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Home > Franchisor > How to franchise a business
The first thing required to franchise a business is a business. Only businesses can be franchised, not ideas.
Highly enthusiastic entrepreneurs mistakenly believe an idea alone is enough, and occasionally attempt to franchise the unfranchiseable – a concept that is unproven, undocumented, unmarketed and unviable.
There are three critical factors required when considering how to franchise a business. These are:
Firstly, a franchise business must already be profitable. In theory it may be possible to franchise an unprofitable business, but the franchisor of such a business is also likely to go broke if their franchisees are unable to pay royalties.
To establish viability and preparedness for franchising, a business should have been operating for at least three to four years.
This is usually enough time for the business to adapt its offering to market conditions, confirm its business model, achieve profitability and refine its supply chain, marketing effectiveness and management systems.
The time spent proving the business is also necessary to document the business’ processes and operational requirements so appropriate training can be developed when franchising commences, and management systems, controls and reporting be implemented for stores or territories operated at arm’s length from the franchisor by franchisees.
A business must be sustainable in order to be franchised. That is, it must be based on a market niche with enduring demand, and not a fad or trend that will pass before the business can achieve a return of capital and return on investment for its franchisees.
In this context, sustainable is about maintaining the ongoing relevance of the business and its products or services to the market.
Finally, the owners and senior management team of the business must be committed to franchising as a long-term growth strategy. With average franchise terms in Australia of five years, with an option for a further five years, start-up franchisors should be looking at a minimum 10-year planning horizon in their assessment of franchising as a growth strategy.
Once the profitability, sustainability and leadership commitment criteria have been met, the owners and senior executive team should undertake appropriate education programs to build their theoretical and practical knowledge of franchising.
While it will be essential to take advice from qualified and experienced advisors in preparation for franchising, this should not be the only method by which information about franchise practices is gleaned.
The Asia Pacific Centre for Franchise Excellence has a range of highly relevant and topical formal and informal franchise training and education options for both franchisors and franchisees at any level – pre-entry, early growth, maturity and pre-exit.
While building their knowledge of franchising, business owners and executives should also be comprehensively documenting their procedures to form the basis of a system operations manual, as well as taking steps to identify and legally protect all intellectual property associated with the business.
While this is being done, the business may also commence (or continue) operating additional company-owned outlets to establish the viability of the business model in different market locations.
By operating additional outlets, this also serves to test the integrity of the documented systems, and provides existing stores or locations with an established trading history that may be converted to franchises at a later stage.
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