Expansion through franchising

McDonalds and Dyno-Rod are two brands that have successfully used franchising as a means of business expansion. Here are the pros and cons

There are both pros and cons to the franchise route to expansion. We take a closer look at the ins and outs to help you decide if expansion through franchising is right for you.

Rapid growth

One of the reasons franchising can work well is because the buyer of the business model (the franchisee) pays to operate under an established brand and uses a proven business system provided by the core company (the franchisor). Essentially, by cloning your existing successful business you can then recruit franchisees to invest in setting up and running these cloned outlets.

Because it costs much less to fund franchisee recruitment, training and support than it does to expand using your own capital, a business can grow more quickly. Franchises outperform start-ups as they have a much lower failure rate (typically below five per cent) which is better for the franchisor and the franchisee.

By their nature, though, franchisees are unlikely to stay in your network for life, so your business model will be reliant upon a cycle of attracting and retaining franchisees. That can be a drain on time and resources and adds an extra layer of unpredictability to your business.

“Retention is a challenge that most brands will face well into their journey,” said Yousif Aslam, co-founder and managing director of Heavenly Desserts. “If you have a big churn, there’s got to be a reason for that. I think the fundamental reason that underpins low retention is the fact that a franchisee will invest in a franchise because they want to make an investment and they want to make a return. If a brand can continuously adapt the way they work, in-line with changing market conditions and economic conditions, and deliver their model to continuously give their franchisees a return on investment, the brand will keep franchisees from exiting.”

Heavenly Desserts was an independent for seven or eight years with a handful of locations before it started franchising in 2017. Aslam and his business partner had a long history of being in business as franchisees for a different business before they set up on their own. Now Heavenly Desserts has 50 franchise locations.

Aslam acknowledges that there are some common challenges for franchise business owners. “It’s quite easy to sell lots of franchises if you’re a successful model, but to not find the right franchise partners, which, perhaps in year two, year three and year four will come back to haunt you. That’s when the challenges start to rise to the surface,” he told Growth Business. “I think it’s important for any business who’s looking to franchise to do thorough research, speak to franchise consultants and franchise lawyers to really understand and create a financial model for themselves.

“In their first few years of their franchise journey, franchisors will require a lot of capital, as they go on to grow the infrastructure, before they reach a point where they have enough franchise outlets that turn a profit. What’s overlooked is the amount of investment that a business needs to put into their infrastructure before it turns a profit.”

He also advised that you need to keep growing. “You need to ensure that each year in line with the upward trajectory growth, the infrastructure is continuously growing at the same pace to ensure that the new franchisees and earlier franchisees are being supported in the same fashion.”

Your franchise’s success is dependent on having solid processes. “There are a lot of intricacies to franchising. Make sure that you know what your core business processes are and make sure that they’re documented,” said Frank Milner, CEO at Tutor Doctor. “If you don’t have those processes documented, your franchise will get very messy very quickly.”

>See also: How a franchise works – pros and cons, costs and how to set one up for your business

Franchise Brand Image

One benefit of franchising your business is that customers across the country will have a homogenous and consistent experience of your company, since all franchisees in a network operate under the same brand identity and follow the same systems. So, provided your business’ service or product is sufficiently high quality in the first place, this quality will permeate the whole network and customers will hold your brand in high regard and remain loyal to it.

However, as a franchisor it is your responsibility to ensure your franchisees are following your business systems properly and that the brand identity is being conveyed in a consistent manner. If not, you will find it more complicated to rectify the situation with a franchisee than you would with, say, a store manager.

To a certain extent you could tell a manager what to do, but a franchisee holds the equity stake in the business and cannot be ordered about! You will need all the negotiating skills at your disposal to remedy the situation amicably. And the matter may not end there. Should you decide to change or update your brand image and operating systems in the future, you will not be able to implement this across your franchise network as smoothly you would with a company-managed chain of outlets. Your franchisees have certain rights, usually laid down in their franchise agreement, and they may not be willing to implement changes you want, especially if it means having to invest in new fixtures, fittings and facias.

As they were already established, Heavenly Desserts didn’t have to do too much to its branding. “We had to fill some gaps in some processes and policies to help the franchisees to be able to run their stores effectively. A brand that’s quite early doors, in their inception, may have to do quite a fair bit of tweaking or repositioning so that they can really grow in whatever space they’re in,” he said.

Bulk buying

A franchise network often purchases from suppliers in bulk and therefore can benefit from group discounts not available to independent businesses. The franchise outlets in your network can therefore compete on price with non-franchised businesses, helping to increase your market share.

But make sure your franchisees are fully aware from the outset whether or not they are permitted to choose their own suppliers independently. Franchisees may object to having their choice of supplier dictated to them and failing to make this clear at the start can create resentment and friction within the franchise network.

Motivated recruits

Franchisees invest their own money in the business, so they have a vested interest in its success. They therefore tend to be more motivated and committed to growing the business than managers on a salary. Franchisees are fairly entrepreneurial too and will most likely offer both fresh ideas and renewed impetus to the over-reaching brand – providing the franchisor is prepared to listen!

“A lot of your franchisees are typically the folks that are out in the trenches every day, very often closest to the customer,” said Milner. “There are a lot of ideas and opportunities for innovation. So many of the things we do in our business were ideas that came from the franchisee community.

“We established the Franchisee Advisory Council for that reason – to give us that opportunity to interact directly with really engaged franchisees who see strategic opportunities and to discuss different opportunities that emerge in our business.”

Tutor Doctor holds a global team call on Tuesdays for franchisees around the world, consisting of a weekly webinar that highlights what’s going on in the network. On top of that there are monthly bootcamp calls that, like workshops, bring groups of franchisees together. A detailed annual survey for franchisees, with the feedback going to the Franchise Advisory Council, allows franchisees’ views to shape support in the business. “They bring a lot of energy and motivation to franchisees. Being tapped into a community like that provides a really big benefit to a franchise,” said Milner.

Aslam echoes the need for franchisee support throughout their development. “If you get that wrong, then you can run into all sorts of problems,” he said. “It may even impact on the pace of your growth because you’re then trying to manage franchisees that are not adhering to protocols or brand standards and your attention is diverted from growth to dealing with problems.”

Higher profits

Expanding through franchising uses less of your capital than opening more company-owned outlets. However, you will obviously receive a smaller percentage of the revenue from a franchised unit than you would from a company-owned outlet. Nonetheless, the return on your investment in a franchised unit can be higher because, although the revenue coming to you will be lower, a greater proportion of it is pure profit.

“The financial benefits are very obvious, especially if it’s a royalty-based franchise. It can be quite lucrative,” said Aslam.

Inside information

Franchisees joining your business may well have in-depth knowledge and experience to which you might not otherwise have access. This is particularly useful when expanding your business into new geographical areas, including overseas. Recruiting a master franchisee in a particular country to expand the business for you will save time and resources and, ideally, their knowledge of the local market will give you a huge head-start.

It’s wise to not let location being the driving factor in recruitment, however. “In our experience, recruitment is pretty much led by the franchisees, so all of our growth and all the locations we’ve grown in has been franchisee-led,” said Aslam. “Of course, as part of our strategy we have always had and still have all the territories earmarked throughout the country where we would like to open, but our job fundamentally is to ensure that that’s the right partner for us.”

For more information on franchising your business contact the British Franchise Association here: www.thebfa.org

See also: Six steps to franchising your business – aspiring franchisors must ensure they follow all the right steps to make their operation a success.