thousand miles away. Spending all of your royalty in travel to a distant franchisee or worse, not visiting that franchisee because you can't afford to is a reality for some new franchisors.

Making certain that you have available markets where you can economically support growth and achieve the required critical mass to sustain franchisee profitability is extremely important for new franchisors. At a bear minimum, market studies to determine that you have available expansion options and where and when you should expand will be required. You will also need to decide how you will expand into the markets. Entering core markets and tertiary markets will likely require different strategies. Will franchisees that meet the requirements of each type of market be available?

None of the elements of a franchise system really stands on its own. Each element rests, to some degree on your ability, to achieve the others. However, realistically assessing your potential through a feasibility examination will enable you to determine not only whether you should expand but will also assist you in determining what may still need to be accomplished before you are ready.

But, conducting a feasibility examination is only your first step in franchise development. Developing legal agreements is still far down the path.

Designing the franchise system

You should view the feasibility examination as a 30,000-foot high look at your future franchise system. The process of designing and developing a franchise program will bring you down to ground zero.

The design and development of a franchise system will requires that you evaluate each element of the future franchise system, determine how it integrates with other elements, make changes based upon the information collected and begin the development of the tactical elements you will require.

The process will differ for each company and each industry but the elements will contain similarities. If the feasibility examination was conducted properly, you will be able to build and expand on the elements you reviewed during the feasibility process.

Some of the broad strategic and tactical elements will include:

  • Existing management's capabilities and other staff that you will require in managing and growing the franchise system
  • Competition both at the franchise and consumer level
  • Potential conflicts between the franchisor and franchisee and methods to reduce or eliminate these problem areas
  • Economic impact of franchising on the franchisor and franchisees including investment, cash flows and return on investment
  • Financing requirements and exit strategies for the franchisor and franchisees
  • Market strategy including market approach, targeted markets, critical mass requirements, franchisee profile, structure of the franchise relationships used, selection criteria as well as marketing, closure and sales compliance strategies.
  • System information and management including accounting, IT and point of sale systems, among others and the use the system makes of the information available
  • Policy formation including, real estate, advertising, territorial rights, supply chain management, terms of the franchise offering, equipment, signage, etc
  • Training programs and manuals including what is included in the training programs and manuals, participants who will attend training, other training required or offered, costs for training, locations, procedures, training staff, etc
  • Monitoring mechanisms including site selection and development, operating standards, financial management, sales and marketing, trademark usage, in-system operating and qualitative evaluation, competitive analysis, etc
  • Support programs including headquarters support, field support, ongoing visits, contact reports, research and development, motivation programs, franchise relations programs, system communication, etc
  • Ongoing services and programs including cooperatives, advisory counsels, etc

This is only a preliminary list but only after these and a host of other elements are evaluated for inclusion into the system, their cost for development and implementation is determined and their impact on the revenue and expenses for the system, at all levels, are determined, can you properly determine the fee and other structural elements of the franchise system. Only then can you truly provide proper information to your legal counsel for the development of the required franchise legal documents.

The reason usually given for why franchisees are better prepared to operate their new businesses than independent business owners is that the franchisor is prepared to provide them with the necessary tools and structure. Where new franchisors shortcut the process, skip the necessary evaluations and the development of the underlying components and move directly into the development of legal documents, it is unlikely that the benefits of franchising can truly be realized for either them or the franchisees. Planning and evaluating the underlying system is the first step in providing franchisees with the tools they require to succeed.

Copyright, 2003, MSA
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Michael H. Seid
Michael H. Seid is the founder and Managing Director of Michael H. Seid & Associates, LLC (MSA Worldwide), a domestic and international franchise consulting firm. For more than 30 years, Michael has served as a Senior Operations and Financial Executive or Consultant for companies within the franchise, retail, restaurant, hospitality healthcare, education and service industries as well as having been a franchisee.

Together with the late Dave Thomas, Founder of Wendy's International, Michael is the co-author of Franchising for Dummies, published by Wiley Publishing, now in its 2nd edition.

He is on the Board of Directors of the William Rosenberg International Center of Franchising at the University of New Hampshire and serves on several other boards, including public corporations

MSA Worldwide
MSA Worldwide is the nation’s leading franchise advisory firm providing guidance to new and established franchisors in the U.S. and globally.

Michael H. Seid
MSA Worldwide
94 Mohegan Drive West Hartford
U.S.A 06117

Tel: 1-860-523-4257
Fax: 1-860-523-4530


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