Business expansion: how to create own franchise

Franchising risks are related to the fact that you sell not a product but a business model, not a chocolate but a process of chocolate manufacturing and sale. How should a franchise be created properly?

Oleksandr Lukianov, a franchising consultant involved in the development of more than 50 franchises on the territory of 5 countries speaks on Business4Women forum* about risks and advantages of franchise creation as a popular way of business expansion and additional income acquisition.

Franchising is a transfer of business organization experience and certain processes. You are not selling a brand and TM, you are selling your experience that will help a partner to minimize costs. You should understand the efficiency of tools you are offering a partner, as well as know the exact volume of investments – from equipment and taxes to premises repair. Lump sum is the price of your experience. As a matter of fact, franchising is a creation of new business process, which should be developed considering external business partner who is not an employee and not a director, but is rather a junior business partner.

Main advantages of franchising for the founder:

1) absence of significant investments into the conquering of the market, on the contrary, increase of income due to the franchise sale. Everything is done with your and partners’ common effort but using their investments. The networks allow you to enter new regions, product areas, which you would not be able to enter independently;

2) multiple increase of the income of the network’s owner;

3) new business connections. Your partners will express their ideas in their area of expertise, using their business experience.

Franchiser’s sources of income 

Entrepreneurs sell franchise to gain profit. In particular, profit may be received due to:

• lump sum;

• royalties;

• mark-up for the supplied ingredients, semi-products etc. (you save money due to the decrease of the cost by consolidation and centralization);

• lease of equipment, real estate, signs;

• supply of brand products (with your mark-up);

• payment for management, advisory services;

• payment for additional staff training (your regular fund);

• purchase of your points-of-sale by the franchisee (if any);

• income from operations administration of the franchise objects.

Step-by-step algorithm of franchise creation based on the Win-win principle 

Using his methodology “Franchise development with the set-up of internal business processes”, Oleksandr Lukianov helps businesses to go through the following stages, which you may try to complete independently:

1. Assess the readiness of business for expansion

Within the frames of the business evaluation analyze:

• managerial function of key employees;

• main resources of the company: financial, production, human;

• structure of business operational proceeds and expenses;

• key partners: geographical footprint, terms of cooperation, contractual obligations;

• algorithms and terms of search, selection and preparation for launching of the network object;

• procedure of human resources recruitment, selection, training and management;

• marketing tools for the interaction with the company’s customers.

Extrapolate the received results into the franchising model and define actual readiness of the company for the franchise launching.

2. Benchmarking. Investigate and analyze the existing competitive or similar business models working with franchising. It will allow you to receive information of the decisions of the companies-competitors, assess the efficiency and adapt them to your business.

3. Franchise concept. Define key processes, points, criteria for interaction and responsibility division, which constitute the core of the franchising project. Franchise development implies the definition of requirements to the franchise in general and to each separate format in particular (if any). In addition, business logic and the related processes are improved during the concept alignment.

4. Develop a financial mode of the franchise. Calculate the volume of investments required for the franchise, forecasts regarding proceeds and expenses considering the adjusting factors (assortment structure, mark-up, seasonality, achieving of the target scope, local specific features etc.) Financial model must include the calculation of the breakeven point and investments payback period based on the weighted average indicators of the own object operations.

5. Generate the legal package for the franchise – a set of agreements that formalize different relations between the parties of the franchise. The main documents are a commercial concession agreement and a license agreement, which coordinate the cooperation under the franchise system. If necessary, documents package may be supplemented with the agreements that regulate procurement procedures, financial liability, staff management, lease, etc.

6. Prepare presentation materials for the franchise - website, presentation, video. They perform the function of primary emotional information tool for the potential franchisees. Add brief information on the company and business in general. Describe the franchise advantages, its formats, prospects for development and business organization under the franchiser’s brand.

7. Develop the strategy of the franchise promotion – define target channels, tools and budget for the franchise promotion and interaction with the potential franchisees. Work on the most efficient channels for communication with the business audience.

8. Create a business book – describe all stages of the franchising object launching and operation as guidelines which will allow you to simplify significantly the procedure for information transfer to the project participants and standardize the franchise network operations. It should be a reference book for franchisees where they can find answers to the majority of questions related to the franchising object management. Having an inspection? Damaged goods? Describe everything.

Franchise promotion tools

Look for future partners systematically via:

1) Own objects (existing customers via advertisements on the Landing page in the section “Franchise” on the web-site, in social networks and messengers both own and of your partners);

2) Specialized portals, franchises catalogs;

3) Visits to business clubs, communities of entrepreneurs, business forums, business events and exhibitions;

4) Context advertising, articles in business media;

5) Guerilla marketing.

Mistakes of young franchisers

Oleksandr Lukianov outlines the following mistakes of entrepreneurs who try to create and sell franchise:

1. Absence of full lifecycle of business model. If your startup operated for 2-3 months and the investments did not start to pay back, it is too early to sell franchise;

2. Hurry and desire to save funds on all stages. The web-site, which is not selling, advertising and legal support of poor quality are the cost-cutting which is harmful for everyone;

3. Absence of the franchisee’s profile and filter during the selection. You risk when you choose people with other values or experience;

4. False promises on the stage of negotiations. You should not set too high profit target and too short payback period, or make an overly optimistic forecast of the market growth;

5. Low degree of franchise elaboration. Poorly developed business-book and vague standards lead to their violation;

6. Desire to receive profit from your franchisees immediately by setting big lump sum, adding payments for each advertisement banner and consultant’s visit;

7. Unreadiness to manage the network growth (network growth crisis). Your back-office should be ready to satisfy all needs of the network;

8. Poor control over the franchising network. Non-compliance with the standards and negative reviews about one location damage the image of the entire network. Ensure quality control;

9. Loss of interest in the franchise network development. The founder may “burn out”, but it should not affect the network: hire good managers;

So now that you are warned about these pitfalls, do not hit them.

Franchising risks 

The experts warn that not all sold franchises will be profitable. Some of them will be closed due to different reasons and the most common are the following reasons:

• non-compliance of the product with the interests on the market (what is popular in Lviv may not be interesting for customers in Odesa);

• inefficient territory development (in a small town business may not find enough customers);

• absence of experience related to the management  of complex networks (back-office may mess up many great initiatives);

• loss of reputation due to the franchise of poor quality (negative reviews on one location will do harm to other locations);

• loss of the competitive advantages during the loss of the franchisee (after gaining knowledge and experience some people will want to do the same independently);

• mixing of the brand style (little things that cause the loss of the customers’ brand awareness);

• closure of franchise often leads to disputes and conflicts and inflicts losses.

Thus, the preparation for franchising should be of high quality and involve experts and then this way of expansion will bring you profit and not problems.

* Business forum Business4Women was organized by the Informative business support center, supported by the European Bank of Reconstruction and Development within the frames of the initiative #EU4Business of the European Union