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To Franchise or Not To Franchise?

As a retailer, there are three principle ways by which you can grow your business: increasing your volume at your current operation; developing a corporate rollout strategy, and, franchising your business.

While everyone is interested in increasing their volume on a per unit basis, a retail operation ran only increase profitability on a marginal basis by concentrating on single unit success. To grow is to live! And without growth, your concept, no matter how creative and interesting it may be, will get tired and stale over time. As a single location operation, you are catering to a specific market in a specific geographic region and, thus, after a while, you're no longer new and likely not unique to your market.

Growth and long-term success can only be accomplished through a development and roll out strategy of your current operations. Thus, while you want to always maintain and attempt to increase unit sales volumes, growth and riches can only truly be found through ongoing development reaching out into new frontiers and new markets.

While there are several opportunities for growth (corporate roll-out, joint venture partnering, limited partnerships, franchising), one vehicle, that of franchising, has stimulated incredible success for innumerable entrepreneurs. In 1994, there were 1,134 franchisors in the Canadian marketplace who had over 60,000 franchisees or over 50 locations per concept. In that same year, more than $4 of every $10 spent at Canadian retail outlets were spent at franchise outlets, representing in excess or $90 billion in sales. Just south of the border, over 3,400 franchisors were represented by in excess of 600,000 franchisees and provided sales revenue in excess of $800 billion.

What should that mean to you? It means that there is a lot of opportunity for an independent retailer to expand their business by finding qualified people who want to work on their own to participate in the growth of their company.

There are a number of benefits associated with franchising. Initially, it allows a small firm to expand into a large marketplace in a rapid manner.

You, as a franchisor, have the ability to enter a new market and capitalize on the goodwill and community involvement and connections of the franchisee. In addition, you also have quick access to the capital required to grow your business. A franchisee will be expected to build their franchise operation based on their equity and their debt service. As a franchisor you have no interest charges, no underwriting expenses and incur no debt. Additionally, the cost of distribution and marketing are much lower when related to the franchise industry. Franchisees will buy your product, carry the costs on their lines of credit and distribute the product to the marketplace without increasing your debt service or carrying costs.

Finally, if your franchisee is an independently owned and operated business, the franchisee can remain "lean and mean" and not carry a large number of administrative staff. This reduces the overall expense of operation and can be a tremendous benefit to the franchisee in terms of increasing the ultimate cash flow and profit.

Assessing Your Franchisability

Before you can start to franchise, it is imperative that you have a unique product and methodology of distributing that product. Therefore ,you should consider the following:

• Do you currently have a prototype of your operation?
• Do you have a demonstrable profitability over a one or two year period?
• Do you have a unique product?
• Can your operations be standardized?
• Are you prepared to develop and run corporate and franchise operations?
• Can you let go?

The Franchise System

Before you can start franchising, there are several things that need to be set up. An operations policy and procedure manual and employee handbooks are required as a base model for teaching and a constant source of reference for your franchisees. The operations manual is, in essence, the "bible" of your business. It must include accounting procedures, layouts and designs sales and service orientation, a marketing program, risk management practices, hiring and firing procedures, and several other details related to the operation of your business.

You also need to develop a franchise agreement which is tailored to your specific needs. These agreements should be drawn by a lawyer with expertise in the franchise industry and not an "off the shelf" agreement.

You must also be prepared to implement a formalized training program. You will need two training programs: the first is to train the franchisee on how to run your retail operation in their territory; the second instructs the franchisee on how to train their employees to effectively work within the confines of the operation. In essence, the franchisee is becoming your new customer and it is your obligation to provide that customer with the highest level of service possible. This level of service includes an excellent training program and a "train the trainer" program so that operational information can be effectively passed down to their staff.

You will require an accounting and internal control system which can be used by the franchisees in order to maintain in their operations and profitability. This system will also assist franchisees in "red flagging" problem areas within their retail operation. A second system must also be set up which allows you the franchisor, to monitor the sales and operation of your franchisee, thus ensuring you receive the appropriate royalties and payments as required.

You will also require an in-depth marketing program with several component parts. Initially, you will need to be able to sell the franchises by putting together a promotional package for your new franchise concept. This promotional package includes information about the operation, application forms, and other pertinent bits of information which will attract potential franchisees to choose your retail operation over another. You will also be required to develop a franchise marketing program or local store marketing (LSM) program, which will enable your franchisees to have a model and guide by which to effectively promote their individual unit.

What are the Costs of Franchising?

There are several costs related to the development and expansion of your retail operation:

• Legal fees depend on the number and complexity of the documents which must be put together.
• In some cases a corporate image must be developed.
• Training programs must be developed which include the cost of writing a training manual and creating a classroom training program for franchisees.
• An accounting program must be developed to ensure that the franchisees are reporting and filing their royalty information in a satisfactory manner.
• A marketing program must be created to sell franchises and may include promotional literature, audio visual materials and free product samples.
• Consulting fees may be required to develop any or all of the above noted services.

To ensure success, make sure your operation is sufficiently capitalized to go through the rigors of setting up and developing the franchise program.

Additionally, avoid the short cuts, as they will, undoubtedly, negate your ability to roll out a franchise program successfully.

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