Firstly, you should ask yourself whether your franchise would be in demand and whether there will be enough prospective franchisees willing to invest in opening new units operating in accordance with your business model under your brand name. While receiving requests for franchise sale is already a good indicator of current demand, however we advise to carry out a more thorough analysis. You must clearly understand that a person (either a natural or legal) buys a franchise because he or she expects to create a profitable and sustainable business faster and with less resources as well as to run it more efficiently and with less risk than he or she would manage to do it independently without the assistance of the franchisor. In order to meet these future franchisees’ needs franchisor’s business must meet these prerequisites:
- Franchisor’s business must be based on a successful business model;
- Franchise must enable franchisees to bring more value to customers than competitors do;
- Franchisor’s business must create value for both franchisees and franchisor.
Let us dig deeper in each of those prerequisites.
Successful business model
Success of the business model is not a clearly defined term and every entrepreneur may imagine success a bit differently. We believe there are at least three ingredients that makes a business models successful – ability to satisfy customers’ needs, ability to generate profit and sustainability. Let us dig a little bit deeper into each of those ingredients.
- Ability to satisfy customer’s needs. A successful business must constantly improve itself and adjust to the ever-changing consumers’ needs. A business may not be successful in the long term if it is not capable of adapting in the changing environment. In order to be successful, one needs to constantly monitor the environment, analyse its changes and adjust the business model to the changes that might create either a threats or new opportunities. The best indicator, reflecting your ability to satisfy customer’s needs, is growing revenue. However, do not be misled by short-term outbursts of income, that could be determined by some factors out of your control, and seek for internal drivers that can cause long-term sustainable rise in your revenues.
- Ability to generate profit. A successful business must be good not only in meeting customer’s needs and in generating revenue, but also in earning profits. Although shareholders can accept temporary losses for the sake of, for example, deploying innovations, rapid development or capturing market share, but in the long run they will still require profit to be earned. Furthermore, earned profit, alongside with borrowed capital, will become the fuel to fill in the engine of your future business development. Finally, being able to generate a profit is a key indicator franchisees look for in franchised business models. Since the majority of franchisees are small business owners, they are quite reluctant for accepting a high business risk and tend to look for “safe” franchises to invest their money into with the highest possible probability of return.
- Business is sustainable and systematic. Franchisees are looking for a proven business models that, if replicated properly, will ensure the compliance with the franchise standards thus providing customers with the same value as any other unit in the franchise network. This might be achieved only if the business, serving as a foundation for a franchise, is sustainable and systematic itself. Some businesses, that are able to meet the customer’s needs and generate profits, could still be unsustainable if, for example, they rely exclusively on the key-man, usually a founder and a CEO, who is working in a non-systematic way, is micromanaging and failing to delegate tasks as well as educate other staff. The success of such businesses strongly depends on a commitment of one or few key-men and it might quickly turn upside down if one or all of key-men for some reasons fail to deliver. For the business to be sustainable and systematic it must be based on clear procedures and standards, planning and monitoring must be in place, roles of employees must be defined and needed competences developed.
Although the above-mentioned characteristics of a successful business model are mandatory in order to create a successful franchise, they are still not enough. A business, used as a foundation for a franchise, must be able to create and sustain competitive advantages not only in its home market, but also in every market in which it plans to develop.
International competitive advantage
The competitive advantages of a franchised business may be discussed only in the context of particular markets where the franchise network is planning to be developed. There are cases when a business that is successful in the home market does not have any competitive advantages in other markets. This can happen because the competitive advantage, obtained in home market, cannot be replicated due to, for example, a different competition structure, different consumption habits, different characteristics of the real estate market, etc. Accordingly, the successful development of a franchise is only possible in markets where such business has or potentially can create and sustain a competitive advantage. Only an internationally competitive business model can create a strong foundation for the international success of a franchise network.
To be competitive internationally is especially important for franchisors originated in relatively small home markets, like Lithuania, Latvia or Estonia. For example, a franchisor’s business, established and having exceptional competitive advantage in the United States of America, has rather big development opportunities in its home market due to its size. Such franchisor might operate thousands of units in its home market before it even starts to think about international expansion. On the contrary, franchisors, established in small countries, face a need for international expansion and, therefore, building and sustaining competitive advantage on an international level in the very beginning of their business life.
Anyway, each franchisor, willing to expand its franchise network internationally, must clearly and realistically plan how to replicate and sustain its competitive advantages in new markets. In order to become competitive it might be even necessary for the franchisor to modify franchised business model. Having in mind, that the process of reshaping a business model might be quite lengthy and costly, some of the franchisors, offering appealing franchises, might pass this duty to master franchisees, who are willing to invest into adapting a franchised business model to their markets in exchange for exclusivity rights. However, for most of newly established franchisors it is quite hard or even close to impossible to find such a master franchisee, who would accept the risk and costs of adjusting franchise business model, simply because their franchise is not appealing and well known enough. Such franchisors might either pray for magic (in a form of a franchisee, who would be adventurous enough to buy untested franchise) or invest into testing and fine-tuning franchised business model in a new market themselves. The most common and straightforward way of doing this – is to open franchisor’s own unit in a new country and use it as a pilot facility for making sure that franchised business model operates well in given environment. Such pilot unit might as well become a great tool for franchisee recruitment. In the end of the day, if the unit is successful enough, franchisor might sold it profitably to some prospective franchisee.
Creating a value – a day-to-day job of franchisor
The last, but not the least thing to be considered during franchisability analysis – is the ability of franchisor’s business to create value constantly both for its franchisees and for franchisor itself. Even the most successful and competitive franchise business model might not be in demand among franchisees if the franchisor will not provide them with the right amount of value for money they pay during the franchise agreement. The answer to the question "Why to buy a franchise and pay fees to franchisor instead of starting a business on one’s own?" lies precisely in the value created by franchisor to franchisees.
The best indicator of the value, created by the franchisor, is long-term profits earned by both franchisees and franchisor. Having in mind that the major part of franchisor’s revenue comes from franchise or alternative fees, paid by franchisees, it becomes clear that making sure that both franchisees and franchisor are profitable is not such a trivial task, as it might seem to be. It is quite common for immature franchisor to fall into a trap of over-squeezing or under-serving its franchisees. Some franchisors, seeking to increase their profit as fast as possible, might charge their franchisees for anything that could be charged. Although this over-squeezing might contribute to temporary increase of franchisor’s profit by ripping franchisees of their profits, however in the long term such franchisor will surely lose its franchisees, customers and profits. Other franchisors might seek to increase their profit by drastically cutting costs of serving franchisees. This might work for some time, but under-serving franchisees will eventually lead to the same negative result.
Although most of the franchisees start evaluating franchise from the franchise business model and trademark, however the franchisor have the ability to generate additional value to franchisees. Franchisor should help its franchisees to keep their business operating costs as low as possible and generate as much revenue as possible while insuring that the needs of the end-customers are still satisfied. The franchisor might help its franchisees to cut costs by achieving economy of scale in purchasing equipment, goods or raw materials, by performing centralized marketing and R&D functions, by developing and helping franchisees to implement more efficient business processes or helping them to avoid typical business mistakes. The franchisor can help its franchisees to generate more revenue by implementation of centralized marketing and customer loyalty campaigns that could lead to increased number of customers, by training franchisee’s employees on up-selling or introducing new products and services that could lead to increased average bill. It is also very important that the franchise fees would allow franchisees to ensure return on their investment in a reasonable time.
If your business has already proven its success, has a distinct competitive advantage and you clearly see, that after becoming a franchisor, you will be able to generate tangible value to your franchisees as well as to yourself, then without any doubt you should "take the bull by the horns” and start planning the franchisor’s business. You can read more about franchisor’s business planning here >>>>