Get it right and transitioning to a franchise model could be the most efficient and effective way to grow your business, says Elizabeth Hughes from The Accountancy Partnership
Business growth is a primary goal of any entrepreneur. Done correctly, expansion leads to increased market share, and profitability, establishing the business as a leading sector authority.
However, growing a business organically is an incredibly time-consuming process – costly both in terms of capital and labour – and challenges such as these often prevent entrepreneurs from securing the required resources to take their organisation to the next level. For these owners, transitioning their business into a franchise may be the best solution to achieve their growth goals.
Why franchise a business?
By franchising, entrepreneurs create the possibility of expanding their business to multiple new locations, while simultaneously acquiring a larger market share and greater dominance within their arena.
Likewise, international markets may take years to break into.
However, franchising prevents business owners from being limited to domestic growth by working with a franchisee that holds in-depth knowledge of the local market. This allows business owners to reduce their dependence on domestic demand and generate new global revenue streams an opportunity that may not be possible without transforming a business into a franchise first.
Between issues relating to cash flow and financial management, forward planning, and recruiting staff with the correct skillsets, business owners face several challenges when trying to grow their business. Given the current extent of competition, along with a global skills shortage, it’s vital that business owners establish their company as a market leader within their industry before key competitors do.
Reduce the risk associated with expansion
Capital constraints are one of the most common barriers to expansion, but when turning an established business into a franchise these are significantly reduced.
With lending institutions increasing loan eligibility requirements, business owners are often forced to source additional forms of capital to fund their desired growth, which enhances their risk of entering debt. However, with a franchise model, franchisees are responsible for the associated costs relating to the business and its growth, and having a financial interest in making the operation a success often causes the performance of the franchise to increase drastically. As profitability is calculated on revenue rather than prof ts, business owners will experience clear increases in their profits once a stream of franchises is established.
Is the business suitable for franchising?
Although franchising creates a number of new possibilities for business owners, entrepreneurs must first ensure that their business is suited to the requirements of the franchise model.
Prospective franchisors must ask themselves whether there is a compelling reason why someone would want to purchase a preexisting business rather than beginning a start-up themselves. Although setting up alone can be a daunting prospect, franchisees are limited by the regulations of the franchisor. As they will be unable to use their own brand name, have sole discretion regarding the direction of the business, or could be limited as to the location of the business, franchisees must be convinced that the structure will support their goals and offer greater returns and long-term success than if they were to set up alone.
Does the business model work?
To open a franchise, the business model must have successfully operated for a sustained period of time, usually for at least two years, and be able to demonstrate financial success and profitability. No potential franchisee will be willing to invest in a business model that can’t demonstrate these factors.
Likewise, a crucial question relating to the original business model is whether it can be easily replicated. Owners must consider whether the business is easily transferable to other locations and if it’s possible to teach new staff members the essential skills for daily operations.
Once entrepreneurs have decided that their business is suitable to become a franchise, they must assess their ongoing responsibilities as a franchisor.
• Operations manual
The franchisor must provide franchisees with an operations manual that clearly lists how the business should be operated. This must include guides for sales, marketing, and operations, as well as stating the parameters for decisions relating to these factors.
• Financial model
Business owners must consider the fees that they’ll charge to new franchisees, as well as ongoing costs for management and associated operational fees. Potential franchisees must be thoroughly informed of these costs, along with cash flow and profit-and-loss forecasts, so they know what’s expected of them throughout the first years of business.
• Support and training
Although franchisors should outline their expectations for franchisees, they should also be prepared to equip new owners with the support and training to achieve these goals. Right from the beginning, franchisors should ensure comprehensive training and development are provided to give the best possible chance to make the franchise a success, as well as establish an ongoing support network.
While providing these resources is essential, ensuring that potential franchisees are a true match for the business is just as crucial. They must be self-motivated, share a desire to grow the franchise, and be able to operate on their own initiative.
Seek specialist support
In order to give a franchise the best chance of succeeding, entrepreneurs must get the setup right from the beginning. To do this, it’s essential that prospective franchisors seek specialist advice about each step, from operations manuals to financial models, franchise agreements to intellectual property protection for branding. The more in-depth the setup process is, and the more support provided to franchisees, the greater the chance of developing a franchise that delivers on the long-term goals for both the business owner and franchisee.
Elizabeth Hughes is content editor at The Accountancy Partnership, which offers online accountancy services. Visit theaccountancy.co.uk