Thinking of Franchising? Check First If You’re Ready

Quick. Which is the first American hamburger chain to sell a billion hamburgers in the US? Nope, not McDonald’s. Guess again, Burger King wasn’t even close.

The first American hamburger chain to sell 1,000,000,000 hamburgers is none other than White Castle. White Castle, the first hamburger chain in the US, sold its first billion hamburgers in 1968.

The pioneering White Castle chain, after more than 85 years, has more than 380 restaurants and served 500,000,000 hamburgers last year. Very good numbers, but McDonald’s, in just 50 years, operates in more than 100 countries with more than 30,000 outlets generating more than USD60B sales annually.

What is the difference? White Castle concentrated in the hamburger business whilst McDonald’s diversified into franchising. Although we associate McDonald’s with the hamburger, it is primarily not in the hamburger business, it’s in the real estate and franchising business.

Franchising is not an extension of your current business. It is an altogether new one with different products, sources of revenue and expenses. When Ray Kroc started to sell the McDonald’s franchise, he was no longer in the business of selling hamburger, he was selling franchises then. His revenue was no longer from selling the burger but from franchise fees, royalties, and others. Likewise, his expenses are no longer from the cost of beef and buns but on the fees he pays to assess the site or on the salary he pays to his trainers.

That is why franchising is not an easy endeavor to pursue. If you have a profitable business and you are thinking about franchising, there are two things you need to check. First, as a business owner, are you cut out to become a franchisor? And second, is your business ready to be franchised?

It is important to determine your willingness to go into franchising. However, it is not a matter of merely saying, “I am willing to franchise.” To assess if you are really willing, ask yourself these few questions.

First, am I willing to invest in the development of my franchise program? Like in any new business venture, franchising requires you to invest time, effort and money to start up. You will need to prepare a business plan, set up a showcase of your product, develop a marketing program, design marketing collaterals and establish a support organization.

All these will not only require time and effort but financial resources as well. In most cases, it is best to get advises from franchise development consultants. If you’re a good chef, you don’t need help to develop your menu but since you are now selling a different product, a franchise, you might want to ask help from a franchise development expert.

Second, am I willing to share my successful business formula and open my operations to scrutiny? Good franchise developers should be able to find ways to protect your secrets and your intellectual properties whilst ensuring that the formula for success is replicated in the franchise units. However, you need to share your successful business formula. Likewise, there will be a need to scrutinize your operations, including your financial performance, to ensure that keys to your success are duplicated for use by the franchisee.

Third, am I willing to focus more on business development rather than day to day operations? There are successful business operators whose success is due to their hands on involvement in the day to day affairs of their outlet. Sometimes, it is hard to wean away from your baby but as a franchisor, you need to put more focus to strategizing rather than operational supervision. If you feel you can’t let go of the day to day management of your shop, don’t go into another business, don’t go into franchising.

You are probably realizing now that it’s really not very easy to become a willing franchisor so let us show you some benefits of franchising your business.

Imagine you have a business and you wanted to open another branch. Somebody will pay you to build it for you, shell out cash to construct it for you, and upon opening, manage it for you. Then, instead of you paying the person, he goes to you and pay you franchise fees, royalties, advertising fees, etc. Is there any business better than that?

Franchising allows you to expand very fast using other people’s money, time and people. We often overlook the last two but most successful franchisors actually need them more than money. It is easy to forget the value of time and human resources when you have only a few branches. If you have one or two units, it will be easy to manage using your own time and resources. But as you expand your business you will have less and less time available for the outlet operations and it will be harder and harder to find a good manager.

Franchising also gives you new sources of revenue like franchise fees, royalties, advertising fees, training fee, mark up on supplies and others. It also gives you better synergy that will drastically bring down cost of your support organization with more branches sharing the expense and your food and supplies cost due to better purchasing power.

Likewise, franchising adds value to you business. One of my past clients once approached us asking us to help her sell her business for a few hundred thousand dollars. Since she was not rushing to sell her business, we asked her if she wants us to develop a franchise program for the business first to add more value. She agreed and we set up the franchise program in place. After six months, even before selling one franchise unit, we were able to sell the business for more than a million dollars.

It is clear that franchising has many advantages. A new business may want the benefit of fast expansion to saturate the market first. A longer operating business may eventually want to go into franchising to widen their market reach. And an entrepreneur who simply wants to exit may go into franchising to add value to his business.

Unfortunately, not all “willing” potential franchisors can franchise their business. Whilst almost all concepts can be franchised, the nature of franchising prevents certain business to be franchiseable. In the Philippines, even funeral parlors are being franchised but there are restaurants in Japan that will be very impossible to franchise.

To see your brand’s “franchise-ability” you need to take a look of your business and answer the following questions.

1.Do you have a profitable operating prototype? The prototype is the unit that you will be replicated and it should be operating profitably. It should generate substantial profit even after deducting future fees like royalty, marketing fee and others.

2.How many units are currently operating? The size of the operations determines how successful your business is. Whilst there is no rule on this, the more branches you have means better chances of success to both Franchisor and Franchisee.

3.How long has been the business in operations? Your three years of operations should have given you more experience and better understanding of your business and your market which is very valuable to a potential franchisee. However, there is no rule that prevents a successful business operating for only three months from franchising.

4.Can you teach somebody to operate your business? There are concepts that require specific know how that cannot be transferred even though intensive trainings. For example, if you are operating a fortune telling shop, you won’t be able to teach another person how to become a clairvoyant.

5.How much capital does your potential franchisee need to start up a franchised unit? The more reasonable the investment package is, the easier it is to sell the franchise.

If after going over the previous sets of questions, you are still not sure of you readiness to go into franchising, you may ask the advice of franchise consultants to help you asses your business’ franchiseability. Franchising is one of the best ways to grow your business fast and exploit your untapped goldmine but you need to be make sure both you and your business is ready for it.

For more information and assistance in franchising, please contact Astreem at +65 6392 3608 or visit www.astreem.com.

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