3 Steps To Franchise Your Business
Business franchising is a rewarding business decision. The process has to be executed properly in order to work successfully for both your business and your franchisees. There are several examples of concepts that have flourished as standalone, but when venturing into business franchising, they suffered and collapsed. In order to thrive as a franchisor, there are three main steps that have to be considered before jumping into the wilderness of franchising. The three main steps are concept size, feasibility and “know how”.
Step 1- Concept Size
Put yourself in the investor shoes. Why would an investor consider your concept if you have only one or two outlets running? Even if this outlet is a unique concept, attracting the right customer base and making a healthy profit, the investor will ask you the simple question; did the concept multiply into several outlets?
There is no magic number for the spread of your concept. However, running at least five outlets spread over Greater Sydney. for example, is a good justification that you can run a network of supply chain, manage your central distribution houseware and have the ability to hire and train the right personnel to conduct your concept. The more outlets you are running spread nationwide, the higher probability of your success and the better reward in increased franchising and royalty fees.
Step 2- Concept Feasibility
Investors are looking for three main key indicators when considering any concept for investment. Firstly, what is the payback period of the investment? In other words, when will the business return its investment? Secondly, is the net present value of the investment positive? Taking into account all the cash flows of the forecasted business and discounting it at a calculated rate, the outcome must be a positive figure for the investment to be sound.
Thirdly, is the calculated internal rate of return higher than the hurdle rate. Investors take a high risk to earn a higher profit versus putting their money in a secure environment such as bonds or banks. The calculated internal rate of return must be higher than the set rate fixed by the investors for a profitable business franchising.
In order to be able to calculate these three investment indicators, the franchisor must have a comprehensive five years financial plan completed. The forecasted figures should portray educated estimates reflecting his own business. As long as the franchisees are witnessing strong performances year after year, more franchisees will join in and the concept will grow into a healthy franchising mechanism
Step 3- Concept “know how”
Franchisees are buying “know how”. Franchisors are selling a proven methodology towards success. For this equation to balance, the franchisor should document every aspect of his concept into manuals. The operation manual is the core of the franchised concept. Other manuals are also common such as human resources manual, information technology manual, training manual and franchising manual. The franchisor must train his franchisees in every operation. Update of the manuals is an ongoing activity to accommodate all innovations and variations.
Finally, a contractual franchise must be clearly formulated explaining the responsibilities and rights of each party. The contract also clarifies the franchising and royalty fees and any other marketing obligations. The contract quantifies the number of outlets that must be opened in a time frame. The territory exclusivity rights of the franchisee must be well defined.
These three steps are a compact recipe to any franchised business. Support of specialized consultants is mandatory to ensure the right implementation of all of the embedded actions in the above steps. The incurred cost of using a consultant is a justified investment due to expected significant savings in time, money, and averted failure.
