from Lori Karpman, President, Lori Karpman & Associates Ltd.
The franchise model is a special one, while franchisees are in operating businesses such as the restaurant, dry cleaning, retail or moving business, the franchisor is in the “franchise business”. Franchising is a specialty of its own just like and is to business like orthopedics is to medicine or chemistry is to science. Deciding to franchise a business is primarily a financing decision that companies make to fund growth. Funding growth requires large amounts of capital and this capital can be obtained via 2 ways: (1) conventional bank financing or (2) private investment. Both of these options have serious long-term financial implications; growth is slow and high priced. The major attraction of financing through franchising is the speed of development and the low cost involved. Instead of borrowing $1 million to build 10 franchises at $100,000 each, a “franchisor” finds investors who can each invest $100,000 and build and own a franchised unit of their own. These investors become “franchisees” and are required to own and operated their franchise strictly in accordance with the franchisors rules and specifications. In return for the use of the name, the goodwill and the system, franchisees pay to the franchisor a monthly “Royalty Fee”, which is generally a percentage of the weekly Gross Sales. In essence then, a series of partnerships is created between the franchisor and individual investors. The whole forms a franchise system-complete with its own set of rules, regulations that must be strictly enforced by the franchisor.
When making the decision to franchise there are many factors to consider. The first and most obvious is whether the concept is “franchisable”. To be capable of being franchised a concept must be easily replicated anywhere in the world. Can a franchisee in Winnipeg get the same dinnerware and food supplies as a franchisee in Moncton? Will the raw materials needed for the construction of a franchise be 3 times the price in Saskatoon? The next biggest consideration is the cost of entry. How much will it cost a franchisee to buy into your concept? What is the total investment required for a turn-key operation? Is a specialized skill set is required? This will narrow your target market of potential franchise prospects. How easy is the business to run? These factors, although not exhaustive by any means, are the primary ones that will essentially decide whether franchising is a viable model for your business. The bottom line is that concepts can only be franchised if someone else can replicate the exact original model in their own community. This is why every franchisor must have a very detailed operations manual, so that every franchisee is ensured to operate according to common standards.
The first question a franchisor has to ask itself before franchising is a financial one. If the company is well capitalized and can afford to do the expansion internally without the requirement of outside financing then corporate growth is the way to go. Why? Because, franchising is an entirely different business than the operating business as mentioned above, so while a franchisor may have been in the restaurant business before, they will no longer be once franchised. Their operations people out in the field will remain so but those at head office, will be facing a whole new set of responsibilities and challenges. Franchising brings with it a host of onerous obligations and responsibilities to which the franchisor will be held to by the franchisees. Obligations of support and training, new product development, marketing, and the like are what will occupy the time of the executives at head office now. Franchisor obligations center on ensuring the smooth operations of multiple stores in a chain. Successful franchisors understand that from this point on the franchisee is their client. While the ultimate goal is always to satisfy the end consumer, that result can only be achieved by providing the front line franchisees with all the tools necessary to ensure their success. This means not only research and development and strong marketing programs, it means having the right personnel in support roles as well. The same rules of customer service at the store level apply to the franchisees. Remember, the name of the game is growth, in sales and in units. A franchisor’s best salesman is a successful franchisee. After all, who do prospects talk to first? The answers to the questions-do you get good support and are you making money, must be a resounding YES! Therefore, a good franchisor is committed to investing in and building an infrastructure of talented people to create, implement, and police the policies, procedures, and systems needed to achieve that YES!
The greatest challenge is in maintaining the peace. The relationship between franchisor and franchisee is too often contentious when it needn’t be. Having been a franchisor twice and a master franchisee for a national brand in Quebec, I have seen and lived both sides. My observation is that it’s the breakdown in communication that causes this distress in a system. Franchisors often fail to communicate the “why’s” of their actions and just expect franchisees to implement programs without any advance notice. Adopting the Nike “Just do it” approach, does not work. Franchisees feel bullied and out of the loop.” Franchisors have to do a better job of communicating with franchisees about future plans, R&D, highlights of successful programs run by other franchisees and the like. When franchisees are forewarned, buy-in to a plan, or at least understand the “why” of it, they are more likely to adopt it. It’s as simple as a monthly newsletter. The franchisor-franchisee relationship is like any other, it thrives on open communication and honest discussion, even if the franchisor is the final decision maker. Franchisees have valuable information as they are on the front lines and the more the franchisor understands the value of the franchisee, the more they will both prosper.
For franchisor looking to franchise their business in Canada there is a wealth of support available. On a national scale, the Canadian franchise community is represented by the CFA, (Canadian Franchise Association, www.cfa.ca). This association, long setting the standard for excellence in franchising, has safeguarded the industry from the bad reputation franchising once had many years ago. The CFA logo displayed proudly by franchisors signifies that they have met the strict ethical and operational standards of the CFA for being granted membership. The CFA, amongst other things, provides educational, social, and business events for franchisors and ensures Canada’s prominence on the international franchising scene. The CFA is THE voice of franchising in Canada and presents outstanding professional opportunities to the community such as Trade Shows and its Annual Convention. Membership in the CFA is an essential element of any growth plan. In addition, there are specialized consultants who can assist a brand in preparing their concept for franchising by creating all the marketing, operations and support strategies and materials.
Making the decision to franchise cannot be made lightly. Truth be told though, it is a different and additional business model from what the franchisor currently operates. There’s a reason it’s a specialty. The best advice I can give prospective franchisors and it holds true for any business decision, is: be smart enough to know what you don’t know and hire an expert in that field who does. Now at least, you know what you don’t know and where to find that expert!
Lori Karpman, considered one of Canada’s leading experts on franchising and multi-unit business development models, is also the President/CEO of the multi award winning consulting and legal services firm, Lori Karpman & Company. During her esteemed career, Lori has been a franchisor twice and the Master Franchisee of the Pizza Hut brand for the Province of Quebec. The firm’s clients range from the Fortune 500 brands to the local start ups. Lori is a prolific writer and sought after guest speaker and has been featured on television, YouTube and radio.