What is franchising?Franchising is a method of expansion for an established and successful business looking to grow a network. It can also help businesses to expand both nationally or internationally, strengthen the brand and reach of a company and act as a good method of securing its future – but only if it’s done well. As a business owner, you have already developed a proven system, faced the challenges of starting the business and created and refined the strategies and procedures responsible for its success. You also know how to market your business, who to hire and how to train employees. So, when considering franchising your business, you first need to gain a full understanding of the advantages and disadvantages, the financial aspects of the relationships between the franchisor/franchisee and how this will impact on your current business operations.
Things to consider before opening a business franchiseOnce you have this understanding, you need to ensure that your business has certain key elements in order to make it successful. These include:
- A clearly defined trading name, brand and system;
- A format which is proven, successful and which can be easily duplicated;
- Profit to support the franchisor and franchisees; and
- The ability to adapt to a culture in which roles and responsibilities are clearly defined.
The big advantages of a business franchiseThe main three benefits of growing your business through franchising are money, time and people. Franchising allows you to use other people’s money to grow your business, while being less involved in the day-to-day operations. It provides a method for growing your business quickly, whether you plan to grow locally, nationally or internationally. You will continue to grow and expand, as long as there are available regions and people want to purchase your products or services. It attracts highly motivated people who have local expertise, and generally requires less staff to operate. You will also have a competitive advantage since you already have a brand, a positioning statement and proposition as well as market share. In the recent afore mentioned NatWest survey, three out of four people saw a competitive advantage with a franchise, as opposed to opening a new business from scratch. Also, the forced failure rate for franchised businesses more recently has been averaging four per cent, so much better than the economy as a whole.
What about international franchising?Growing your business through international franchising will start in one of two ways: either by a company which has produced a planned offer, or from an enquiry made via the internet or from a franchising exhibition. By expanding overseas and using local franchisees, you are able to tap into the local business knowledge/market and the franchisee is in a much stronger position to deal with legal and cultural issues. There are several ways in which an international franchise arrangement can be structured, and below are some of the options to consider:
1. Master franchiseThis involves the franchisor granting franchise rights for the whole or a part of a country to a local business entity (a master franchisee). These rights then allow the master franchise to operate its own outlets and to grant franchisees to other local business entities within that country or a specified region.
2. Direct franchisingThe franchisor grants direct franchise rights, along with continuous training and support to a franchisee in another country. However, this type of structure is suitable where only one or two branches will be opened in a particular country.
3. Joint venturesJoint ventures involve a franchisor establishing a joint venture with a local business entity. A master franchisee is then granted to the joint venture, which becomes the national franchisor.
4. SubsidiaryThis involves the establishment by a franchisor of a subsidiary in another country. The subsidiary would then grant individual franchises in that country and has a local presence. The franchisor will have a personal relationship with the franchisee and will retain total direct control of the franchise system. These structures can be used in a variety of ways and each will have their own benefits and drawbacks. However, before thinking of franchising, you will need to have a proven franchise system, a training module, processes, procedures, and a format which can be easily duplicated and be profitable for both the franchisor and franchisees. Recruitment, motivation and development of quality franchisees will be the key to success. Adrian Price is a partner at Menzies LLP.
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