Looking For Business Growth? Don’t Forget Franchising

By: Noel Guilford
Submitted: 2007-07-17 11:33:42
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Franchising has established itself as a successful way of growing a business, although like any business venture it presents risks. Careful planning is needed to ensure that the business model is fully developed and that the franchise is structured properly.

Franchising began in the US where companies wanted to expand and still be able to control a ‘branded’ business. Vast geographical distances were possible where new operations – like McDonald’s - thrived harnessing the knowledge and experience of local business people. Franchising has developed more slowly in the UK, in part due to our reluctance to embrace new concepts and the occurrence in the past of some dubious schemes for which those who became involved did not take proper advice. But still franchising has been responsible for the creation of a number of household names such as Bodyshop, Prontaprint, Dyno-Rod and Pizza Hut.

Today franchising is a growing, professionally managed business solution to be considered alongside acquisitions, joint ventures, distributorships and agencies as a means of growing a successful business. It enables a business to expand, whilst retaining control of its brand and reputation, by selecting motivated business people who will invest their own capital in return for a tried and test business model and the advantages of a better-known concept.

The key to developing a successful franchise is for the franchisor to develop a ‘blueprint’ of its already successful business model in such detail that, once selected, a franchisee can copy it in their ‘licensed’ territory. From the franchisees point of view this reduces the risk inherent in starting a business, provides training, back-up and support and sets out in great detail how the business should be run.

Many, but not all, sectors lend themselves to franchising. In general a business where customers are prepared to pay for quality or service is ideally suited. A low margin, commodity business is less likely to prove successful. Key success factors are a supported brand, a commitment to continuously improving the product or service, well-developed training and quality control processes and key performance indicators that are specific and measurable.

It is a mistake, however, to think that once developed the business owner can charge high fees for a franchise and sit back and enjoys the profits. A typical franchise will derive three types of income from franchisees:

1. The licence fee sometimes called the up-front payment – this should be charged at cost, including training, and should not make a profit for the franchisor.

2. The management services fee, typically 10% to 15% of the franchisees turnover. This is for ongoing support, product development and advice and is where the franchisor makes its profit, although successful franchises are those that support and nurture their franchisees, so still expect quite significant costs in this area.

3. A marketing levy – not all franchises charge a marketing levy but if they do this is to fund, on behalf of franchisees, either local marketing or more likely national marketing. It is typically 5% of turnover but can vary.

Article source: Expert Articles