Key Stages in Growing your Franchise

in association with Lloyds TSB

There is a pattern to the development and growth of a franchise, although no two systems – nor the problems to overcome – will be identical. These are the basic, underlying challenges you should expect to encounter on the route to franchise success.

1. Finding a business idea
You may be running a business already – coffee shop, sign manufacturer, fast print, bookkeeping service – that you want to use as your business idea. Or you may decide to devise an idea from scratch by brainstorming, networking and researching a range of possible options.

2. Organising the first pilot operation
To build a franchise, you should consider devoting at least one year to piloting your basic business idea. This will enable you to test your strategies for sales, marketing, product or service delivery, pricing and staffing. Virtually every business start-up plan has to be changed during the first months of its implementation. High failure rate figures, particularly during the first 30 months after start-up, confirm this. However, if you have an established business which is doing well, you may decide to let this represent your pilot.

3. Establishing transferability
With the pilot in place, your next step will be to set up an identical outlet in a different location. This will test how easy it will be to find new premises, hire new staff, organise a launch and all the other aspects of transferring the skills and success of your original enterprise. It involves a steep learning curve, but there is no more certain test of your business idea’s transferability.

4. Drawing up key documents
Before you can start looking for franchisees, you’ll need three essential documents:

• Operating manual: this puts on paper detailed instructions that will guide your franchisees in running their outlets.
• Franchise contract: this sets out the legal obligations of the franchisor and franchisee.
• Franchise prospectus: your marketing tool for recruiting franchisees.

Expect to put a great deal of time and hard work into each of these. You may also need to pay for external help from management consultants, solicitors and accountants.

5. Arranging financial support
Setting up a franchise system is costly. You may have to invest over £50,000 in development costs to franchise even the least expensive systems, before reaching break-even point. Trying to finance system development purely from franchise sales and royalty fees seldom succeeds. When planning the financial side of your franchise, you could consider bank loans, investment by business partners, or family members – in addition to your own funds.

6. Franchisee recruitment
The tried and tested methods of attracting the interest of potential franchisees are usually quite costly. But with no previous track record or brand awareness to draw upon, spending this money may be unavoidable. Expect to spend money on taking stands at franchise exhibitions and advertising in the national press. Expect to spend time filtering down the 40 or 50 leads that are typically required to yield a single franchisee.

7. Establishing management control and field support systems
As you gain franchisees, to ensure that the system runs smoothly you will need to reinforce your own management team in such areas as: franchisee training and support, advertising, setting up reliable supply lines, and collecting royalties.

8. Achieving break-even
The franchise process is heavily front loaded, in that you need to have in place a tried-and-tested business system, management team and fieldwork support well before a steady flow of money starts to come in from franchisee fees and royalties. For most systems you can expect break-even only after 4-5 years and with 30-40 outlets trading.

9. Communicating with your franchisees
As your franchise continues to grow, business systems will come to replace the personal communications that you used in the early days. For any business, two-way communications are essential – especially if you want to introduce changes. You may need to set up a formal franchisor-franchisee advisory committee, publish company newsletters and fact sheets, and hold national or regional conferences.

10. Surviving post-maturity
Your franchise will have reached ‘maturity’ when regular royalty fees are coming in from the franchisees. It may take five years to reach this point, but this will be no time to relax. You need to be constantly alert for competition in your chosen field, and to come up with improvements to your product or service that will help to keep you ahead. As your army of franchisees continues to grow, the scale of your management support systems should also grow. Here careful management is particularly important. If you expand your support systems too soon, you’ll have to carry high overheads. But if you do so too late, you risk undermining the confidence and goodwill of your franchisees.