The pitfalls of franchising

Thursday 9 July 2015

iStock_000030408368_XXXLargeFranchising can help your business achieve amazing results.  It can help you increase your brand’s market presence and its value.  However, there can be pitfalls awaiting those who have neither planned nor prepared well.

One such pitfall awaits those Franchisor’s that are under-capitalised. Although franchising is great for growing your business through using other people’s (franchisees’) capital, properly developing and supporting your franchise network requires an investment. Poorly capitalised Franchisors typically under-resource head office and as a result fail to properly support their franchisees. Since staffing costs for Franchisors usually account for the largest share of their operating costs; the key is to carefully plan what support will be provided, what roles are required and when, how much they cost and hire accordingly. If your franchise program has been professionally developed, you will fully understand the head office financials and know the relationship between the income from royalties and franchise fees and your head office support costs. One of the biggest errors is to stretch support staff too thin with a greater number of sites than they can manage. For example, Area Managers (depending on proximity of sites and the nature of the business) should typically have no more than 10-15 stores to support-more than this, you risk not supporting franchisees sufficiently and the potential performance problems this can create.

Individuals looking to buy a franchise have a lot of choice in Australia with over 1,150 franchise systems operating.  Other than having a great business that your customers love, this means your ability to properly develop the franchise offer and the franchisee recruitment marketing program required to promote it will be paramount in differentiating your franchise and attracting more, good quality applicants.  The franchisee recruitment process is an opportunity to showcase your brand. It is important your responsiveness and any individuals, presentations, site visits and product samples/demonstrations involved reflect your brand experience. If your care and investment in promoting the franchise is limited, it is extremely challenging to attract quality applicants.

There is a common misconception that complying with the Franchising Code of Conduct is strenuous. Reality is that the Code merely seeks to ensure Franchisors are acting appropriately and prospective franchisees are duly informed about entering into, and operating under, the Franchise Agreement. The Code’s obligations for a Franchisor merely reflect good business practice. Most disputes between franchisors and their franchisees are usually resolved in mediation, and if the Franchisor acts in accordance with the Code, franchise disputes are quite uncommon and easily managed.

One of the most common challenges franchisors face lies in their need to relinquish control over some aspects of their business. This challenge arises from the Franchisor’s belief that ‘no-one else can do it like I can’. Franchisors and business owners must recognise that while staff and franchisees may not be able to complete tasks exactly as they would themselves, these tasks can typically be completed to an acceptable level, provided the people involved are given the appropriate training. This issue is particularly prevalent in franchised businesses because they can grow much faster than company-owned networks so the need to relinquish control and delegate arises far sooner than in the often, more slowly growing, company owned businesses.  If we’re to work ON the business instead of IN the business, the owner’s focus must be on trying to make themselves redundant in day to day operations so they can focus on the bigger picture. This does not mean you leave the business-it means the business is not solely reliant on you and can operate in your absence while you focus on strategic growth and improvement opportunities. Many people find it tough to relinquish certain roles, but the franchise network cannot reach its full potential if the owner does not delegate effectively.

Franchising your business does not come without risk or potential pitfalls. However, if you are diligent and expertly develop the system, the risks can be mitigated. It is wise to speak with franchise business advisers because avoiding a problem is usually far cheaper than fixing one.