It is well known that the world's largest brands rely on a successful franchise network, from clothing brands through to the more common fast food outlets. At one stage, each of those businesses embarked on its first franchise arrangement, and no doubt lessons learned along the way.
Many businesses seek our advice when looking to offer their brand as a franchise. Key reasons to consider franchising are:-
- Expansion. Brands can expand overseas and nationally by utilising the resources of existing businesses.
- Cash flow. A franchisee is usually the one who provides the initial working capital to get the franchised business open. Their return comes later.
- Expertise. A franchisee will often have expertise in a specific sector, and add value to the existing brand whilst also securing a licence to use it.
However, statistics show that many businesses unwind their franchise network within the first five years, often before the "development term" has expired. Here we share some tips from our experiences to hopefully change that statistic.
- Timing: is the brand right to franchise? The answer to this will often depend upon the goodwill which the brand has amassed. If the brand is well known in a particular area or territory, how confident is the brand owner that there is demand for it elsewhere? Analysing sales, or social media data, can be good tool to answer this.
- Due diligence on the franchisee: selecting the right franchisee is key. Does the franchisee demonstrate a successful track record expanding other brands, and if so, in the same sector and or territory? A franchisor is often concerned to see that the franchisee has the financial covenant strength to a. initially get the business open, and b. continue it or expand it thereafter. There is often a lot of focus on due diligence on the franchisor and its good title to the intellectual property rights in the brand, but due diligence on the franchisee is just as key to a successful franchise.
- Objectives of the franchise: what are both parties looking to achieve? Does the franchisor have milestones which the franchisee is required to meet, and if so, how are they measured and what happens if they are not met? Does the franchisee have a limit (e.g. financial) to its commitment? There are often targets included in the arrangement and both sides have to be comfortable that these can be met to avoid a failure.
- Management: how much discretion will the franchisee have in opening the business? A franchisor is no doubt keen to ensure the brand's protection and that the franchised business meets certain standards, but micro management is often a deterrent to the franchisee who wishes to be trusted to maintain a successful franchise. There is a balancing act.
- Key personnel: a franchise is built through a good personal relationship between franchisor and franchisee. Common issues which affect this are a. a change in key personnel, and b. a change in ownership. If either of those occur, then is there a transitional period which seeks to maintain the relationship with the new personnel and or owners? This should be detailed in the agreement.
With many companies having global expansion / entry into new territories as key objectives, franchising remains an attractive option. Getting it right is key, as a failure to do so can lead to irreparable damage to the brand and business reputation. Our commercial team remains available to discuss any franchising queries, please contact George Stead.
Around 80 per cent of companies that develop into franchises don’t continue in franchising after the first five years.