2. Franchisors' business planning

In essence, franchisor’s business planning is no different from planning any other business. Picture below illustrates the major logic behind franchisor’s business planning.

Business planning is an essential step for those who wants to create a sustainable and long-lasting franchisor’s business. If approached properly, franchisor’s business is rather sophisticated undertaking aimed at monetization of continuously upgraded intellectual property proprietary to franchisor, providing B2B services to franchisees and improving core business model to meet constantly evolving customers’ needs. To execute all of these aims successfully, franchisor’s business requires at least some professional planning.

 

Defining the foundation of the franchisor’s business

First, we recommend lying the foundation for franchisor’s business by establishing its business vision, mission and long-term goals. While doing this you need to bear in mind, that franchisor must serve and create value both for franchisees directly and for end customers through its franchisees. Therefore, it is important to reflect this duality while formulating mission and vision. Then you must proceed to describing initial long-term business goals. Generally, when formulating business vision, mission and long-term goals, do your best to answer these questions complexly:
 

  • Who are your clients?
  • What is the geographical area / countries / cities you are going to serve clients in?
  • What needs of your clients are you going to address with your value proposition?
  • What exclusive features will your value proposition have?
  • How are you going to establish and sustain your exclusive competitive advantage?
  • What are the major indicators you are going to measure your business success with? 
     

Having long-term business goals defined will enable you to use them as a benchmark for validation of other business planning decisions. However, since you are in the very beginning of the franchisor’s business planning, it might be difficult to define precise and reasonable goals. Do not worry. You will be able to come back and adjust these goals more than once during the business planning process.  

 

Performing environment analysis

The next step in franchisor’s business planning is execution of the business environment analysis for all countries indicated as your target markets. It is common to carry out this analysis in three dimensions: macro-, meso- and micro-dimension.  
 

  • Macro analysis usually covers political, economical, socio-cultural, technological, environmental and legal components of business environment. The best tool for performing this analysis is well-known PEST method. The aim of this analysis is to assess possible threats and opportunities deriving from the abovementioned macro-environmental drivers in the target markets. We advise you to apply PEST analysis to the macro-environment of both franchisor’s business and your core business, which is used as a foundation for a franchise. 
     
  • While the macro-environmental analysis looks at a contextual level of “global forces”, meso-environmental analysis examines forces in direct proximity of business. The mostly notorious tool for this analysis is, so called, Porter’s five forces model. This analytical tool is used to assess the bargaining power or suppliers and buyers, competitive rivalry and threats of new entry and substitutes. The aim of this analysis is to understand the main outside drivers that influence your business directly, attempt to foresee dynamics of this influence and model your response accordingly. Again, we recommend you to analyse meso-environment for both franchisor’s business and franchised business. For example, evaluating of competitive rivalry applicable to franchisor’s business will cover other franchisors offering same or similar franchises. At the same time assessing competition applicable to franchised business will cover all direct competitors of the business, you are building your franchise on, both franchised and independent. 
     
  • The most comprehensive part of environmental analysis is carried out on micro level, which is your business itself. Although there are many different tools used for micro-environment analysis, we usually apply Porter’s value chain, Osterwalder’s Business model canvas and our own proprietary tool, called, “Know-how” matrix. One of the aims of the microenvironment analysis is to identify strengths and weaknesses of your business to be able to design the measures to increase your business strengths and decrease weaknesses. Another aim of this analysis is to deconstruct your business to the simplest process level so it would be possible to evaluate all processes altogether and each process separately against the criteria of effectiveness, efficiency, unification, replicability and adaptability.

 

Defining franchise concept

After performing the environment analysis, it is time to move to the stage of franchisor’s business design. We also call it the development of the franchise concept that is comprised of these interconnected parts:
 

  • Profiles of the potential franchisees. In order to be able to fine-tune your franchise and target its marketing, you need to identify the socio-economic profile of your future clients - franchisees. You can start with deciding, whether you would like to sell a franchise to an individual or to business company. Then you need to define the requirements for franchisee’s competencies, experience, personal traits, available liquid assets and other specific characteristics that could influence the management of a franchise unit. You also need to define the ways and measures that will be used to attract the attention of the prospective franchisees that meet the formulated profiles.
     
  • Know-how” to be transmitted to the franchisees. The franchisor’s “know-how” is one of the main sources of value for the franchisees. In the broad sense, the “know-how” concept covers whole intellectual capital accumulated by franchisor, except for corporate identity elements. There are couple of steps you need to take at this stage:
     
    1. You must audit all “know-how” available in your organization and structure it by assigning it to the business processes or functions.
       
    2. Then you need to evaluate the level of formalization of your “know-how”. Formalized “know-how” includes objects of the franchisor’s intellectual capital that are clearly structured, described, and are systematically applied. Only formalized “know-how” might be transferred to franchisees in an effective and efficient way. Therefore, you must also identify what “know-how”, that is not currently formalized, must be formalized before the launch of the franchise.
       
    3. Later you need to categorize your “know-how” in order to identify those pieces that are crucial for building and sustaining competitive advantage of your business. After categorizing “know-how” you need to decide which “know-how” will be passed to your franchisees and which will be kept by franchisor. While doing this it is wise to ensure that most valuable “know-how” is well protected and stays in your control thus creating incentives for franchisees to stay in your network and discouraging them from simply “stealing” your business model.
       
    4. Finally, you must design the measures for transferring “know-how” to your franchisees. You might transfer your “know-how” in a form of operations manuals, trainings, standard support, ad-hoc assistance, etc.
       
  • The elements of the corporate identity to be transferred for the franchisee to use. The elements of corporate identity are the main business trademark, trademarks of separate goods and services, the brand style, design and so forth. Well-known and popular brands could constitute a huge part of the value transferred to the franchisee. Therefore, franchisor must ensure that all corporate identity elements are properly registered and protected. At this stage, franchisor has to define the elements of corporate identity that he is going to pass on to the franchisee, the terms of their use, the means of their protection in the target markets, and measures for raising their popularity, aka marketing activities.
     
  • The franchise infrastructure to be developed to serve the franchisor’s and franchisees’ needs. The franchise infrastructure might consist of franchisor’s organization itself, arranged supply chain, marketing channels, customer support centers, IT infrastructure and all other elements that are necessary for both franchisee’s units and whole franchise network to function properly. At this stage, franchisor must design main elements of the franchise infrastructure and outline the plan for their development. When deciding on what services franchisor is going to provide to its franchisees and what infrastructure is needed for this to happen, it is wise for the franchisor to keep control over key services thus creating incentives for franchisees to stay in your network and discouraging them from simply “stealing” your business model.
     
  • Fees payable by the franchisee and other income of the franchisor. The franchisor’s income may come from the franchise fees, payments for services or goods provided to franchisees, commission fees paid by the suppliers, and from other sources. The franchise fees are most often the largest part of the franchisor’s income. At this stage, franchisor must set a preliminary structure of its income streams and, therefore, franchise fees applicable to franchisees. The most common franchise fees are initial fee, royalty and marketing fee.

 

Developing financial models   

There are two financial models that have to be prepared – franchisee’s and franchisor’s. These financial models must reflect the anticipated income, capital expenditures and operating expenditures as well as the assumptions upon which these forecasts were based.

You must start with development of the typical franchisee’s financial model that will serve as a basis for calculating the franchisor’s income and expenditure. The financial model of a typical franchisee helps to anticipate the financial outcomes of a franchised unit. This model is most often based on the historical data of the franchisor’s own units. The financial model is defined as dedicated to “typical” franchisee for a reason. It shows that the financial model is not customized according to a specific franchisee, but serves as a universal model showing the general financial aspects of any franchisee’s business. However, when preparing the financial model of a typical franchisee, the franchisor should retain the possibility to easily alter the assumptions, so that the model could be used to forecast financial results of the specific franchisees in specific markets.

After the typical franchisee’s financial model is finished, you can move to designing franchisor’s financial model. When developing franchisor’s financial model you must take into account all strategic decisions and assumptions that were made earlier in the process of the franchisor’s business planning. These might include expected growth rate of the franchise network, preliminary franchise fees, elements of the franchise infrastructure to be created, scope and frequency of the provision of services to franchisees, etc.

The last step of development of the financial models is harmonizing typical franchisee’s and franchisor’s financial models. Two main links between these two financial models are set of fees paid by the franchisee to the franchisor and scope of service provided by franchisor to franchisee. The aim of the harmonization of these two financial models is adjusting both franchise fees and scope of services provided by franchisor to ensure that both franchisee’s and franchisor’s financial forecasts seems feasible and realistic. When calculating the franchise fees, the franchisor should bear in mind that their payment should not cause the franchisee’s return on investment period to extend unreasonably or lead the franchisee’s business to incur losses. At the same time, forecasted franchise fees multiplied by the number of franchisees must generate sufficient flow of income for franchisor to cover costs of providing services to franchisees, cover other franchisor’s expenses and earn expected profit. It is important to bear in mind, that even the most successful franchisors see the return on investment over much longer period than the franchisees. If a typical franchisee expects to see the investment made to start the business to pay off during around 3 years, the franchisor should plan for a period of 5 to 8 years or more. The franchisor should note that its business is long-term, so the more important goal is to increase the value of the franchisor’s business in a long term rather than to earn a higher profit in a short term.

 

Formulating long-term and short-term plans

The last stage of the franchisor’s business planning process is development of long-term and short-term action plans. Generally, all strategic decisions that lay a foundation for a long-term action plan has been already made during the previous steps of the planning process. Therefore, you only need to describe all long-term plans in a concise and integrated manner. We recommend structuring all long-term plans under two main strategic programmes – franchise network development and franchisor’s business development. Under the franchise network development programme you must define long-term goals and actions related to franchise marketing, recruiting franchisees, opening new franchised units and ensuring successful operations of the existing franchised units, etc. Under the franchisor’s business development programme you must aggregate goals and measures related to continuous improving of franchised business model, developing franchise tools and infrastructure, strengthening corporate identity, etc. It might happen, that after compiling all decisions together you will see that some of them are inconsistent or in conflict with each other. In this case, you will need to come back to the respective stage of the franchisor’s business planning and redefine the specific decisions to fit organically into complete framework of franchisor’s strategy. After setting long-term goals and actions (also might be called projects or initiatives), you will need to set KPI’s to measure the progress of the strategy execution. Then you will need to define strategy execution monitoring processes that will enable you on a regular basis to gather and analyze information relevant to your KPI’s as well as to adjust strategy respectively.

After long-term strategy is compiled in a consistent way, it is time to move to developing short-term action plan.  The purpose of the short-term action plan is to describe the actions and tasks that have to be completed in a short period in order to ensure the effective implementation of the franchisor’s strategy. Usually, such plan is drafted for a period of one or two years. The short-term action plan has to include at least two types of activities:
 

  • Operational or everyday activities. These activities are directly related to everyday tasks of the franchisees’ recruitment, franchise marketing, franchisees’ support and so on. Effective performance of these activities should help to achieve the organization’s strategic financial objectives.
     
  • Strategic activities. These activities are directly related to the implementation of strategic initiatives. Effective performance of these activities essentially helps to complete the strategic objective that are necessary to complete the operational activities in a more efficient and productive manner.
     

A sound action plan has to be detailed and contain clearly defined implementation criteria of activities as well as their expected results. Also it is important to assign persons that will be directly responsible for completing the activities and ensuring that they are completed according to schedule. The franchisor also has to have a budget drawn up according to the activities plan and its financial model; the budget has to show exactly how many expenses will be necessary to implement the activities. This was the last step of the franchisor’s business planning.

After completion of the franchisor’s business planning tasks, the franchisor should move to the stage of development franchise tools. You can read more about development franchise tools here >>>>

 

  • Check our presentation about creating a franchisor's business here >>>>
  • Download the e-book “Franchisor's business: the beginning” here >>>> 
  • If you have any question, fell free to contact us here >>>>

 

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