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Rapid Scaling a business by franchising

Walter Hay

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Over the past few years I have posted frequently on the subject of franchising, and as requested by some members I have at last released my book on the subject.

The title is:
FRANCHISE YOUR WAY TO THE FASTLANE
SCALING ON STEROIDS
This thread will possibly become an AMA, but not only do I intend answering questions, I also intend providing helpful information by assembling extracts from some of those numerous posts.

In searching for them, I also found a lot of old threads dealing with franchising, and the majority of them dealt with the subject from the point of view of the merits or otherwise of buying a franchise.

I would like to make it clear at the start that having been a franchisor for over 20 years I would never buy a franchise. The industry is riddled with cheap and nasty “buy a job” systems that could only appeal to people lacking any entrepreneurial ability. It also has a good share of businesses in which failures are likely, sometimes because they are deliberately structured to cause that.

My view is that real entrepreneurs, with a mindset to provide value, would make ideal franchisors. With that approach, they could franchise a business they already own, provided it was suitable for franchising, and the rate of growth is potentially awesome.

If you are attracted by the idea of “growth on steroids”, but don't own a suitable business, you can do it by buying a suitable business and franchising that! To help members decide whether their business or one they buy might be suitable for franchising, here is the relevant chapter from my book:
9. How To Decide If A Business Is Suitable For Franchising.

There are a number of vital factors to consider:
  • The business must have a proven track record, with a credible reputation and some kind of distinctive factor, (USP). It must have a sustainable competitive advantage. That credibility must be evident in the eyes of prospective franchisees.
  • Credibility can be apparent in various ways such as length of time the business has successfully operated, its obvious prosperity, the number of regular customers if a food business, or repeat orders if it is B2B.
  • Evidence of satisfaction with the brand, as demonstrated by provable testimonials can also be important. You can prepare for this by ensuring that good records of customer satisfaction are kept.
  • Even a lawn mowing service or a pet care business can have a USP that makes it a desirable business. A business planning on becoming a franchise organization must be adequately differentiated from its competitors who might already be franchised. This can take the form of a specialized product or service, a unique and successful marketing strategy, or specialized target markets.
  • The business must be profitable, and profitability must be provable. This might occasionally entail redacted disclosure of financial records for brief sighting, although I was never called upon to do that.
  • There must be sufficient profit available to any franchisee to allow them to pay royalties without creating financial hardship or resentment. Unless a business can generate a healthy return on investment after deducting a royalty, which is usually between 5 and 12 percent, but occasionally higher, it will not keep franchisees happy. As a rule of thumb I suggest that most franchisees would expect an ROI of at least 15 -20%.
  • The business system must be well documented, and this should not just be something of an afterthought, because it won't be easy to prepare such documentation retrospectively. There must be a well-organized system that can be replicated. It needs to be teachable. Could someone learn to operate the business in three months or less?
If your business meets these criteria, then it could well be suitable for franchising.

Walter


 

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Bekit

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I would like to make it clear at the start that having been a franchisor for over 20 years I would never buy a franchise. The industry is riddled with cheap and nasty “buy a job” systems that could only appeal to people lacking any entrepreneurial ability. It also has a good share of businesses in which failures are likely, sometimes because they are deliberately structured to cause that.

My view is that real entrepreneurs, with a mindset to provide value, would make ideal franchisors. With that approach, they could franchise a business they already own, provided it was suitable for franchising, and the rate of growth is potentially awesome.
Fascinating topic @Walter Hay !

As a franchisor, I'm assuming that your method would NOT set up a "cheap and nasty" system where failure was likely for your franchisees.

But is there a way to set up the franchise so that your franchisees are not just "buying a job"? Or is that just intrinsically part of the package for them?

In other words, if you as the business owner and entrepreneur wanted to create franchises that also recruited and developed entrepreneurs, is there a way to do that?

To help members decide whether their business or one they buy might be suitable for franchising, here is the relevant chapter from my book:
9. How To Decide If A Business Is Suitable For Franchising.
There are a number of vital factors to consider.
Your criteria here are like the holy grail of an amazing business! I think whether or not we look at building a franchise, anyone building a business could use that list as a litmus test of what kind of business to build.
 
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Walter Hay

Walter Hay

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Fascinating topic @Walter Hay !

As a franchisor, I'm assuming that your method would NOT set up a "cheap and nasty" system where failure was likely for your franchisees.

But is there a way to set up the franchise so that your franchisees are not just "buying a job"? Or is that just intrinsically part of the package for them?

In other words, if you as the business owner and entrepreneur wanted to create franchises that also recruited and developed entrepreneurs, is there a way to do that?

Your criteria here are like the holy grail of an amazing business! I think whether or not we look at building a franchise, anyone building a business could use that list as a litmus test of what kind of business to build.
Here are some quotes from the book that show the approach that I would strongly advise if setting up a franchise system:
"When preparing to franchise my importing business I consulted a lawyer that had prepared the franchise agreement for KFC. He nearly fell of his chair when I gave him my brief. I told him that if there was to be a bias in one direction or the other, I wanted it to favor the franchisees."

"My recipe for success. If you want to succeed as a Franchisor, I consider it essential that you genuinely consider the welfare of your franchisees, and although you might prefer to not tell them so, you should treat them as business partners."

"If you start off with the intention of building something for your franchisees, you will in fact be building something for yourself. Your success truly does depend on their success."


I would add that I use the word "happy" seven times in relation to franchisees, including a brief chapter specifically on that subject. You can see the full table of contents in my marketplace offer.

The nature of the business will largely determine what type of franchisee candidates you attract, but you will have to sort the sheep from the goats whatever franchise type you are offering.

Walter
 
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Walter Hay

Walter Hay

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Because of the fact that some important terms are misunderstood or used loosely, with possible disastrous consequences, I decided to post a brief quote from Chapter 7. Differences between Franchises, Distributorships, & Licences:

"Distributorships, dealerships, sales agencies, subcontractor arrangements, licensing arrangements covering trademarks or even software, may in fact in some jurisdictions be regarded as franchises...........There have been many adverse rulings handed down by courts resulting in what appeared to be normal business to business transactions being adjudged to be subject to franchise law. The result has been financially catastrophic for some, who have been heavily fined, and whose business has effectively been destroyed."

The main point I make is that if anyone considers using such arrangements to get around the restrictive legislation covering franchises they need to be very cautious and get prior legal advice.

Walter
 

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