Establishing a Franchise System

Establishing a franchise system should be approached carefully and deliber- ately. While the process is a familiar one to a company such as McDonald’s, which at the end of 2013 had 35,429 restaurants in 119 countries,10 franchis- ing is an unfamiliar process to a new franchise organization. Franchising is a complicated business endeavor, which means that an entrepreneur must look closely at all of its aspects before deciding to franchise. Indeed, franchising of- ten involves the managerially demanding tasks of training, supporting, super- vising, and nurturing franchisees.

An entrepreneur should also be aware that over the years a number of fraudulent franchise organizations have come and gone and left financially ruined franchisees in their wake. Because of this, franchising is fairly heavily regulated. Even with this regulation, though, caution is in order for those pur- suing franchising as a business opportunity.

Despite the challenges, franchising is a popular form of growth. It is par- ticularly attractive to new firms in retailing and services because it helps firms grow and alleviates the challenge of raising substantial amounts of money. There is some anecdotal evidence, however, that many companies are hasty in putting together their franchise programs and as a result do a poorer job than they might have were they to take their time.11 Although franchising is often touted as an easy way to rapidly expand a business, an effective franchise system needs to be as consciously initiated, managed, and supported as any other form of business expansion.12 An example of a franchise organization that has been consciously managed and has grown in a sensible manner is Wahoo’s Fish Taco, as illustrated in the “Savvy Entrepreneurial Firm” feature.

Now let’s look more closely at the issues to consider when an entrepreneur is trying to decide if franchising is an appropriate approach to growing a business.

1. When to Franchise

Retail firms grow when two things happen: first, when the attractiveness of a firm’s products or services become well known, whether it is a new restaurant or a fitness center, and, second, when a firm has the financial capability to build the outlets needed to satisfy the demand for its products or services.

There are at least two options firms have as a means to grow. Building company-owned outlets is one of these options. However, this choice presents a company with the challenge of raising the money to fund its expansion. As dis- cussed in Chapter 10, this option is typically pursued through debt, investment capital, or earnings, none of which is easy to achieve for a start-up venture.

Franchising is a second growth alternative available to firms. Franchising is perhaps especially attractive to young firms in that the majority of the money needed for expansion comes from the franchisees. Franchising is appropriate when a firm has a strong or potentially strong trademark, a well-designed business model, and a desire to grow. A franchise system will ultimately fail if the franchisee’s brand doesn’t create value for customers and its business model is flawed or poorly developed.

In some instances, franchising is simply not appropriate. For example, franchising works for Burger King but would not work for Walmart. While Burger King has a large number of franchise outlets, each individual outlet is relatively small and has a limited menu, and policies and procedures can be written to cover almost any contingency. In contrast, although Walmart is similar to Burger King in that it, too, has a strong trademark and thousands of outlets, Walmart stores are much larger, more expensive to build, and more complex to run compared to the complexity of running a Burger King restau- rant. It would be nearly impossible for Walmart to find an adequate number of qualified people who would have the financial capital and expertise to open and successfully operate a Walmart store.

2. Steps to Franchising a Business

Let’s assume that as an entrepreneur you have decided to use franchising as a means of growing your venture. What steps should you take to develop a fran- chise system? As illustrated in Figure 15.2, you, as an entrepreneur, should take nine steps in order to successfully set up a franchise system.

Step 1 Develop a franchise business  plan: The franchise business plan should follow the format of a conventional business plan, which we discussed in Chapter 6, and should fully describe the rationale for franchising the business and act as a blueprint for rolling out the franchise operation. Particular attention should be paid to the loca- tion of the proposed franchise outlet. For example, a Baskin-Robbins franchise that is successful in the food court of a mall in an upscale area doesn’t mean that it will be successful in a less heavily trafficked strip mall in an average-income neighborhood.

Step 2 Get professional advice: Before going too far, a potential franchisor should seek advice from a qualified franchise attorney, consultant, or certified public accountant. If the business cannot be realistically turned into a franchise, then a qualified professional can save a poten- tial franchisor a lot of time, money, and frustration by urging that the process be stopped. If the business can be turned into a franchise, then it is advisable to get professional advice to help direct the entire process.

Step 3 Conduct  an  intellectual  property  audit:  As  we  discussed  in Chapter 12, this step is necessary to determine the intellectual property a company owns and to ensure that the property is prop- erly registered and protected. All original written, audio, and visual material, including operating manuals, training videos, advertising brochures, and similar matter, should be afforded copyright protec- tion. If a firm has a unique business model that includes a unique business method, it should consider obtaining a patent for its busi- ness method. These protective measures are vital because once a company begins franchising, its trademarks and business model and any unique business methods are disseminated, making them more visible to customers and competitors. In addition, a franchisor should make sure that its trademark is not infringing on the trademark of any other firm.

Step 4 Develop franchise  documents: Later in the chapter, we discuss the documents that are required to franchise a business. Here, we can note that at the beginning of the franchise evaluation process, a prospective franchisor should prepare the Franchise Disclosure Document (formally called the Uniform Franchise Offering Circular) and the franchise agreement. A franchise attorney can provide specific information regarding the content and format of these documents.

Step 5 Prepare operating manuals: Businesses that are suitable for fran- chising typically have a polished business system that can be fairly easily taught to qualified franchisees. The franchisor should prepare manuals that document all aspects of its business model.

Step 6 Plan an advertising strategy and a franchisee training program: Prospective franchisees will want to see an advertising strategy and a franchisee training program in place. The scope of each program should match the speed at which the franchisor wants to grow its business.

Step 7 Put together a team for opening new franchise units: A team should be developed and prepared to help new franchisees open their franchise units. The team should be well trained and equipped to provide the franchisee a broad range of training and guidance.

Step 8 Plan a strategy for soliciting prospective franchisees: There are many channels available to franchisors to solicit and attract potential franchisees. Franchise trade fairs, newspaper ads, franchise publica- tions, social media platforms, and Internet advertising are examples of these channels.

Step 9 Help franchisees with site selection and the grand opening of their franchise outlets: Location is very important to most retail businesses, so a franchisor should be heavily involved in the site se- lection of its franchisees’ outlets. The franchisor should also help the franchisee with the grand opening of the franchise outlet.

Along with the specific steps shown in Figure 15.2, it is important for a franchisor to remember that the quality of the relationships it maintains with its franchisees often defines the ultimate success of the franchise system. It is to the franchisor’s advantage to follow through on all promises and to establish an exemplary reputation. This is an ongoing commitment that a franchisor should make to its franchisees.

3. Selecting and Developing effective Franchisees

The franchisor’s ability to select and develop effective franchisees strongly influences the degree to which a franchise system is successful. For most sys- tems, the ideal franchisee is someone who has solid ideas and suggestions but is willing to work within the franchise system’s rules. Bold, aggressive entre- preneurs typically do not make good franchisees. Franchisees must be team players to properly fit within the context of a successful franchise system.

Once franchisees are selected, it is important that franchisors work to de- velop their franchisees’ potential. Table 15.2 contains a list of the qualities that franchisors look for in prospective franchisees and the steps that franchisors can take to develop their franchisees’ potential.

Source: Barringer Bruce R, Ireland R Duane (2015), Entrepreneurship: successfully launching new ventures, Pearson; 5th edition.