The Main Ingredients of a Healthy Franchise
This article appeared in Issue 3#5 (July/August 2009) of Business Franchise Australia & New Zealand
There are many ingredients that make up the advantages of franchising. When you buy into a trusted name, take on its fame and systems, you can be sure to have a business that people will recognise quicker than a start-up mum and dad-type business.
In fact, franchising is one of the most common business expansion tools. Not only that, but entering into franchising is like entering into a family: there are other people there who will help you with everything from day-to-day operations of your business, to buying your business’ equipment at the lowest price possible.
One of the biggest advantages of franchising is the draw of the brand name. People recognise brand names, and because of this, the name of a business is worth quite a bit. People come to trust names they see again and again, because they associate this frequency with quality and consistency. Soon, people become loyal to certain brand names. Additionally, if people know the name of the franchise, it will make it easier to attract customers to your establishment.
Many statistics say that as many as 80% of new businesses fail in the first five years, mainly because it’s hard to get the business generating funds while learning the ropes of what works and what doesn’t work. A franchise’s model is proven – it’s why people want to buy into the business – and it makes it easier to keep your business afloat. Once you’re in charge of a franchise, you’ll have a manual that explains the business’ ins and outs and will make day-to-day operations easy as pie.
Ultimately, there’s less risk involved with opening a franchise, and this is perhaps franchising’s greatest advantage. Though the cost may be high to buy into a well-respected name, the possible rewards are much higher. However, just as it is important to assess the franchisor’s business, it is also important to assess the strength of their franchisee selection criteria. As always, you need to ensure your research is done in a manner which means you have all the facts in place, and doing your due diligence will ensure that not only the franchise is right for you but that it is one that is going to be value for money too.
In addition to the many questions that you should pose to a potential franchisor and the many questions they should pose to you, there are several other considerations for you to determine your compatibility with a particular franchise system.
If you are going to be getting into business with someone with the goal of creating an outstanding future together, you should cover more bases than just the basic questions, to understand how the business makes money. That will be ultimately important of course, but several general considerations will be imperative for you to analyse as well, if you really want to understand your potential ‘strategic-partner’.
Franchisor’s Selection Criteria System
One of the initial things you should strive to understand is the level of development that the franchisor’s selection criteria have reached. Your first reaction to that might be, “Why do I care about that; I only care if I get a franchise or not”. I would suggest that you should care a great deal.
After all, if the franchisee selection criteria system hasn’t been well developed, it may be a reflection on the business of the franchise itself. The most important asset of any franchise system will be its people, including both franchisees and franchisor staff. Almost all companies will confirm that to be the case. They say it even if they don’t believe it. They say it even if they don’t actually put systems in place, to ensure they add the best people and nurture their development over time. So how do you determine if the statement matches the execution?
If people are the most important asset, it would follow that the system of finding, qualifying, and granting franchises to the best franchisees would be a well thought out and well developed system. If there is no formal step-by-step system to provide information to both parties, then it may be an indicator that there is something amiss.
If the system doesn’t allow for a step-by-step, give and take, system of information flow, then perhaps the other business systems within the franchise aren’t as well developed as represented either. The information system shouldn’t be so fast that you are overloaded, but it should be steady enough that you can continue to assess and deliver information, at a pace that makes sense for both parties.
If the system is too fast, for example if you are given Disclosure Documents within the first week of the due diligence process before many other things are assessed, I would suggest there is something wrong. To rush is to make a mistake. On the other hand, if the system is too slow, you won’t get a true flavour for the company because of the sporadic nature of the flow.
If the franchisor does not have a good step-by-step information flow and due diligence system, then that alarm bell in your head should go off.
Communications with Existing Franchisees
One of the most important sources of valuable information will be the existing franchisees. The franchisor’s system should include available exposure to all of the franchisees. First of all, in the Disclosure Documents, one of the required disclosures is a full list of all franchisees, including contact information.
If you get a feel that a franchisor is discouraging you from communicating with certain franchisees – well, there’s that alarm bell again.
That’s not to say that all franchisees will be happy, or that all will be great operators. In fact, most systems have disgruntled or unsuccessful franchisees. It will be important for you to speak to the top echelon, the middle range people, and the poor performers. The test should be to identify the factors that differentiate the groups. Then determine how you are more like the successful people, and how you are not like the unsuccessful people.
This one is fairly simple but very important. If the franchisor responds to your enquiries quickly and efficiently, it’s probably a good indicator of the type of responsiveness the company executes as a whole. Of course, that becomes very important when you require support once you become a franchisee.
If a franchisor takes several days to get back to you after your initial enquiry, you should take that as a warning sign. If they don’t respond in an efficient and professional manner to your email and telephone enquiries as you go through the process, it probably means they are not running a tight ship.
A system that responds almost immediately and then starts you on a step-by-step information flow, including personal contact, should be what you are looking for in terms of responsiveness.
The system of evaluation for both parties should include a face-to-face meeting. After all, you are trying to determine if you want to get into business together for 5, 10, 15 or more years. If a franchisor wants you to join the system without a face-to-face meeting, it doesn’t really make sense. Would you start a partnership business without meeting your partner? A franchise is not an actual partnership, but the same criteria should apply. It should actually apply to the franchisor every bit as much as to you. So if that meeting is not part of the process, the system is incomplete.
The face-to-face meeting should also include an invitation for your spouse to participate. In fact, some systems require the spouse to be in attendance. Again, it is sensible to include spouses at the discovery stage because the ultimate decision to start a new franchise business will be focused on building family dreams, and providing family security for the future. If a spouse is not fully aware and comfortable at the decision-making stage, it could create difficulties down the road as you build the business.
The main point is that if a face-to-face meeting is not a part of the process, and your spouse is not welcome to attend, the process is faulty.
I’m not going to spend much time with this point at this stage, other than to say that the entire process of due diligence, for both parties, should be about determining whether there is unified thinking. My advice is to step back at the end of the process and ask yourself the following question: Did the process help both parties to determine if they have unified thinking about the business at hand? If the answer is not yes, then you’ve either got more work to do, or something with the system is not right and you should examine alternatives.
Franchising is about finding the right strategic-partnerships to allow both parties to prosper at a higher level together, than they would if they were not entering an agreement to do business together.
You must be comfortable with the franchising concept itself. It’s the franchisor’s strategy to penetrate and dominate a marketplace. You’ve got to be comfortable with the franchisor’s strategies to do just that. If they make sense to you, it can be a great ride in achieving success together.
You should assess your needs, wants and desires to make sure that they can be met with a successful franchise in the system. You should bring to the surface all of your fears, uncertainties and doubts, to determine if you can solve them with the business and the future you can create. The worst thing you can do is leave them buried.
Finally, can you see yourself reaching your goals, dreams and objectives by operating a successful business in the franchisor’s system? Will the franchise help you to achieve those goals and dreams?
Kevin Bugeja, Managing Director
Suite 201, Level 2, 566 St Kilda Rd
Melbourne, Vic 3004
PH: 1300 FRANCHISE (372 624)
Mobile: 0412 511 630