By Manuel “Noel” Siggaoat Jr., CFE, MBA
Managing Director, Francorp Philippines
Franchising has made many brands household names, making their founders rich and famous beyond their imagination.
Every week, I meet with entrepreneurs who want to be the next franchise tycoon. They want their business to grow from one to one thousand, from few to many, like Tony Tan Caktiong of Jollibee fame or Benjamin Liuson of the The Generics Pharmacy phenomenon. Unfortunately, not every business can be a franchise. Some are not yet ready and need to work on their concepts before they can become franchisable.
How do you know if your business is ready for franchising? To guide would-be franchisors, I use the following criteria to help entrepreneurs assess the franchisability of their concept:
Differentiation – Is your business unique? Are you offering something different, or are there others already selling the same thing?
Differentiation does not always stem from your product or service as being entirely new. You can be selling the same product or service like the others but differentiated in the sense that your product is better tasting, or has higher quality, or is priced lower, or is delivered more conveniently.
Also, there is the so called Unique Selling Proposition (USP). Are you bringing something of value to the customer? This is not only applicable to franchising but to businesses in general. The best businesses are those whose value proposition to customers is better than any of their competitors.
Continuing value – Can your franchisee do without you in the long run, or will they continue to need you even after they know how to operate the business? If you are able to provide continuing value to your franchisees, then they will continue to depend on you and stay within the system until the end of the franchise agreement.
The easiest way to do this is to be the sole source of proprietary goods and services. Proprietary goods and services are those associated with your intellectual property and are only available from you. Recipes are an example of proprietary items. Franchisors keep recipes and secret ingredients confidential so that they continue to be the sole source of proprietary items. Branded merchandise sold in retail stores are also a good way to provide continuing value through proprietary items. Some franchisors provide continuing value by delivering support unmatched by others in the industry.
Operating prototype – Do you have an operating prototype of the business you want to franchise? Franchising is basically duplicating success stories. If there is no original, there is nothing to duplicate. If you have a successful operating prototype, you can start to think of franchising that business.
Affordability – How much capital will a franchisee need in order to put up a replica of your store? If the required investment is high, the less people will be able to afford your franchise. The smaller the initial investment, the higher your business rates in terms of affordability.
Return on Investment – Are your stores profitable? Since a franchise is an investment, investors would like to know when that investment will pay back. People usually look at return on investment compared to its affordability. Even if a franchise is affordable in terms of initial investment, the return of investment has to be attractive.
Credibility – Does your brand generate confidence among customers or with potential franchisees? One of the reasons why people buy franchises is because the brand is recognizable enough to generate instant customers from Day 1. If customers are not aware of the brand, then the entrepreneur may be better off starting his own business using his own brand name. Some companies achieve credibility through the strength of their organization.
Adaptability – Can your store locate in areas and markets away from your own? Will your business still be relevant in other markets with different tastes, cultures, and conventions? McDonald’s India, though it does not serve Big Macs, is able to cater to the non-beef eating Indians by serving the Maharaja Mac which comes in either chicken or lamb. Can your business thrive in markets different from its origins while still retaining its character?
Teachability – For most franchises, no experience is required of franchisee- applicants. If that’s the case, how long will it take you to teach someone with no background in your business how to operate and manage it? If it will take several months before a franchisee can learn your business, then your business will score low on teachability. The shorter the training time, the higher your teachability score.
Capital – Do you have capital to invest in the development of a franchise program? Although franchising is a low-cost means of expansion, it is not a no-cost means of expansion. You have to spend money to make money. Investment in a franchise program will go to developing a strategic business plan, franchise agreement, operations manual, franchise marketing plan, and a franchise sales plan. These can be done in-house or with the help of professionals.
At some point in your franchise preparation, you may need to beef up your capacity by expanding your commissary or warehouse. You may need to stockpile inventory in anticipation of increased demand, or to take advantage of volume discounts. You may need to add vehicles and equipment to augment your logistics capability.
Long-term commitment – Franchise agreements can last for several years. Do you have the commitment to perform your obligations as franchisor for the long term? It’s easy enough to play the role of franchisor when sales are good. Can you show the same commitment during the downturns in your business when sales are low and franchisees are complaining?
Do you need to score high on all these criteria to be franchisable? Not necessarily. Some concepts score low on a few factors but earn high points on others. The business needs to be looked at holistically. The bottom line is that the franchise program must result in a win-win-win scenario for the franchisor, the franchisee, and the customer.