by Steward Germann

In evaluating a move into franchising


CONSIDER IF THE BUSINESS:

  • Is profitable

  • Is well capitalised

  • Has management strength/experience

  • Is easily taught to others

  • Has good training expertise/resources

  • Has unique features

  • Will have an edge on competition

  • Has an effective, catchy name

  • Has firm intellectual property rights

  • Has a solid, widening market

  • Is capable of network support

AND QUESTION YOURSELF:

  • Do you understand how franchising works?

  • Have you compared the pros and cons of franchising with other ways of expansion?

  • Are there resources available for a feasibility study and pilot operation?

  • Is there adequate recruitment and selection experience?

  • Is there awareness of the kind of questions franchisees may ask?

  • Is the price for the franchise realistic?

  • Are you willing to be patient about payback?

ADVANTAGES OF FRANCHISING YOUR BUSINESS - FINANCIAL

  • Expansion capital injected by franchisee

  • Economies of scale in network purchasing

  • Improved cash flow from franchise

  • Fees/royalties

  • More R & D resources

  • Spread of risk

  • Less risk of management fraud

  • Less recruitment, selection and training costs

  • Less localised stock control costs

  • Less personal management/IR costs

  • Reduced operating costs

  • Reduced distribution costs

  • Reduced production costs

  • Reduced advertising costs due to pooling

  • High rate of return on outlets (low investment)

  • Potential buyback of successful franchises

OPERATIONAL ADVANTAGES:

  • Faster network expansion

  • Better distribution facilities

  • Easier to focus on changing market needs

  • Higher branch motivation level

  • Better training and manuals

  • Better quality control

  • More consistent standards/products

  • Ability to exploit new ideas more quickly

  • Rapid growth reduces competition effects

  • More effective head office expertise

  • More R&D emphasis

  • Improved local sales effectiveness

  • Longer hours worked in branches

  • Greater economy-consciousness in branches

  • Secured outlets for production

  • Quicker service or deliveries

  • Greater loyalty from franchisees

  • More cost-effective labour force

  • No unsociable hours/overtime/holiday problems

  • More line management stability

  • More efficient use of management resources

  • Relatively small head office needed

  • Greater local knowledge and contacts

  • Better service for customers

DISADVANTAGES OF FRANCHISING YOUR BUSINESS

  • Less central disciplinary control

  • Difficult to remove unsatisfactory franchisees

  • Successful franchisees may resent paying royalties

  • More consultation needed in decision-making

  • Franchisee owns the outlet

  • Pressure for change from franchisees

  • More disclosure of confidential information needed

  • Capital needed for pilot

  • Resources needed to recruit, train and support network

  • Possible empire-building by franchisees

  • Potential skilled competitors should they break away

  • Broader risk of spoilt reputation through misfits

  • Limits on corporate expansion in franchised areas

  • Smaller corporate profit margin per outlet