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The Franchise Option

Ever consider franchising your business? DOUGLAS FISHER looks the secrets of franchising success
The number of restaurants franchising today seem to be growing at a similar or better rate than TSE, DOW JONES and NASDEQ. It seems that everyone, whether successful or not, is trying to franchise their business, and many simply for the reason of listing their business as an Initial Public Offering (IPO) on one of these exchanges, going after the ever elusive "Quick Buck." During the 1990s there was a boom in the number of restaurants franchising, resulting in a tremendous amount of marginal success and unprecedented failure. As a result, many in the industry believe that less than a third of all restaurant franchises legitimately provide their franchisees with an opportunity to regain their investment and earn a reasonable living. The problem comes when unsuccessful and marginal operators believe they can find a road to recovery by convincing others to purchase their concept and attracting initial franchise fees to offset their operations, something that has been a blemish on the industry. But while not all restaurants can be turned into successful franchise systems, if you really want to try and grab the purse strings of the IPO, your franchise system should be developed with a legitimate base. The following should provide ideas on how to develop your business so that you can, if you have the "right stuff," capitalize, on the franchising trend.

Trend or Fad?

Is your concept riding the wave of a trend or a fad? Trends include concepts such as steakhouses and coffee shops which have proven, long-lasting market appeal, while fads include concepts with much shorter appeal, such as the croissant and bagel restaurants which proliferated and then bombed in the 1990s. If your concept is based on a long-term trend, it may be franchisable. However, if it falls into the fad category, a few units may be successful for a short term but the concept will not be able to stand the rigours of the market.

Do You Have What it Takes?

To be considered a legitimate franchise you should have at least two or three restaurants in operation in a variety of markets. This will demonstrate:

• Which demographics best support the concept.
• Which locations and characteristics best support your concept (for example, store-front, mall, strip plaza or office).
• Whether or not the operations are consistently profitable.
• A proven year-over-year sales increase.
• A strong, recognizable name in the market which has a proven track record of success.
• A willingness to relinquish control of customer contact to an independent operator.

Strategic Planning

Once you’re able to prove your concept is well targeted to its market and has a successful track record, you may be ready to set up your franchise system. The first step is to gather your key management and operations personnel and conduct a detailed strategic planning session. Strategic planning is best conducted over four six- to eight-hour sessions that include a detailed look at your market and your competition. Your team should begin by conducting a business review allowing each member to define their individual goals and objectives, as well as to determine where your business is today.

Next, your team should conduct a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) in three phases: the first analyzing your internal strengths and weaknesses; the second reviewing your company’s external threats and weaknesses; and finally, highlighting the issues at hand and prioritizing those issues for action. Based on these findings you can then develop an action plan, including your vision, strategy, mission statement and value statement. This strategic plan will enable you to set a five-year projection for growth and will assign responsibility for specific tasks to specific people.

Business Planning

Every franchise operation requires a detailed business plan. This plan arises from the strategic planning process and sets out the business objectives and financial planning of the new franchise company, while detailing growth and location strategies.

Because additional head office staff and resources will be required to properly support the franchise organization as it grows, the business plan should also detail corporate expansion. The best organizations have strong business plans which ensure that they meet their rollout, financial and operational obligations.

Legal Considerations

In order to franchise companies must also meet several legal obligations, while taking steps to protect their operations from being used by another system.

The best franchisors often retain specialized legal counsel and management consultants who work primarily in the field of franchising and who will offer a better understanding of the current trends in franchising, as well as ideas on how to "bullet-proof" your organization. The primary issues that must be considered are:

• Developing your franchise agreement.
• Obtaining trademarks for your logo, marks, slogans and other similar proprietary documents.
• Copyrighting your operation’s documents and systems.
• Ensuring that you have the rights to your company name. Many franchisors actually discover during the strategic planning stage that another company was already using the same name before them.
• Developing a standard lease agreement, especially if you’re planning to be the head tenant in order to control the lease.

Codifying Operations

Because you’re selling both the reputation of your business and your operational expertise, customer relations and training, it’s extremely important that you codify your operations through resource materials that define your operating procedures. These include:

Operations Manuals — These should cover all aspects of your business, including your operating philosophy, staffing requirements, set-up procedures, problem solving methods, customer-service standards, job descriptions and staff motivation procedures, selling and marketing strategies, accounting and record keeping procedures, internal control procedures and sanitation standards.

Recipe Books — Recipe manuals should include all product specifications and outline each recipe, including quality requirements, in detail.

Local Store Marketing (LSM) — A LSM procedure should be available to allow franchisees to develop a local marketing strategy to augment the chain’s regional or national marketing program. This should outline issues such as how to improve client relations, develop catering and take-out business and increase unit sales. Franchisors should update the LSM annually to provide franchisees with marketing strategies for the year.

A Training Program — Companies must develop a training program that outlines how franchisees and employees should be trained. The program must feature hands-on training and classroom work during which franchisees learn about customer service, operating philosophy and, most importantly, how to think for themselves within a restaurant environment.

Organizational Structure

Successful franchise companies require an organizational structure with adequate staff to support current operations and to recruit new franchisees. Initially, a new franchise organization needs a director of Operations and director of Franchising. The director of Operations will oversee franchisee training, start-up and day-to-day concerns. As the number of franchisees increase, they will build an operations structure that will eventually oversee field supervisors, operations training personnel, administration, design and construction, and location assessment and evaluation. The director of Franchising will oversee franchisee recruitment, franchisee marketing and restaurant marketing. Eventually, a Marketing director will take over the responsibility of marketing the operation. The Franchising director must also ensure that new franchisees are chosen because they meet a specific profile suggesting that with the right training they will be able to build sales, rather than the fact that they simply have the money to buy into your concept.

Growth Strategies

Next on the agenda is deciding how to grow your business. The first rule to growth is to grow in "clusters," while the second is to ensure that you have more units than your franchisees during the initial growth periods. Growing in clusters means opening units in the same area and then growing from a central core outwards. It will be much more costly to monitor and support restaurants across the country than those which are within driving distance of one another.

By ensuring that you have more units than your franchisees, at least during the development of your first 20 units, you will be able to maintain control over your organization. Remember that should your franchisees become more powerful than you during this phase they may be able to leverage their real estate and their royalties to force you into a position that may not be tenable. Also, if you franchise all or most of your restaurants early in the process you will quickly become dependant on the royalty stream, something that could lead to serious financial trouble should the franchisees cut that royalty stream off by refusing to make payments for a period of time.

There are typically three main growth strategies in the franchise industry. These include:

Individual Unit Growth — Any reasonable franchise company should begin by franchising one unit at a time in order to check the strengths and weaknesses of the franchisees, as well as to gauge customer reaction to the rollout strategy. This will also allow you to grow your franchise organization in a systematic and methodical manner. The rollout of your first 20 units should be developed on a unit-by-unit basis.

Area Development Growth — This is an ideal way to enter communities in which you have little business or community orientation or presence, and in which you may have difficulty finding individual franchisees. An area developer is a franchisee who has the rights to develop and operate your restaurants within a specific market area. Certain minimum requirements should be placed on the area developer as to how many restaurants must be opened within a specific period of time and what their rollout schedule will be. Obviously you will have to find an area developer with community ties and the financial strength to open several units.

Master Franchising — By granting a master franchise license, the franchisor gives a master franchisee the rights to sub-franchise restaurants. The master franchisee in turn agrees to develop and operate the business in a specific territory (province, state or country) according to a certain rollout plan. The franchisor and master franchisee will then split franchise and royalty fees. Master franchising is an excellent way to enter large potential growth areas which are not within your region or within your control. For instance, many Eastern Canadian companies sell the master franchise rights to Western Canada, and most sell the master rights to other countries where they want to expand.

While franchising is an ideal way to grow successful businesses, it is not a way to save a floundering operation. However, through intelligent and planned franchise growth you can achieve significant financial success, and can then consider going public. At the same time though you must have a viable core business which you are committed to through some sort of significant investment, and you must have the systems and organization in place to support your franchisees. Finally, a successful franchisor must have the patience to build an operation over a reasonable period of time.

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