Franchising a business: navigating the 6 key challenges
Franchising is a bold, ambitious, growth-incentivised move by a business which is looking to conquer new territory through expansion. Like many commercial activities though, franchising is not without risk. Not all franchise models are destined to succeed and achieving success often requires the business (and indeed the determined minds of the entrepreneurs running it) to successfully navigate the commercial challenges that franchising poses.
This article describes the key challenges that even the most established and reputable businesses could face on their journey to franchise heaven.
What is Franchising?
Franchising is essentially a method of business licensing in which an established business licenses its business model, know-how and intellectual property to a franchisee in return for fees. Typically, each franchisee-business operates in an exclusive geographical territory and this means successful franchisors can have a network of franchises nationally and even internationally.
In the UK, the British Franchise Association (BFA) plays a significant role in franchising. For decades, the association has been responsible for setting industry standards, and it has also supported its members through education and promotion.
Establishing a franchisable business
There are few who would argue that before a business embarks on a franchising model, the business itself should be in a position whereby it can stand up and trade on its own two feet. It needs to form a profitable business model delivered through a recognisable brand, a strong ‘get-up’ which generates consistent income. Only once the business is robust enough to sustainably stand solo is it then sensible to begin to considering expansion through a franchise model.
Challenge 1: Having sufficient resources and infrastructure
Adopting a franchise model will require the franchisor-business to adapt to a new way of working. Rather than being on the frontline and operating the business on the ground day-to-day, business leaders within a franchisor-business will instead have a more remote role, mentoring and supporting franchisees through regular training, marketing support and product development to name a few responsibilities.
Franchisors will therefore need to have appropriate and robust IT systems in place as well as up-to-date administrative and HR procedures. Above all, Franchisors will need to establish a solid asset portfolio consisting of both tangible assets in the form of business premises’ and intangible assets where relevant such as trademarks, patents and database rights. Therefore, it can make sense for franchisors to start small with a pilot franchise in a geographical area that the franchisor feels the brand has the best chance of success in before growing a larger network.
Challenge 2: Bringing the right franchisees on board
The long-term success of the franchise model will ultimately depend on the quality of the franchisees. Franchisors will therefore need to ensure they correctly market their opportunity to reach the best possible candidates and then ensure they establish a thorough but effective selection and vetting process for prospective franchisees. Prudent franchisors often award their first franchise to someone known to them, such an employee.
Once chosen, the franchisor will need to build positive relationships with the franchisees and provide the franchisee with the tools they will need to establish and grow their business.
Challenge 3: Bringing the right staff on board
Once the first few franchises have been awarded, the franchisor-business will need to retain or hire appropriate staff to manage the franchisees and to operate the franchisor-business on a day-to-day basis. Such staff will need to positively represent the company’s values to prospective franchisees and to those already selected. If a business does not have such staff in place already, it will need to consider making hires before embarking on the franchise journey.
Challenge 4: Establishing the terms of the franchise
A franchisor will need to decide on the terms on which it is willing to essentially delegate the operation of its business to the franchisee. The franchisor will need to determine what its financial and operational boundaries are and create standard terms which will apply throughout the franchise network.
Considerations for a franchisor include:
Ultimately, the franchisor’s desire will be to have a model which is both financially viable for them, but which gives the franchisee enough autonomy to operate a business that is profitable for them too.
Challenge 5: Having sufficient capital
Money is perhaps the biggest challenge for a franchisor. Indeed, tackling all of the challenges mentioned so far will inevitably require a level of financial input from the franchisor-business and so the company will need to ensure it has sufficient capital to do so, at least in the short-term.
However, a business looking to franchise must also consider the long-term capital that they will require. A franchisor can easily burn through the funds it immediately gains upon granting a franchise to a franchisee within 12-18 months, which is not normally enough time for the franchisee-business to start making healthy returns from which the franchisor can reap some benefit. In order to regain capital, franchisors often award franchises to previously rejected franchisees who are weaker than they would have liked. This is of course risky, and not only does it lead to financial difficulties for the franchisor, but it can cause practical difficulties too if relationships with franchisees break-down and the goodwill and reputation of the company’s brand deteriorates.
Challenge 6: Risk
Inherent to all of the challenges are the financial risks involved in franchising. It is the fear of the company’s collapse which will often be the biggest challenge facing the individuals running a franchisor business, so bravery and confidence are paramount.
Building a franchise network gradually, in increments is wise, or else large amounts of capital will be needed for resources and infrastructure. In reality, lots of franchisees fail. Franchisors less so, unless they expand too quickly.
For advice in relation to any franchising matters, contact one of our commercial team today.
Parker Bullen Solicitors are members of the British Franchise Association.