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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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Walter Hay

Walter Hay

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I have received a number of questions from people who think I am suggesting that by buying a franchise they can achieve growth.

I have reviewed many franchise systems for friends who have been considering doing just that, and in every case I advised against it. The main reason was that rather than operating in a way that enabled growth within a single franchise, the franchisors only wanted their franchisees to buy another site or territory. That was because those franchisors were living on the license fees instead of on the royalties. That is a huge red flag.

In short; Don't buy franchises, sell them. That's what can give you a very fast rate of growth.

Walter
 
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LifeDreamn

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I have received a number of questions from people who think I am suggesting that by buying a franchise they can achieve growth.

I have reviewed many franchise systems for friends who have been considering doing just that, and in every case I advised against it. The main reason was that rather than operating in a way that enabled growth within a single franchise, the franchisors only wanted their franchisees to buy another site or territory. That was because those franchisors were living on the license fees instead of on the royalties. That is a huge red flag.

In short; Don't buy franchises, sell them. That's what can give you a very fast rate of growth.

Walter
So...
Do you help with setting up franchises? I'd love to be a franchisor and empower franchisees in a way that is as profitable for them that makes the entire chain happy to lend a helping hand to their clients.
 
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Walter Hay

Walter Hay

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So...
Do you help with setting up franchises? I'd love to be a franchisor and empower franchisees in a way that is as profitable for them that makes the entire chain happy to lend a helping hand to their clients.
No I don't handle the setting up of franchises, but my book gives a comprehensive account of what can and should be done.

If you go to my Marketplace offer here: MARKETPLACE Walter Hay's Business Books and scroll down you will see the price is $65 and if you scroll further you will see the full contents list.

The book is designed for people such as you who are willing to do the right thing by their franchisees so I wish you success. You can let me know here if you have any questions, but if it is confidential, you can send questions via the forum PM system.

Walter
 

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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."
Oh come on now - how bad can it be? Subway decides the price of swiss cheese is too high and does not offer it (True example - I used to get it, but then it was discontinued)?

A few examples of bad examples would be most interesting - and they don't have to even be real events. Theory is fine. I just can't see how a few minor rules are going to destroy a business. The fine art of selling hamburgers is not really too much of an art - is it? How complicated can it be?
 
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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.
I have quoted in full the post referred to by @Real Deal Denver because he seems to have missed the point.

I was not talking about franchises, but business structures that have sometimes been used to circumvent the strict laws covering franchises. Those rules (laws) are not minor.

This was intended as a wake up call to any who might think they have found a way to get the benefits of a franchise-like business structure without going through the legal formalities required of a franchise.

I don't make the law, I just report on it in this case, and when I see court rulings made that are relevant to the subject of pseudo franchises, I think it is important to alert people so that they don't get in too deep before discovering that they have made a serious mistake.

True franchising remains a means of very rapid growth with the potential to earn massive sums for the franchisor.

So that there is no mistake, I repeat what I have stated previously, that the real money is to be made by selling franchises, not buying them.

Walter
 
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Walter Hay

Walter Hay

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Yesterday I was asked: What industries are best when considering setting up a franchise organization?

The answer to a large extent will depend on a person's personal experience and financial circumstances, but I will generalize.

The most popular and widespread franchise networks are in the food industry, but I would never consider buying out a food business with a view to starting a franchise organization. The industry, particularly fast foods has for years been beset with problems.

Changing consumer tastes appear to be one of the big factors, as is the case with Subway. The business has encountered problems worldwide, with many franchisees selling out, but doing so at prices that are as low as 50% of what they paid when they bought into the system.

Even people experienced in the food industry should think twice about taking over an existing food niche business with a view to turning it into a franchise network. Consumer tastes are fickle.

I would recommend instead that investors should look at evergreen types of business. Generally at the lower end of the scale, service industries will always be in demand, so if you have good administration, organizational, and marketing ability, a service industry could be worth considering.

Professional service industries such as medical, accountancy, and legal professions can be owned and managed as a franchise. Stability is a big plus.

Specialty retail, such as the one I describe in my book can be evergreen. The business that I mention had an amazing USP, and the owner controlled the supply chain to ensure constant quality and price stability. His store design flair would have been easy to replicate with instructions.

Just look at businesses for sale. If you find one with good, steady profitability, and a great system in place, but run by someone ready to retire, this could be your opportunity, provided it can be replicated and there is demand for the goods or services.

Walter
 
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Walter Hay

Walter Hay

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Be cautious in choosing a franchise developer.

I have conducted my own small online survey of franchise developers, and the most important thing I found was that over 60% of those I looked at also sell franchises.

Although Google search results vary frequently when using the same computer from the same location, this finding confirms what I already knew.

Does it matter if a developer also sells franchises? The answer is most definitely it does. You need a developer that specializes in developing franchise systems, without the sometimes conflicting motivation of selling the franchises for the system they devise. For example, they can set up your system to maximize franchisee numbers, when that could mean reducing the revenue each franchisee could reasonably hope to earn.

Over - Engineering. Some of the developers, particularly those whose business is exclusively development, appear to make the process as complex as possible. That might be to justify their fees, or it might be to sell you extra services to cope with the complexity of their system design.

The one and only that I recommend in my book does a very complete job of designing a system to suit you. I am not an affiliate, I simply prefer the relative simplicity of his program. If you follow the link in my book, don't be put off by the lack of bells and whistles on his site.

There is a huge amount of helpful information there, so I suggest you check out all that information when comparing that developer with others.

Walter
 

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Kid

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Or is that just intrinsically part of the package for them?
There's the thing that @MJ DeMarco said.
Go into fastlane by selling to slow lane.

In other words, yes , you create fastlane, they buy a job.
It doesn't mean its bad job.
(CRMIIM)
 
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