What we're talking about
Think of any major fast-food or coffee-shop chain and consider how many of its stores are dotted around a single city. Although they all have a similar look and feel, and probably the same menu, they're most likely owned by different people. This is the franchising model. The original business owners (the franchisors) have given others (the franchisees) the right to use their brand identities and trademarks and, in return, they receive a cut of sales from franchisees' stores. For the franchisee, it means that they can open and run their own business without having to build a whole brand from scratch.
This is a pretty common model for many different types of businesses, including retailers, restaurants and cafes, gyms and fitness facilities, and hotels. Franchising might seem like it's only for large-scale companies, but it's within reach for small businesses as well. For example, coffee shop Grind started life with just one location in east London and, through franchising, it now has 11 coffee shops and bars spread all over the capital. Drury 188-189 is another cafe in east London that's looking to expand by offering franchising opportunities to aspiring business owners.
Why it's important
In the current economic climate, starting a franchise can be an appealing alternative to starting a new business from scratch. The franchisor provides the new business owner with all of the materials they need, such as licenses to use branding, guides and recipes. The franchisee then has to foot the bill for the cost of premises, equipment and staff.
If it's a well-known or established brand, customers are pretty much guaranteed to walk in the door: that's why McDonald's is one of the best-performing franchises in the US. Franchises are also more likely to withstand economic turbulence – over the past few years, they've grown steadily in Germany, for example, and they're forecast to grow substantially in the US.
If you've already established a brand and would like to expand out to new areas, franchising your business to somebody else means that you don't have to shoulder the full responsibility of doing so. All you have to do is provide somebody else with the necessary guidance and material they need to replicate what you've already built in another area. You'll financially benefit from it too, because the person franchising your brand will pay you a fee.
Things to note
Information is everything. To successfully franchise your business, you'll have to provide prospective franchisees with as much information as possible to make sure they can fully understand and replicate the business that you've already built. This includes directions on how to fit out a shopfront, branding material, marketing guidance and recruitment handbooks.
Have clear terms and conditions. Before you dive headfirst into signing a franchise agreement, you'll need to make sure that there are clear demarcations in responsibility for you as the franchisor and them as the franchisee. For example, it'll be important to iron out who has control over what and whether that might change over time.
You'll need to provide support. Although franchises function as independent businesses that are just using an already established brand, they do need some degree of ongoing support. Particularly at the very beginning, you'll need to be on hand to answer any questions and support with marketing and first recruits. But, beyond that, there might be points where the franchisee will need your help.
Weigh up the risks. Franchising allows you to expand your brand out to a new location but, because you're ceding a lot of control to somebody else to run the operation, there are some risks involved. If anything goes wrong in the franchise, there could be an adverse impact on the brand as a whole. You'll also get only a cut of the revenue, rather than being able to keep hold of all of it.
How to explore this alternative revenue source
1. Work out if it's feasible. Turning your business into a franchise isn't easy. It has to be something that can easily be replicated multiple times – from the way a shop or cafe is designed to marketing materials. It also should ideally be a business that's proven to be profitable. A franchise feasibility study can help you understand whether it's worth going down this route, or whether you might be better off opening something yourself.
2. Write a manual. After an initial feasibility study, you should start drafting up a manual to help potential franchisees replicate different aspects of your business when they open their own. The manual should include detailed information about the products or services that your business offers, any key suppliers that they should be aware of, your recruitment policies and guidelines on company culture.
3. Figure out your goals. Once you've worked out how to replicate your business across multiple locations, you should set a strategy for how you'd like to approach franchising it. For example, do you have particular locations that you'd like your brand to be present in? Does a franchised version of your business look exactly like the original, or would you welcome some small changes?
4. Outline responsibilities. For any franchising relationship to work well, it needs to be clear from the get-go who's responsible for what. State this clearly in any franchising materials you put out there: for instance, you should make it clear that the franchisee is responsible for the cost of starting the business from scratch, including equipment and staffing. You should also outline what sort of training and support you'll provide, as well as branding and marketing materials.
5. Write a person specification. For example, you might want somebody who has professional experience in your industry – that's particularly important for restaurants, cafes, bars and other businesses in the hospitality industry. You might also want to specify the sorts of personality traits you're after: someone with an entrepreneurial, problem-solving mindset, who won't shy back from leading their own team, is pretty important.
6. Calculate the costs. The franchisee is responsible for most of the business' costs, so they should have access to enough capital in the form of savings or a bank loan. But it's important that you provide them with a rough estimate of how much they should expect to spend or the minimum amount that they should have access to. You could factor in things like expected real estate prices in different locations, the estimated cost of equipment and staffing, and how long a franchise owner can expect to be operating before they see a profit.
7. State your price. As the original business owner, you'll be entitled to a cut of the franchisee's profits, also known as royalty fees. You can dictate how much you expect to be paid. You can request either a fixed amount or a percentage of profits – 6% is fairly standard in the US, for example, but the fee can vary depending on the industry and size of the business. You can also decide how frequently you'd like to receive payment, such as monthly or every quarter.
8. Put it all in writing. It's important to get a specialist lawyer involved at this stage to help you draft a franchise agreement and contract. This will include information about both parties' responsibilities at the start of the partnership and beyond, and rough costings and fee structures.
9. Test your model. Now that you've established you have a replicable business model, written up a manual and found a potential partner, you'll want a test run to see if it works smoothly. Does the manual provide extensive enough information for the franchisee to work independently, or do they need to lean on you for questions quite a lot? Adjust your guidance accordingly.
10. Monitor how it goes. Pay attention to how often you have to get involved, for example, and what might be unclear to the franchisee. Although you'll ideally not stay heavily involved for too long, you should have a plan for providing ongoing support. This is why it's important to not bite off more than you can chew when it comes to franchising: if all of your franchise locations need support, you might not be able to get on with your own work. Once your business expands out to a few locations, you might consider hiring a dedicated franchise support manager.
• Franchising is a particularly popular business model in the hospitality and retail industries. If you've built a well-known brand that customers are loyal to, it's worth considering how you can expand through franchises.
• Franchising allows brands to open up new locations without the original business owner having to foot the bill for it. They provide the branding, marketing materials and manuals for how to operate, while the franchisee pays for the costs of a physical store, equipment and staffing.
• You'll likely need to be quite hands-on in the early stages of a franchise. Although most of the things a franchisee will need to do will be outlined in the manual, it's important to be available for support and training.
Tool. Instead of keeping up with each of your franchisees and their progress manually, you can lean on a franchise management platform. Monday allows franchisors and franchisees to assign tasks, share materials and track progress.
Example. US-based beauty business Face Foundrié is a great example of a business dipping into franchising. Here's how it communicates about its brand, who it's looking to partner with and the locations it's interested in.
Perspective. Check out The Wolf of Franchises, a platform dedicated to reporting on the world of franchise investment opportunities through a newsletter, podcasts and guides.
A version of this article was published in the Courier Workshop newsletter. For more deep dives into essential business concepts, sign up here.