Franchising is often the go-to strategy used by small-business owners looking for strategic growth of their brand. With so many exciting new businesses and energetic entrepreneurs on Vancouver Island, it’s no wonder the term “franchising” comes up frequently at business networking events when discussing business growth.
However, there seems to be a misconception out there about what exactly a franchise is. Just because a company has multiple locations or possibly spans a large geographic region does not mean it is a franchise. For example, Tim Hortons is a franchise, and Starbucks is not. In a corporation like Starbucks, the company hires managers to run the business in its various locations. In a franchise like Tim Hortons, local business owners are awarded the rights to use the brand and operating system in exchange for a percentage of the overall sales.
Having been a local franchisee of two M&M Food Market locations (formerly M&M Meat Shops) on Vancouver Island since 2000, I have experienced first-hand the benefit of running a business with a strong brand, a proven operational system and ongoing support from the corporate head office. Before becoming a franchisee, I was involved in the development and growth of M&M Food Market across the country and learned a lot about the ins and outs of franchising a business.
Before any business should consider expanding via the franchising model, it is essential to understand what franchising actually is. So let’s dig a little deeper into what franchising is, and then we can take a look at the benefits of this organic growth strategy and the criteria that make franchising a good fit for a business.
What is Franchising?
Franchising is all about growing a business by finding local partners to run the business exactly how you prescribe it should be run, in markets where you want your brand to be. Franchisees pay you a monthly fee called a royalty, usually about six per cent of their overall sales, to use your brand, which includes the name and operational systems of your business.
The franchisee’s initial investment includes a “franchise fee” that covers your portion of the cost to get their business up and running. The franchisee is ultimately responsible for the success of their business, but you provide ongoing support, usually in the form of business coaching, marketing, training and even some emotional rescue at times!
The Benefits of Franchising
So why not just expand corporately, have full ownership in other markets and hire managers to run your satellite businesses? Well, that is an option, but let’s take a look at the benefits of franchising.
› Leveraging the Capital and Time Investment: This is one of the biggest benefits of franchising. Instead of having to come up with expansion capital, it is the franchisee who invests his or her money and time to get a replica of your business up and running in another market, thereby growing the brand and those royalties we talked about above.
› Partners with “Skin in the Game”: Why not just start up a replica of your business in another market and hire a manager so that 100 per cent of profits come directly back to you? Sounds great in theory, but a manager is less likely to invest his or her heart and soul in the business to make it the best it can be, so you may be missing out on overall brand success. A franchisee often has invested his or her life savings and has the intrinsic motivation to make the business a success.
› Local Connections: A franchisee living in the same community where he or she is doing business can get involved in local events and can establish community connections with local businesses, media and organizations. That’s hard for you to do from a distance. And partners (franchisees) with local connections can grow the business beyond what a local salaried manager would be capable of because they are more likely to put in the extra time and energy needed.
› Exponential Idea Generation: We’ve all heard that “two heads are better than one.” Well, imagine the creative ideas generated from a team of committed “business heads” i.e., franchisees. Bring together these local franchisees who have skin in the game, and just watch the benefits of creative brainstorming that can lead to an even better brand.
A Few Caveats
With all these benefits, it’s no wonder franchising is a popular strategy for growth. However, as we often hear from Jim Treliving, resident franchise expert on CBC’s Dragons’ Den, not every business is cut out for the franchising model. In order for a business to be “franchisable,” it must meet the following key criteria:
It Must Be Profitable There are two parts to this. First, before a business can be franchised, it must have a solid foundation. This is Business 101! That means revenue minus expenses needs to equal profit. Simple as that. Second, when you factor in the initial franchise fee and ongoing royalties that franchisees will have to pay, is it still profitable? The franchisee will only consider buying in if he or she can see that there is proven return on investment for the individual franchise unit.
It Must Be Unique Here’s more Business 101 for you. Back when I was in school, we used to talk about a “competitive edge.” Now we talk about a business’s “unique selling proposition.” Same thing. What makes your business different from the others out there? This is important, because once your business starts expanding, more people will be tempted to copy your concept. This might mean you have a unique business, the only one in the country or even world, or it might mean you have something unique about your business.
It could be as simple as having highly trained and knowledgeable employees or as complex as being first-to-market with unique technology. An example of a local business that is having success for being first-to-market is the new Float House in Victoria, which offers floatation therapy as a means of stress relief and relaxation.
You Must Be Able to Replicate It Whether we’re talking about a retail concept like Jusu Bar, a fast-food restaurant like Big Wheel Burger, a mobile service like Superbath Mobile Car Wash or even an on-the-go fitness business, your model needs to be easily replicated. For example, if customers are patronizing your café because they like to visit you and support you, then what will happen when you are not a part of the equation? Would it work if you could find franchisees with similar personality traits? And what about that unique location? Can comparable unique locations be found in other markets at comparable costs? These are all very important points to consider.
Diligence and Determination
Having spent many years on both the franchisor AND franchisee side in business has taught me a lot about franchising. It is an exciting growth strategy, but it is critical to do adequate due diligence to determine whether franchising is a fit for your business model and expansion plans. Being a franchisee can be very rewarding but also requires a lot of due diligence to ensure you are entering into a franchise company that is a fit for you and your lifestyle.