FRANCHISING PART 2: THINKING OF PURCHASING A FRANCHISE?

In this two-part feature, Philip Ciniglio from Market Minds looks at both sides of the coin when becoming involved in a franchise business. Here, part two looks at the considerations of starting a franchise company.

Franchising works well in the pest control industry. Both the franchisor (the creator of the formatted business system) and the franchisee (the person who buys into that system under a contract or Franchise Agreement) should both prosper if the business model is set up correctly. Australia is one of several countries that has been legislated with a code of conduct and is world-leading regarding best practices in ethical and fair trading in franchising.

In this two-part article I will provide an outline of the benefits and potential pitfalls of entering into a franchise.

Weighing up the options

If you are thinking of starting a franchise then this is a significant business step. Do not consider becoming a franchised company unless you have been operating for at least two years and have the success to prove that your system can support franchisees.

It is important to understand that a franchise company can only be built and prosper through having ongoing fees from its franchisees. These fees can include royalties, marketing, software, lead generation and so on. There is no standard set of fees; each industry operates at various margins and profitability, and each industry determines its own level of fees.

The fees must be viable for both the franchisee and franchisor. It is essential that as a franchisor, you have adequate fees to be able to grow and support your franchisees; if they are too low you may end up with complaints about the lack of support or lack of customers acquired through marketing. Conversely, unnecessarily high fees may restrict the franchisees’ earning potential.

The pest control industry is considered a mature market, and if you are contemplating entering the market as a new franchisor, then you will need to take market share. You will need to determine your point of difference – what is it that will make people want to change their supplier to you?

Getting the model right

The business modelling is critical, and you should seek advice from experts that have experience in developing franchise business models. In my opinion it is far better to develop your business model first before seeking any outside professional advice, as this will help you determine the level of fees and help make the decision whether to proceed any further.

Once you are satisfied that you want to go ahead with franchising, then it is time to engage with a franchise lawyer and accountant, both of whom should be members of the Franchise Council of Australia. A qualified franchise lawyer will help you follow the mandatory process of legally agreeing to abide by the rules of the Franchise Code of Conduct.

If after seeking professional advice you have a business model that you can take to market as a franchised company, there are still other factors to consider.

Managing your new business partners

Managing franchisees is a whole different world. These franchisees will be your business partners, and whilst they will join the franchise company for direction and leadership, it is important to give them respect as business partners and involve them in strategy and planning as much as possible. Are you the right person to manage a franchise network?

Franchising was designed so that you can grow the business by using other people’s money, which is fine if you are not trying to grow the business on a shoestring. When you recruit franchisees, you become responsible for their success even though they are taking their own personal risk. If there are any problems with a franchisee’s business, then your support system should be in place to help put things back on track.

If you are planning to make a lot of money by franchising, then you’d better plan to make it slowly. All new franchised companies take time to make significant profit. As a franchisor builds the number of franchisees, they have to spend money on extra staff, technology and marketing, until they reach a critical mass of number of franchises. Critical mass is the point at which the business has become so well established, with many franchises in the system, that every franchise sold after this point gives exceptional extra value to the franchisor business.

The 20-60-20 rule

Franchising can be summed up using the ‘20–60–20 rule’. A survey of the Avatar group, which comprises over 100 franchised companies, revealed that 20% of any franchise group on average will be highly successful. The top 20% were found to be entrepreneurial and only 80% compliant to the systems. Across the range of companies of course the percentage varies, but on average it was 20%.

The next group is the bottom 20%, which consists of struggling franchisees, new franchisees just in early growth stage, or failing franchisees (failing businesses only accounted for, on average, 1%).

The largest group was in the middle, 60%, which we could call mediocre. Those franchisees earning a living from a low to a high rate. This may seem alarming, as you may expect that all people that purchase a franchise business would want to be considered high achieving, but that simply isn’t the case.

There are many reasons people want to purchase a franchised business and it is not just about building wealth. There are those that choose lifestyle and there are those that may not be as competent as first thought. Nevertheless, this will be the mix of people that you will end up trying to manage when your business grows in numbers.

My advice when setting up your business model is to embrace these facts and build your model and systems to accommodate all types of people.

Philip Ciniglio, Managing Director, Market Minds

Read part one of this article, Thinking of Purchasing a Franchise?