Essential steps to building a successful franchise

So, your idea has taken off and is wildly successful. Next step is to franchise it and make some serious money, right? Not so fast: While the franchising model can be applied to almost any industry, not all businesses are ‘franchisable’.

In this article, we explore the journey to creating a successful franchise.

The feasibility test

The first step to building a successful franchise is having a concept that has been growing well as a freestanding business, and being able to understand how the business operates and what is at the root of its success.
Essentially, several critical success factors need to be examined, which can be done by closely evaluating your responses to these 12 questions.

Does the business operate in a large and growing market?
Is the growth in the market sustainable?
Are the margins sufficient to cover the proposed management services fees?
Can the product demand a price premium?
Does the franchisor have access to sufficient capital?
Does the potential exist to establish a memorable brand?
Is there a substantial barrier to entry – not easily copied?
Will the development costs permit a satisfactory return on investment?
Is it possible to grow a franchise culture in the company?
Does the concept have staying power?
Is it relatively easy to transfer the required skills?
Are suitable systems and procedures in place?

This assessment helps you better understand the proposed business model to be replicated and allows you to gather the information needed to review your business with a view to developing a strong franchise value proposition.

This would include product and service range, pricing and competitiveness, skills and systems needed to run the business, marketing and branding, supplier relationships, staff training programmes, and financial models.

Develop an expansion plan

Assuming the information you’ve gathered is positive from a franchise feasibility perspective, the next step would be to formulate a practical expansion plan for the structuring, development and replication of the business.

This expansion plan should detail the ideal expansion format; the value proposition for the franchisee; franchise fee structure and documentation; franchisee needs, support and training; a geographical expansion plan; marketing of the franchise opportunity; a proactive recruitment and selection process; and the ideal owner-operator/franchisee profile.

Taking care to decide who will make an ideal franchisee is an essential step. Franchisers make a huge investment in their franchisees and depend on them to help them grow the business.

The potential franchisee needs to identify the skills, experience, and characteristics essential for success, develop a profile around these findings, and stick to it.

Tools such as psychometric assessments to assess whether the potential franchisee fits the required profile should be considered.

During this stage, we recommend that potential franchisers operate at least 1 unit at arm’s length to test the concept as a franchise, perhaps as a joint venture with a trusted staff member.

This helps identify and address problems and eases the franchisee into their new business model. Retaining this company-owned outlet also helps to generate income to fund ongoing operations and forms the ideal base for providing training and testing new products or services.

Implement your expansion plan

During the implementation phase, the most important steps are training key management and support staff, and the development of franchise documentation in conjunction with industry experts.

These documents include the franchise disclosure document, franchise agreement and franchise operations manual.

This phase also entails marketing the franchise opportunity and franchisee recruitment, identifying training courses for franchisees and franchise support staff, and monitoring the progress of the franchise development.

Seek bespoke financial support for your franchise system

A crucial component of this stage is presenting the concept to commercial banks or funders. From Nedbank’s point of view, we would create a client value proposition, which entails a preferential banking solution to be offered to your franchisees.

This would include lending guidelines that cater for various scenarios, including the financing of new stores, multi-site opportunities and refurbishment of stores; pre-arranging transactional pricing at group benefit rates for all franchise stores; and offering value-added solutions for the business.

Once these phases have been completed and successfully implemented, your business is ready for expansion, and you are now officially a franchiser!

The process outlined above can be daunting and may take up to a year to complete, but it’s worth putting in the time and energy upfront as this gives your franchise business a better chance of success.

Understanding the Financials

One of the reasons that businesses fail is that there was either not enough capital available to successfully launch the business to start with or the ongoing pressures of maintain financial controls in running the business were not given priority. Getting finance is just the first step to running a successful franchise – it is how you handle your finances thereafter that will determine your success.

Always be aware of who needs to get a slice of your business pie and determine how much of each rand of sales income goes where.

How much to the franchisor in royalties?
How much to service your debt?
How much to the landlord?
How much to employees?
How much to suppliers?
How much for unplanned incidentals such as power failures, petrol hikes etc?

Only then will you know what is left, what needs to be kept for future expenses and expansion and what remains as profit.

The following are key elements to financial success:

Profitability
1. The margins of the business should be sufficient to not only sustain the business, but also to finance further growth if required. The growth rate of the business should be monitored as rapid expansion may require additional external funding.
Stability
1. A proven track record takes time to establish. Ultimately there should be an element of predictability to the sales volumes, monthly expenses and the inputs required to meet the daily demands of customers. A good franchisor will also give you on-going guidance in the form of group bench-marking.
Cash Flow
1. Understand how the working capital cycle works and which factors cause pressure on the cash flow. For instance, the management of the cash flow needs to provide for seasonality where customers’ demand for products or services may vary depending on the time of year or from a downturn in business.
Debt Structure
1. The ability to repay debt and other commitments must be taken into account when doing financial planning. Your bank can assist to determine an appropriate loan structure based on the detailed financial information provided and your capacity to repay the debt.
Return on Investment
1. As a franchisee you must weigh up the risks associated with investing in the business venture, ensuring that sufficient returns are realized on the investment. The correct gearing and capital structure of the business, that is the balance between debt and equity, will optimize the return on investment and provide tax benefits to the business.
The Right Financial Solution
1. Aside from providing loan finance and funding working capital requirements, the bank can also play an important role in providing convenient transactional banking products and services to assist with the smooth running of the franchised business.

Keeping your finances healthy

Cash is king – keep control of your cash flow by having the right management information and systems in place. They’ll allow you to act on warning signs before they become a problem.
Credit checks – keep your credit checks on your customers up to date and monitor late payments.
Get paid – you must set clear terms of business and collect debts promptly. If you’re worried about being paid, then consider stage payments or even cash on delivery to reduce your risk of bad debts. You could also consider offering a incentive for early payment.
Look at your costs – as sales fall, avoid taking on unprofitable business. Cutting your costs can provide you with the scope to reduce prices. If you take on big orders, you could be overlooking your smaller more profitable customers
Spread the risk – don’t just rely on one or two customers. In an economic downturn, all it takes is for one of your customers to move to a cheaper supplier and your business is no longer viable.
Take advice – there is plenty of support available and as a franchisee you have the advantage of asking other franchisees about their experience and what they are doing as well as your franchisor. Build a relationship with your bank to periodically review your plans and structure.

Article by Karen Keylock, National Retail Services Manager, Commercial Banking, Nedbank – email: karenk@nedbank.co.za or Nedbank