“Hello, I would like to buy your franchise!”
Have you received such an inquiry? First, most of entrepreneurs tend to treat the opportunity to sell a franchise with skepticism – they are usually too busy by growing their own business. However, if the requests for acquiring a franchise begin to repeat, most of entrepreneurs will not ignore them. If you have already received such a request or do believe that you could receive such inquiries in the future, then it is definitely a good time to start your acquaintance with franchising.
Franchising - what is it?
The word “franchise” translates as freedom, the granting of rights or privileges from ancient French. Historically, “franchise” meant permission or an exclusive privilege to conduct certain activities, which the feudal lords would grant to ordinary peasants. Usually these were breweries, strong alcoholic drinks distilleries, fur workshops and other similar crafts. By granting such privileges, feudal lords not only controlled the extent of the activities of different crafts within their holdings, but also increased their income from peasants who paid for the granting of privileges. In the modern business world, franchising is a business organization model when one entity (the franchisor) temporarily transfers the right to use the franchised business model, its “know-how” and corporate identity to another entity (franchisee) within the defined territory for a defined fee. You can ready more about basics of franchising here >>>>
Franchisor’s business potential
Franchising creates an incredible opportunities for business growth and increasing its value. There are plenty of successful franchisors, who managed to quickly develop their franchise networks from a few to hundreds and from hundreds to thousands of units. Consider such examples, as “McDonald’s”, which manages over 36 000 restaurants, “7-Eleven”, which has over 60 000 stores, or “Subway”, with over 44 000 units. Huge potential for increase of franchisor’s business value can be illustrates by market capitalization of major franchisors. For example, “McDonald’s” is worth over 98 billion US dollars, the market value of "YUM! Brands” Corporation, which owns the “KFC”, “Taco Bell” and “Pizza Hut” franchises, is over 35 billion US dollars, while “Restaurant Brands International”, which owns “Burger King” and “Tim Hortons” franchise networks, is worth over 22 billion US dollars. Let us also look at "Rosenberg Center Franchise 50" stock index of 50 franchisor companies listed on US stock exchanges. RCF50 index during the period from 2000 to 2015 increased by 211%, while “Standard & Poor's 500" index, which is considered as one of the most significant indicators of the US stock exchanges, increased by only 47.7%.
These examples tend to induce ambitions of entrepreneurs, who have received a request for franchise sales. However, the mere ambition is not enough for achieving success in franchising. Entrepreneurs, wishing to become successful franchisors and to manage large franchise networks, must have a good understanding of the peculiarities of franchising business model, thoroughly plan franchisor’s business and develop it in efficient and effective way.
Franchisor’s business - new business
First, the prospective franchisors should be aware that the sale of franchises and managing franchise network is a fundamentally new business that needs to be created from scratch. Let us use, as an example, entrepreneur, who is running a popular bakery store in a downtown area and earns his money by selling tasty muffins and pies, and wishes to start franchising its business. Instead of producing and trading pastry, he will need to provide his franchisees with formalized bakery business model, described business procedures and registered trademarks. He will also be expected to assist franchisees in opening and running new bakeries, manage supply chain and marketing of a whole network, control quality in all units operating under franchise, develop new recipes and teach franchisees to use them properly. At the same time, he will market his franchise, proceed the applications from prospective franchisees, negotiate and sign franchise agreements as well as deal with those franchisees who are not following their contractual obligations. We hope you agree that the responsibilities of a franchisor and an owner of a bakery differ significantly.
What does it take to become a franchisor?
Although it is not necessary to abandon the existing business, which is used as a foundation for a franchise, however, to be successful franchisors, you will need to invest a lot into development of the new franchisor’s business. Therefore, it is important to estimate if you will be able to devote enough resources to development of franchisor’s business.
The most crucial resource needed for development of franchisor’s business, that is actually quite scarce especially among SMEs, is founders’ time. Having in mind that most of small businesses are quite demanding for their founders’ time and attention, it might become a great challenge to dedicate enough of time and energy for development of the new franchisor’s business while still paying enough attention to keep the original business up and running.
Specific competences are also in great demand during the creation of franchisor’s business. Although the fact, that you have managed to build a successful business, says a lot about your existing skills, but it does not necessarily mean that these skills will be sufficient for the franchisor’s business development. Building an intellectual property based business with a high potential of growth usually requires more sophisticated management competences, than running an ordinary store, bakery or repair shop. Therefore, the wannabe franchisor must thoroughly compare available competences against required ones and, in necessary, be prepared to bridge the knowledge gap.
It is also important to keep in mind that the new franchisor’s business will require financial investments that are most likely to be funded from your existing business accounts. You need to weigh, whether an existing business will be able to generate enough profit and cash, even after you will pay significantly less attention to it, because much of the time you will dedicate to the franchisor’s business development. You might also consider alternative sources of financing franchisor’s business, such as crowdfunding, loans or joint venture with investor. However, bear in mind that franchisor’s business is not a quick-cash-business, but a long-term investment. Therefore, some of the lenders or investors, seeking for high margin and quick ROI, might not be suitable for becoming your financing partners.
Create a Franchisor’s Business
If you strive to exploit the potential of franchising and you have sufficient time, necessary skills and available funds for starting a franchisor’s business, then it makes sense to start actually building a franchisor’s business. So, how do you do that?
Let us present you the conceptual framework of “Seven steps for creating a sound franchisor’s business”, created by ADVANCED ADVICE.
As you can tell from the name of the framework, there are seven interconnected steps, which each franchisor must take to create a viable franchisor’s business with a high potential for international expansion:
- Business franchisability analysis. For more information click here >>>>
- Franchisor’s business planning. For more information click here >>>>
- Development of franchise tools. For more information click here >>>>
- Development of franchise infrastructure. For more information click here >>>>
- Development of franchise legal tools. For more information click here >>>>
- Preparation for franchise marketing. For more information click here >>>>
- Preparation for franchisee recruitment. For more information click here >>>>
You should bear in mind that the complexity of implementation of each step depends greatly on your business situation and plans. For example, if you want to create a franchisor’s business on a foundation of a very small, yet successful, business and expand it firstly in your home market, then it might be wise to keep it lean and not to go into too much details during the creation of the franchisor’s business. However, you must remember to constantly upgrade and improve your franchisor’s business and its tools, as your franchise network grows bigger and poses more challenges and demands for you as a franchisor. On the other hand, if you represent a large business and strive to expand internationally instantly after launching your franchisor’s business, then you might want to invest more time and money into creating professional franchise system from scratch, which would be competitive among other well-established franchises in the same business field. Anyway, despite of depth and complexity of approach, all seven steps are necessary for building a franchisor’s business that would last and achieve success. So, let us explore this process systematically. To read more about the first step of creating a sound franchisor’s business - “Franchisability analysis” - click here >>>>.