Franchising is a way of growing a business by bringing in outsiders to help it expand.
It involves the business owner – the franchisor – selling the right to market the business’ goods or services in a particular location or territory. The products and services are usually standardised across the franchises, with the best known example being McDonald’s.
By franchising, a business can expand even if it has limited funds, says Jason Gehrke, principal of the Franchise Advisory Centre, a privately owned company that provides education and advice to the sector.
“Franchising provides a way of other people – being franchisees – bringing their capital to fund the cost of opening a new outlet,” he says.
Another advantage is that the outlets are run not by paid employees, but by managers who have the incentive of financial self-interest to make sure they are a success.
Gehrke says businesses in food and hospitality, home services such as cleaning and gardening, and financial services such as mortgage broking and real estate can often be franchised successfully.
Not every business is a candidate for franchising. Steve Wright, executive director of the Franchise Council of Australia, outlines four key conditions before a business can consider selling franchises.
A business must be successful as a stand alone entity before the owner considers franchising it. Some people make the mistake that if a business isn’t working of trying to expand it to get the benefits of scale. “You can’t covert something that is unsuccessful to become successful as a franchise by some kind of magic,” says Wright.
2. More than one location
The business needs to have proved that it can operate successfully in more than one location. This is to ensure that its success isn’t just tied to a lucky location, says Wright. “It may just be – either by planning or good luck – that you’ve tapped into something that is just not available elsewhere for whatever reason,” he says. For instance, a pie shop across the road from a football ground would get a big spike in business every time a match is played, but the same shop elsewhere wouldn’t get the same benefit.
Can the business be replicated in other areas? “You’ve got to be confident that the business will work in another suburb, in another region and in another city if you’re serious about operating outside of your own local environment,” says Wright. For instance, a restaurant that relies on the skills and status of a single chef might not do as well when it expands to more than one location without the chef. “It’s more difficult to repeat the essence of what makes them successful because it resides too much in the chef,” he says.
4. Systems and sourcing
They key to the success of McDonald's franchising – which has turned it into the world’s biggest restaurant chain – is that it has rigorous systems for preparing food and serving customers that ensure it presents a consistent product. Wright says any business wanting to franchises will need to be able to clearly document how the product is made or the service is carried out so that it can be followed when the owner is not around.
Likewise, the sourcing of product is also important. “How can you be sure that you’re going to deliver a very similar product in many locations if you don’t have similar supply availability?” he says.
IP Australia, the federal government’s copyright agency, says businesses need to formally protect the intellectual property of their trademarks and business systems to give potential franchisees the confidence that competitors will be restricted from entering the market.
“This not only assures potential franchisees, but is also effective business insurance for you as a franchisor,” the agency says in its franchising guide.
While franchising can allow a business to expand without a huge amount of capital from the owner, it is still not cheap to franchise a business, says Gehrke. Depending on how much of the work the business owner is prepared to take on themselves, it can cost between $30,000 to $100,000.
The major cost is documenting the business systems so that franchise owners can follow them. Business owners can do some of this themselves but are also likely to need a consultant, says Gehrke. There’s also the cost of business advice and legal fees. “It makes sense to use an experienced franchise lawyer, not someone who’s done the business owner’s will,” he says.