The franchise is a successful business concept developed by the franchisor who grows a multi-unit network through selling the rights to their intellectual property and the systems and processes to operate one or more individual units to franchisees.
Franchising has become an important growth strategy but there are few guidelines for managing franchise systems ‘strategically”.
This article develops a strategic perspective on franchising by first discussing the growth and strategic importance of franchising.
The authors then show how the strategic concepts of portfolio management, global strategy, and network analysis can be used in formulating and implementing franchise strategies. These perspectives are combined into a framework for the use of practicing managers.
Why is Franchise Important?
Franchising is the growth strategy of choice even when economies are going through tough times. Why is this? In simple terms it addresses the two fundamental requirements for business growth:
- Raising the funds to expand
- And finding the right people to manage that growth.
A franchise is a successful business concept developed by the franchisor who grows a multi-unit network by selling the rights to their intellectual property and the systems and processes to operate one or more individual units to franchisees.
The franchisees in turn operate their businesses under the guidance of the franchisor that gets an ongoing royalty or fee. For more on what is franchising, visit our site
Franchises dot our landscape and meet thousands of our goods and service needs every day.
From frozen yogurt, blow waves and guinea pigs to nose rings, IVF, or a mortgage, 453,000 people working in almost 83,000 franchised outlets across Australia contribute about $154 billion per year to the economy, according to IBIS World.
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Franchising is a huge part of the global economy. Pepsi, Shell, BP, Ford, General Motors, and KFC have used franchising as a capital raising, HR, management, and marketing tool to span the planet.
Common Ways you can Participate in a Franchise Program
The Classic Path: This is how most people think of franchise opportunities: You buy a new franchise, find the location and build it out yourself. It’s all-new, and it’s all yours. You roll up your sleeves and plunge into your new business as an owner/operator.
This is the classic route because it is precisely how so many thousands of franchisees built their multiunit empires, and it describes how much of the franchise world still operates. Newer (and hotter) franchise offerings usually provide the classic route to business ownership.
There is always a downside, of course (business imitating life?). With the classic route, the biggest possible downside is the untried location. It can make or break a retail business, and you may have a substantial sum of money riding on that outcome.
Second, your team is untried, so the training and opening support had better be solid. The startup phase of the franchise at a new location will drain your cash until the operation’s growing revenue begins to carry the payroll, inventory, and other expenses; so plan carefully, and never go into a startup franchise undercapitalized.
Buy an Existing Franchise
The strongest advantage of buying an existing franchise business is that you have a chance to examine its performance numbers. You know what the sales and expenses were in the past year and even earlier, assuming the records are accurate (ask the franchisor to provide a royalty payment record so that you can cross-check the key sales numbers).
You have an opportunity to discuss the business with the owner, interview key employees, and observe the operation. You can research the industry and gain an understanding of objective valuations in that business sector. In an important sense, you also lower your investment’s uncertainty and your own risk.
Where will you make your money? Maybe you can identify a struggling franchise that needs a new shot of leadership and enthusiasm for the business. If you’re successful, you’ll build a strong business out of a weak one, and reap the financial benefits.
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Buying an existing franchise business means that you’re subject to the transfer provisions of the existing franchise agreement, which can be very restrictive. Many franchisors reserve the right of first refusal on all proposed transfers, so it’s possible that you can end up putting a big effort into a formal purchase offer only to have the franchisor match it and take you out of the picture.
The franchise agreement might also impose a hefty transfer fee, often expressed as a percentage (5 to 15 percent) of the purchase price. This will, of course, fall on your shoulders, so include it in your calculations and your price negotiations.
You might also negotiate with the franchisor on the transfer fee, especially if you’re buying a troubled franchise.
A new, enthusiastic owner may be the answer to the franchisor’s prayers; the company may be more than willing to lower or eliminate the transfer fee just to help you take over the ailing franchise.
Your major risk: hidden problems of the previous owner’s making. No one likes surprises in a new venture, and these hidden problems will cost you the money you didn’t plan on spending.
They range from unhappy supply vendors to dishonest employees to defective equipment and they simply come with the territory. Add an “unexpected problems” line to your opening budget, and plan for the unexpected.
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The appointment as a master franchisee is usually extended to existing franchise owners who prove successful in their operations and are interested in expanding their involvement in the system. If you enjoy teaching and want to super-size the return on your franchise investment, inquire about master franchise programs.
It’s the involvement in franchise sales that draws many investors to master franchise programs, and it is there that the law imposes the most restrictions.
As a third party participating in a franchise sale, the master franchisee will be considered a “franchise broker” and, as such, must be included in the company’s Uniform Franchise Offering Circular, disclosing business experience and litigation history.
The franchisor must submit a “salesman disclosure” form to most registration states. In a few states, a broker must independently register with state authorities.
A master franchise is often confused with a sub-franchising program, but there’s one important distinction: A sub-franchisor offers and sells franchises directly, for its account; and, of course, a master franchisee does not sell franchises directly.
A master franchisee typically generates leads, meets with and qualifies prospective franchisees, and sends them on to the franchisor for closing.
A master franchisee is the utility infielder of franchising. Success is measured by the ability to manage, teach and recruit while continuing to operate your own franchise business successfully.
Absentee Ownership & Conversion Franchises
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1) Be an Absentee Investor: For the right kind of business, with the right employees running that business, it is entirely possible–though rare–to own a franchise business and not be directly involved in its management. Rare, I think because it is hard enough to own and operate a successful small business even when you’re on the floor every day.
What type of business lends itself to absentee ownership? First, it must be a business that doesn’t have valuable inventory. Only an owner on the premises is sufficiently motivated to prevent that from happening.
Second, the business must have sufficient margins to be profitable after the expense of having a reliable manager. So many franchise businesses have razor-thin margins that allow for the owner to take out not much more than a modest salary. So the key question then becomes: What drops to the bottom line for the owner?
Service businesses with training programs that can support an employee manager may meet these qualifications. It would be a mistake to assume that any franchise can prosper with an uninvolved owner, but with the right program and a handpicked management team, it can work.
2) Buy Into a Conversion Franchise: A conversion franchise allows an existing independent business to affiliate with a national brand.
The classic conversion program is Century 21 Real Estate Corp., which converts independent real estate brokers and allows them the benefits of a strong brand affiliation while allowing them to continue using their identification.
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Affiliation programs have been launched by a variety of professional service providers, such as handymen, home-repair programs, and hotel chains.
Conversion franchise programs offer an attractive balance of brand identification and buying power.
If you’re operating an independent business and long for the competitive advantages of being tied into a national reservations system or receiving local leads generated by a national or regional advertising campaign, you may want to consider joining a franchise affiliation program in your business category.
Often, the fees paid for an affiliation program are considerably lower than those of traditional franchise systems, reflecting the fact that the franchisee is an experienced business owner and needs less training and less support than someone new to the business.
Franchising doesn’t exist in a single investing dimension; it has developed in ways that allow virtually any level of investor in any business situation to participate. The lesson is clear: Keep looking until you find an investment that’s well-structured for your interests and needs, and you’ll probably find it in the franchise arena.
In conclusion, when it comes to developing growth strategies, Small businesses have several options to choose from, depending on various factors and circumstances. We will look into five of the growth strategies that apply to small businesses hoping to improve sales and customer base.
For your business to sustain long-term growth, you must understand what sets it apart from the competition. Identify why customers come to you for a product or service. What makes you relevant, differentiated, and credible?
Read Also: From Idea To Maturity: The 5 Stages Of Business Growth