Franchising – building an empire

McDonald’s did it, 7-Eleven did it and Boost Juice did it, too. Imagine creating an entire empire from the small business seed you have sown and helped prosper over the years.

While the prospect of expanding your business empire is quite exciting, keep in mind that franchising does come with its risks, warns Mark Attard, CEO of San Churro, a chain of Spanish hot chocolate cafes.

“I think a lot of people look at franchising as potentially an easy way to grow your business quickly, but there’s nothing easy about it,” he says.

In Attard’s experience, one of the biggest traps for small business owners is not properly planning ahead. To be successful, you need to constantly review your model and how it works, especially as you add more and more stores to your franchise.

Are you ready?

Before you take the plunge into a full-blown franchising operation, your business should have a strong record of profitability, so it’s more likely that you will have the same kind of financial success in future stores.

According to Steve Wright, executive director at the Franchise Council of Australia, if you currently own a business and you’re considering franchising it, before putting your plan into action, it’s preferable to first run your company for two years in different locations with slightly different demographics.

“If you’ve gotten to three stores and they’re in different places that are noticeably different, and managing them requires some adjustments to be made, then you can have a greater confidence that you’re on the path to understanding how to implement a network,” Wright suggests.

Building a great business model

Creating a franchise business model is very different from producing one for your run-of-the-mill, independently-owned business and there are a few more considerations that you need to keep at the top of your mind before you launch.

As Stephen Giles, commercial and corporate partner at Norton Rose explains, “It’s not about a business opportunity that might work. That’s franchising maybe 15 years ago, where it was a business opportunity where franchisees took their chances.”

Seeking an experienced lawyer who specializes in franchising to help you build a viable model will ensure success for both you and your franchisees. According to Giles, franchisors sometimes build a model which is successful for their franchisees but doesn’t generate enough revenue for them to make it worthwhile.

“There is a general rule of thumb that unless you can get to critical mass quickly (at least 20 to 25 outlets) the franchisor is going to struggle to give the support and assistance that the franchisees require,” he warns.

San Churro’s Attard emphasizes the importance of investing in specialist professionals to help you with matters in which you don’t have much expertise. This is particularly important in the early stages of launching your franchise.

“You’re up against some big players in the franchising space and you need to compete with them for both customers and potential franchisees – that means you need to look at least as good, as well as demonstrate that you have the systems in place to match their business models. Not easy to do when you have one or two stores,” he says.

Observe how your business model functions in the marketplace, think about why it may be successful and whether it can be replicated. It needs to be capable of systemization, so less experienced businesspeople can be trained to become successful operators, says Norton Rose’s Giles. Hopefully, it should also be able to work in different areas and suburbs, taking into consideration various socio-economic and cultural factors of each region.

Attard points out that many business owners think they may be ready to franchise because they own a profitable store, but this may be large because of the competent team running it, not the model itself. A common trap for a business owner is not realizing just how dependent the success of their business may be on the people behind the counter.

“You may have a cool café that works well in one location, but it might not be just because of the location. It might be because you’ve got a good operator, who’s really hospitality-savvy and knows what he’s doing, and knows his customers,” he explains.

“That’s not a franchisable model. Is it because of his personality that this place is working well? Is it a personality you can transfer to another site? That’s where it gets difficult.”

The perfect fit

“It is very important to select franchisee partners carefully. If they underperform, this will be a drag down the entire system, including the brand owners. If they fail, this may cause significant costs for the system,” says Franchise Council of Australia’s Wright.

According to Norton Rose’s Giles, first-time franchisors often make the mistake of thinking that finding franchisees is an easy task.

“I think at the moment, Australia has high levels of employment and there are 1,100 different franchise systems competing for franchisees, so it’s not easy to find people who are prepared to take a business risk and buy a franchise,” he explains.

Effective ways of finding franchisees are posting an ad in the Franchise Council of Australia’s online Franchise Business Directory, or exhibiting at the Franchising Expos which take place in major capital cities.

Ideally, the perfect franchisee would already have had experience running a small business in the industry in which your company is in, such as retail, fashion, or hospitality.

However, one important characteristic of the ideal franchisee is his or her ability to fit in franchising and whether he or she will fit a particular system, says Franchise Council of Australia’s Wright. He also suggests franchisors approach an organization like the Franchise Relationships Institute to help find candidates.

According to San Churro’s Attard, passion is the most important trait to look for in a potential franchisee.

“Especially in what we do, we need people who love what they do and love chocolate and love talking about it and love bringing that experience and spreading it to other people,” he says. “If you haven’t got that, you can be the best business mind and it’s still going to miss something and probably not work.”

Make sure you have an experienced franchise lawyer on board who can help you draft a franchise agreement, detailing the nature of your relationship with the franchisees, such as each of your rights and responsibilities, and the fees which your franchisee must pay you to work in the business.

Your lawyer will also help you understand the ins and outs of the Franchising Code of Conduct, a federal law that outlines the relationship between a franchisor and franchisee, the key element of which is disclosure.

This means you need to keep your franchisees up to date with detailed information about the company and its progress with a disclosure document.

The franchise industry is highly regulated, so it’s essential you be on top of its changes on a regular basis. Failure to follow the Franchising Code of Conduct may involve an investigation by the Australian Competition and Consumer Commission into your business practices.