Published on February 21, 2016
Posted in: Blog, Dixie Ho, Marta Jankovic
As franchising continues to expand across industries and sectors, the fundamentals of this established business model remain constant. Whether a franchise candidate is considering purchasing a casual dining restaurant or a car repair service, there are certain critical aspects of a franchise that a candidate should consider before investing in the business. This blog post is part 1 of a 2-part post highlighting ten such considerations.
1. The Concept
At its core, a franchise is a business with a unique brand. Since a brand is inevitably linked to a company’s name and logo, it is essential to investigate whether a franchise has well-protected trade-marks. A franchise concept is often focused on unique business methods that distinguish it from its competitors. If a franchise has a strong and positive reputation, its franchisees will benefit by being associated with a popular and robust franchise concept. Ultimately, the purchase of a franchise must give the franchisee a “head start”, whether by facilitating the setup of the business, or by attracting customers through the strength of the name on the sign.
2. Replicable Formula: The System
The theory behind franchising is that it lowers business risk by allowing a franchisee to replicate an established business concept with a proven track record. The standardization of certain key business processes, such as store appearance, supplies, operations, marketing techniques, customer service, etc. is often referred to as a franchise “system”. Most commonly, this “system” is detailed in an operations manual that the franchisee obtains when it acquires the franchise. A franchise agreement may also specify the exclusive use of certain building contractors, equipment suppliers, and/or any other service-providers that the franchisor may designate. Franchise candidates should learn as much about a “system” as possible, although franchisors may withhold certain information, such as trade secrets that are unique to the franchise. In order to fill this gap, franchise candidates should contact existing franchisees within the “system” to learn about their experience working in the “system” and replicating it in the operation of their business.
A successfully replicated formula translates into multiple business locations that have a consistent look, feel and customer experience. Special consideration should be given when bringing a franchise concept into a new market that differs geographically and/or demographically from a market in which it is well-established. What makes a concept successful in one market may not apply in an untested area, and may lower the likelihood that the formula will be successfully replicated.
3. The Fit
It may seem obvious, but a franchise candidate should consider how a particular franchise fits with his or her lifestyle, personal style and taste, the amount of time available to commit, and any previous business experience that the candidate may have. A franchisee may be drawn to a particular concept because of prior involvement in a similar industry. If that is not the case, it’s especially important for franchisees to obtain insight into whether a particular franchise is a good fit for them. A franchisee can expect to be heavily involved in the franchise. This is often the case at the outset when a franchisee has limited financial ability to hire additional staff. A franchise operator can also be called “into action” at unexpected times and on very short notice for various reasons, including being short-staffed or experiencing issues at a tenant at the franchise premises. For these reasons, a franchise operator should be comfortable with the manner and extent of direct involvement required of them in the day-to-day operations of the business. Some franchisors hold “discovery days”, which franchisees may find insightful for understanding the life of a franchise operator in a particular system.
4. Business Methods
A popular saying in franchising is that “you’re in business for yourself, but not by yourself”. As mentioned, good franchise systems have established business methods and tools, including operational support available to franchisees. Franchisees should ensure that a franchisor has well-documented procedures, such as detailed operations manuals and guides for standard operating methods. Although franchisors generally will not provide these confidential documents for inspection in advance, they will often provide a table of contents of their operations manual in their franchise disclosure document. , Franchisees should ask about the type and extent of support provided by a franchisor , such as the number of locations managed by regional franchise directors, the frequency of their visits to each location, and their evaluation criteria of operations.
The fast-paced nature of today’s economy also demands that franchisors continue to improve and develop their systems over time, and is particularly important to franchisees who are investing in theirfranchised business for the term of a franchise agreement. At the same time, changes to a franchise system may have financial implications on franchisees, since they are often expected to implement new business methods at their own cost. It is important to ascertain how a franchisor balances the dual nature of maintaining currency while being sensitive to system changes and improvements.
5. Supply chain and other business relationships
The designation by a franchisor of the exclusive use of certain suppliers ensures consistency across the system, and can also benefit franchisees in other ways. Certain franchises provide access to a unique and proprietary product, such as a secret recipe for a restaurant, or an exclusive teaching method for a tutoring business. Other franchises harness the power of numbers of its franchisees to negotiate rebates or lower prices with suppliers. Note that it is not uncommon for these types of volume rebates or discounts are not always passed on to the franchisee. If the franchisor does not pass on these savings, franchisees should ensure that supplies are being sold to them at competitive market rates. For example, a franchisee that is required to use the franchisor, or a contractor designated by the franchisor, as its general contractor to build out a franchise location should carefully review the competitiveness of the constructions costs, including who is responsible for overruns. Franchisees may also benefit from relationships that a franchisor establishes with banks to obtain or to fast-track the approval of financing. Finally, large retail property centres often deal primarily or exclusively with franchisors, making it difficult for entrepreneurs to otherwise secure locations at these sites.
In Part 1 of this 2-part blog post, we have identified the items that a franchise candidate should consider when deciding if a particular franchise concept will be a good “fit” based on a candidate’s personal preferences, and on the reputability and functionality of a franchise “system” and its formula. We have also identified the significance of having effective operational support from a franchisor, and access to an efficient supply chain. In Part 2, we will dig deeper into how to identify a “good” franchisor, including considering its business history and growth strategy, its ability to adapt to new technologies, and its willingness to negotiate with franchisees. Ultimately, a franchise candidate’s long-term goals, both professional and personal, should be in harmony with the franchisor’s business philosophy and the franchise concept being acquired.