09 Sep Franchising – Is it too hot to handle?
Recently, I met with one of my linkedin connections and we ended up in discussing franchise management & franchising. As this is one topic that I am very passionate about and had a privilege of working under both franchisor and franchisee in the past. I would dedicate this article to my mentors/ bosses who gave me the opportunity to learn about franchising in a more practical way rather than a theoretical manner.
What is franchising?
Franchising is a business relationship in which the franchisor (the owner of the business providing the product or service) assigns to independent people (the franchisees) the right to market and distribute the franchisor’s goods or service and to use the business name for a fixed period of time.
“Franchising works by combining the drive and energy of the entrepreneur with the experience and expertise of the franchisor.”
Benefits of franchising for entrepreneurs?
- Be your own boss.
- Tested business model
- Training & Marketing support
- Support in site/location selection
- Networking with peers/partners in other territories to learn from their experiences.
- The cost advantage of bulk purchasing by the franchisor and the cost benefits are usually passed onto the franchisees.
- Pride of ownership of franchised brand in an exclusive territory.
You may also check out my article on entrepreneurship here:https://retailritesh.com/2018/08/06/start-a-business-not-a-startup/
So why do franchise system fail to deliver?
The main reason for the system to break down is lack of managing expectations both from franchisor’s & franchisee’s side. This happens when the franchisor starts seeing franchising as the fastest way to grow their riches. They are interested in signing of new franchisees and get their annual fees in return. They fail to understand that it is the success of their franchisees that will make their mother brand succeed in new territory. “Take care of your franchisees and they shall in return take care of your business and your brand in their territories” is one of the mantras for the success of the franchise system.
Few questions need to be asked prior to taking any brand on franchising:
- Can you make money with this franchise? What are your COGS? Royalty or fees payback period? Is the franchisor ready to provide initial capex support?
- Is the franchisor making money/ where is the money coming from? Do they have a good network of financial partners/investors/ banking institutions?
- Does the franchisor understand franchising?
- Are other franchisees happy with their investments?
Word of caution for franchisees:
- Do your due diligence: Never get carried away by big promises made by franchisors, ensure you understand all the finer details in a franchise agreement or hire a professional legal advisor to review all the agreements. Ask for franchisors income statements as you need to ensure that your franchisor’s financial health is sound enough to ensure steady supply chain of goods and services to your newly formed franchised business.
- Many people mistakenly believe a franchise, although higher cost, is a lower risk option – but it is not. When the franchisor is asking for 7% of turnover per month for license fees and up to 3% of turnover per month for a marketing fund, the franchisee has a lot of work to do before they break even. Not to mention the cost of borrowing to buy the franchise and ongoing fixed cost base.
- Pricing is a common issue in the startup of a franchise. Finding the price point between cost and profit is a must to be successful. Every business needs to fill a gap in a market with its product or service hence every franchisee need to do research as to how much his customers would be willing to pay for availing a product or service from the franchised brand. Most of the times, franchisor fail in reading this aspect of the market as they tend to evaluate multiple territories with their own base territory pricing which may or may not hold true. The best way is to use the Big Mac index while devising pricing in multiple territories.
To sum up, not all business models will be successful, nor all franchise models would ensure your success. Hence prior to deciding to franchise your business or to purchasing an existing franchise, make sure to evaluate both pros and cons.
I have tried my best to provide an initial checklist for both franchisor and franchisee which they can follow in order to make their business successful.
In case any of my connections or fraternity member wants to know more about franchising or want insights to develop their franchise infrastructure then, you already know who your “Go-to” person is. I can be reached on firstname.lastname@example.org for any queries.
About the author:
Ritesh Mohan is a passionate retail professional with over 20 years in the Retail sector, handling some of the biggest brands in beauty, fashion and fragrances retail & FMCG sector. He has been instrumental in the growth of some of the regional brands as well in the Middle East region. He specializes in Retail management, Product development and Brand management, Retail Operations, Sales Management, and Franchising & Business Management. He strongly believes in empowering business owners with his wisdom & experience of around two decades in the industry.