16 Sep How to build a robust franchise model?
This article is a continuation to my previous article on franchise model wherein I gave few tips in form of questions that every franchisee and franchisor need to ask prior to moving ahead with their franchising plans.
Click & Read my previous article here: https://retailritesh.com/2018/09/09/franchising/
I was overwhelmed by the response from my connections & few of them wrote to me asking me to clarify and write another article highlighting the model in terms of margins. My article is my attempt to answer these queries pertaining to margin structure.
The most critical element for any franchise manager is to play a balancing act between both franchisor and franchisee. He/ she has to think like an entrepreneur all the time taking care of both franchisors & franchisee’s interests.
Franchising model encompasses & provides independence to the franchisee to run & operate his business but at the same time provides protocols & systems that comes by having brand affiliations or along with franchise agreements.
It is the main KPI (key performance indicator) for any franchise manager to manage interests & expectations of both parties so that the model becomes profitable.
How to play a balancing act?
Franchise managers need to spend their efforts on creating systems and process flows:
- Robust franchise agreements
- Detailed training manuals and its implementation with internal audit checks.
- Comprehensive operating manuals, guidelines, brand guidelines etc.
- Strong policies and procedures – try using automated tools here in case you have merchandise/products to handle.
From my practical experience of franchising fashion apparels and beauty brands, it is advisable to ensure that your franchise partner uses your Point Of Sales systems so that you can monitor his sales and stock levels closely and implement PUSH merchandise replenishment strategy from time to time.
It would result in faster replenishments and stock rotations thus resulting in more sales and faster break even for the franchisees.
Types of franchise models:
There are multiple ways of creating franchise models & put to test. Most common practices are:
- Collection of franchise fees for territory allocation (master franchisee) on sign up and then X amount per location added in that territory, coupled with royalty i.e. % of sales on per annum basis.
- Some franchisors work on X% of your gross profits.
- Some franchisors sell their products to the franchisee on % discount and advise them on their selling retail prices, thus ensuring that product is sold at uniform base pricing globally.
- Some franchisors help franchisee build their first store by providing them with shop fittings and furniture at subsidized rates and with longer pay-back periods.
Basically, there are multiple ways you can make your franchise model customized and suited to your requirements.
Foremost point to remember, “Always think from franchisee’s perspective and ask yourself, will you buy this franchise yourself with these commercials?”. If the answer is yes, then you are on right track.
Profitability varies from business to business, and industry to industry. How well a business is managed by the owner will have a significant impact on how profitable it ultimately is.
I’ve seen 1 million dirhams businesses that don’t generate any profits – or worse, are losing money.
I’ve also seen smaller businesses that generate only Dhs100,000 to Dhs 200,000 in gross sales, yet turn a net profit of 40 percent.
The key is to not let big top line numbers blur your judgment. The bottom line of a business is much more important.
Work out your COGS (cost of goods sold) ratio or % so that it gives enough space to your franchisee to sell and make some decent net profit post incurring all the expenses (rent, salaries, equipment, taxes, depreciation, operating costs etc).
Remember: Your franchisee’s success would determine your success as a franchisor.
Case study: Wow momo by Sagar daryani
This video would give you some inspiration to start up your business and for your information, wow momo is one of the fastest growing franchise in India.
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.