Franchising is where you license another company to be your presence in another geographical region. There are a range of household names that are run as franchise businesses – McDonalds, Burger King, MR. Barbers, Snap-on tools and many more.
It is very different from having a 3rd party manufacture for you, or having an agent sell for you, or a distributor supply a market for you. In essence, a franchise is another arm of your company which represents your brand and has to behave as if it is you; but you don’t own it. You benefit from an up-front franchise fee plus a royalty for every item made, sold or service provided – typically 10%.
The relationship between the franchisee and the franchisor is an interesting one. The relationship is initially formalised through a franchise agreement. Integral to this agreement is a manual that defines the way the franchisor must run the business. Franchise agreements are usually framed so that the franchisor has a lot of leverage in terms of ensuring the franchisee operates as required.
The franchisee is taking on the risk of the business but needs to ultimately believe in the brand that they are buying into. They are buying a ‘how to succeed’ bundle.
In practise this is not as straight forward as it seems. When everything is going well, and the franchisee and franchisor are able to work together, then the benefit to the franchisor is an income stream with few costs against it. When things are not so optimal, the franchisor needs to ensure the franchisee is holding to the brand values whilst not having direct control. Trying to manage the situation as you would if they were your own employees does not work.
So, what are the pre-requisites before thinking about creating a franchise?
You must have a brand that is, or people believe will be, recognised and delivered through a well-defined process to well-defined standards. Your aim is to grow the business regionally whilst sharing the risk so that you don’t have to take it all.
You need to be able to articulate the brand, the proposition, the process for delivery and the opportunity for a potential franchisee. This means understanding the potential market for the franchisee (though ultimately this is their responsibility to assure themselves that the market opportunity is real) in order to be able to sell the idea. There are companies that can help you with this.
Then you need to seek interested parties and, whilst doing so, translate your brand values and business processes into some outline requirements for an agreement and a draft manual. You will probably want to engage with some legal advice at this time.
Once you have interested parties, you need to negotiate a strong agreement that gives you the leverage in order to maintain the brand etc, but also allows you to change things as the business develops.
Once agreement is reached, you need to resource time and energy to support the franchisee in setting up their business. This involves providing training, auditing and being available to answer any questions or concerns. Once established, you need to manage, monitor and audit your franchisee as if it was another branch of your business (which it is), bearing in mind that you are working with a business owner, not managing an employee.