Do you have a brand that could be franchised? When should you consider franchising? What are the key components to launching your franchise program?
There are many reasons founders and ownership groups consider looking at growing their brands using the franchise model. On the quick take, franchising allows you to grow your brand without the capital outlay with a revenue stream taken off the top-line sales of the franchisee. The top-line % revenue stream is generally not mitigated by rising costs in labor or commodities, while the franchisee must have a viable business from the bottom-line revenues. The franchisee bears the burden of absorbing any rise in costs along with paying the royalties and any other fees to the franchisor.
As I outline all of the considerations of franchising your brand, this is the number one consideration, question and ongoing mindset you must have as a franchisor: Consider this: Is everyone making money in the relationship?
What is Franchising and is your brand a franchise brand or not?
Franchising is a method of distributing products or services involving a franchisor. The Franchisor has established the brand’s trademarks, operating systems, and processes to create a business system. A franchisee will pay an initial franchise fee to become a franchisee and will generally pay an ongoing royalty fee for the right to do business under the franchisor's name and system. The ongoing royalty is often a % of sales generated from the franchised business and/ or the franchisee may be required to purchase certain products or use required systems where the franchisor can generate income.
This is a very broad definition of what can be a very complicated system. Both the franchisor and franchisee have very distinct responsibilities, but the relationship should be a mutually beneficial relationship. The franchisor can expand their business with partners, while the franchisee can take advantage of the expertise and support of the franchisor.
In broad terms, if you have a restaurant and have established all of the operating procedures, manuals, intellectual property, and trademarks. You can also provide all of the know-how to operate the business – you technically have what it takes to franchise. But is your brand a franchise brand?
There are several points to consider:
What is the unique positioning and offering of your brand and how do you differentiate yourself from the competition? Often called your “white space”.
There are many restaurant franchises that you could experience, and if blindfolded, wouldn’t be able to tell the difference between them. Sometimes the demand for a product or service is enough to drive a solid franchise program… for a while. We’ve all seen a “hot concept” emerge and next thing you know there are 20 different (but not so different) players in the space. Oftentimes, the first to market or the biggest wins out and many of the smaller franchisors in the space go away. Once again, this is a consideration but whether you are going to franchise or not, you should always be looking at how you can distinguish your brand from your competitors.
How difficult is it to operate your brand?
You may own and operate an amazing brand, with great unit-level economics, clear “white space” and with the strong oversight of your operations and support team, you deliver an amazing product and experience. The challenge in franchising is translating not only your standards and procedures, but you are also adding another layer between you and how you operate the brand as well as your franchise partner and their team. How YOU operate your brand and how familiar and experienced you are with the nuance and vision has to be able to be taught and executed by others who are not your employees or members of your team. In preparing to franchise, it is important to look at your overall processes and procedures and determine if they are written to be executed successfully by an average performer. This isn’t to say that your franchisees or their operators are average or below, but it’s important to simplify as much as possible, eliminate procedures that are not critical to the brand essence, and make it as simplified as possible. Often for restaurants, this involves having complicated recipe items produced in a commissary or further processed products (pre-cut meats or produce).
Are you ready for opinions about your brand?
This is often the hardest for founder-led brands. While these brands are generally the most successful, it is often hard for the founder to have new partners, that have invested in your brand talk about “your baby." It is important to remember, even though they are the franchisee, and they are operating under your brand, they will bring a fresh set of eyes and oftentimes have amazing ideas of how to enhance the menu or procedures. The Big Mac and Egg McMuffin sandwiches are two of the most popular menu items at McDonalds, both created by franchisees.
Does everybody make money?
Remember, the franchisee is investing money, oftentimes signing leases and taking out bank loans to open and operate your franchise. I like to look at franchisees as “intra-prenuers." They are taking many of the same financial risks as the founder but must also have some latitude in how they operate their business provided they operate within the prescribed guidelines of the franchisor. The franchisee should own their results, their sales, and success while with the support of the franchisor, the brand consistency is maintained. Franchisees will want to look at the return on their investment, the cost to open a franchised location, and your success/ failure history. A standard of a sales to investment ratio of 2:1 is usually a good indicator of a return. As a goal, the franchisee should net double what the franchisor takes in royalties as a minimum. The more profitable the franchisee, they will continue to build the brand and validate the opportunity with future franchisees.
When and Why Should You Consider Franchising?
Looking at when is really after considering all of the points of whether or not you have a brand that could be franchised.
When To Consider Franchising:
Evaluate your infrastructure to make sure you have the team in place to support the franchisees through the development, training, opening, and ongoing operations of the business. Many times, you hear franchisors that started franchising with little or no support for the franchisees and later added support as the royalty revenues increased. Those early franchisees are the pioneers in growing your brand and need the same support that franchisee #50 would receive.
SOP and IP Complete
It is important that you have created all of the necessary systems and processes needed to grow your brand. If you have already opened a second location, you have most likely completed most of this. It is important your standard operating procedures are clearly written and communicated to avoid any confusion or reason for a franchisee to have to figure it out on their own. Recipes, operations manuals, training programs, and all of the tools and processes to help the franchisee operate a successful business.
Securing your intellectual property can involve registering for trademarks on your logo (word script and design), any signature menu items or marketing slogans may also be eligible for a trademark or service mark. These along with all your operating procedures and standards make up your intellectual property.
Educate Yourself on Being a Great Franchisor
Join the IFA and meet with other franchisors. Most will share their stories (good and bad) of starting their franchise program and freely share advice. There are numerous legal requirements and guidelines that exist to be approved and operate as a franchisor. The guidance of a good franchise attorney will help you understand how to navigate this process.
Beyond the legal requirements, the moral duty of being a great franchisor is most important. Franchisees trust that you will be there to help and guide them along this journey. When you become a franchisor, the franchisee's success and well-being should be your and your team’s primary focus and concern as well as continuing to be a good steward for the brand. A franchisee once told me, “When you start signing the front of the check, and not the back… you’ll understand what it’s like to be a franchisee”.
There are many reasons, and I am a huge advocate and fan of the franchise model. Franchising allows you to grow your brand at a much faster rate than you could open your own corporately owned locations. If you have checked all of the boxes to this point, then be sure to align on why you want to franchise. All of these can tie together to make it the best decision for your brand.
- Scale faster and beat the competition to market.
- Establish a strong supply chain platform with multiple locations opening in markets for efficiency.
- Scale your ability to contract and buy goods and services at a better price for your system.
- Create opportunities to change lives by providing a business model for franchisees to grow and control their own destiny.
- From a business standpoint, the franchisor model is strong requiring less human capital and financial investment.
- Bring your unique offering, whether it's unique regional cuisine and service or a one-of-a-kind experience, across the region, the country, and perhaps internationally.
Franchising your brand is one of the biggest decisions and opportunities you will consider as a founder or operator. While the rewards outweigh many of the risks, in my opinion, it is important to make sure you have answered all the questions and set your organization and your future franchisees up for success. Get involved in the industry, meet other franchisors, and ask as many questions from successful and unsuccessful franchisors and franchisees as you can. It will help guide you in setting up your own best-in-class franchise system for the future.
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