« ...continued from page
During the feasibility examination, ensuring that consistency is
possible requires a few assessments to be made including:
- Whether the business, at the unit level, can be defined and
broken down into clearly defined steps that can be included in
operating procedures and manuals; and,
- Whether franchisees and their staff can be taught within
a reasonable period of time, and at a reasonable cost to execute
These determinations also necessitate an analysis of whether the
prospective franchisee or their future staff requires any specialized
skills or licenses before they become franchisees.
Depending on the skills or licenses your franchisees or staff requires
may reduce the pool of available candidates and have an impact on
the ability of the franchisor to find people able to meet their
Just as when we said earlier, " Before there is a single franchisee
there has to be a franchisor". Well before there is a franchise
system there has to be someone willing and able to become a franchisee.
Are they out there?
It's not sufficient to guess whether a pool of potential franchisees
exists. Simply knowing whom your potential franchisee might be is
not enough. You also need to know whether the pool of candidates
available to purchase your franchise will be sufficient to meet
your expansion goals. Even if you determine that the pool of potential
franchisees is adequate, are you certain that they would be interested
in your franchise. If they are, will they be able and willing to
make the required investment? Answering questions about the marketability
of your franchise offering and the extent that it can be marketed
is essential in determining whether your business is franchisable.
In determining whether there is likely to be a sufficient pool
of franchisees to meet your expansion requirements, at a very basic
level, requires you to determine:
- What basic skills will your franchisees will need?
- Will they be able to hire employees with the needed skills
if they may not have them?
- If they can't hire skilled staff, will your training program
give their staff the necessary skills?
You can't wait until you begin to offer franchises to have answers
to questions about your system's marketability. You may find out
that you have all of the documents required to invite people to
come to your party but nobody shows up to help you blow out the
candles. One of the reasons so many new franchisors experience little
if any growth in their systems is that the pool of candidates was
never adequate for their purpose, and a feasibility examination
might have determined that before they began the development of
The support system and fees
It's simply not enough for you to simply sell franchises to call
yourself a franchisor. Expansion of the system is only one goal.
The management of a growing and profitable system is your long-term
Good franchisors today provide support and other services to their
franchisees sufficient to give them a sustainable competitive advantage
over the competition. Will you be able to provide the necessary
support? During the feasibility examination you will need to determine:
- The types of headquarters and field support services that
will be required and how and when you will provide those services,
- The cost of developing and providing those services
Establishing fees and other sources of revenue will be a significant
focus when you begin to design and develop your franchise system.
But, during the feasibility examination, making certain that sufficient
income will be available is essential in determining whether your
business can expand through franchising.
It is important to remember that ultimately the fees and other
sources of revenue will need to meet two tests:
First, they will need to provide the franchisor with sufficient
income to provide the services required while providing for a reasonable
return on their investment for developing and operating the franchise
Second, when paid or incurred by the franchisee, the franchisee
will have sufficient revenue to be profitable and there will be
sufficient residual income to ensure a reasonable return on their
Setting appropriate fees is one of the most difficult decisions
a franchisor will have to make. If you set your fees too high, your
franchise may not be marketable against the competition and your
franchisees may not be profitable. If you set them too low, your
franchise may be marketable but you may not have enough revenue
to provide the services needed to your franchisees. Neither alternative
However, we often find in discussions with clients who are already
operating a franchise system that their franchise fees were set
primarily by profiling those of their direct franchise competitors.
When you think about it, even if franchisees offer the identical
product or services as their competitors, their investment, sales
or cost of operation will not be identical to those of their direct
competitors. Even if the franchise system looks the same as others,
the same cost structure, growth strategy, exit strategy and a host
of other variables will not be the same. Establishing fees based
primarily on those of the competition is not only foolish, it's
potentially dangerous since the fees need to be based upon the reality
of the business being franchised.
Unfortunately, many new franchisors who do not strategically develop
their franchise system and who do not sufficiently understand the
system's economic realities simply review the listings contained
in publications like the Entrepreneur 500, determine what the competition
is charging their franchisees and set their fees lower. If all you
have to offer a franchisee is lower fees, do you really have anything
worthwhile to offer? If the fees you select are too low or too high,
the impact on the future franchise system can be dramatic.
As an inelastic method of distribution, that is one that is governed
by long-term contracts where changes in the fee structure during
the term will be difficult if not impossible, franchisors will have
to live with the fees they set initially, at least for those franchisees
that enter under that contract. In addition, setting ongoing fees
simply as a percentage of gross sales may be routine for most franchisors,
but it may be the wrong structure for your system. Changing how
you charge royalty fees will be equally disruptive.
The feasibility examination should provide some assurances that
once developed, the franchise system will be able to meet the financial
expectations of the franchisor and future franchisees. During the
strategic process, when all of the variables are examined in detail
and the costs are better known, the final rate and structure of
the fees can then be determined.
Your ability to expand
By definition, the reason companies enter into a franchised method
of distribution is to expand. What are your goals for expansion?
Are they realistic and achievable?
Few franchisors come out of the box and successfully develop into
a national chain overnight. Many, because they do not have a market
development strategy, allow the phone calls to determine their expansion
strategy and find themselves with one location here and the next
one a thousand miles away. Spending all of your royalty in travel
to a distant franchisee or worse, not visiting that franchisee because
you can't afford to is a reality for some new franchisors.
Making certain that you have available markets where you can economically
support growth and achieve the required critical mass to sustain
franchisee profitability is extremely important for new franchisors.
At a bear minimum, market studies to determine that you have available
expansion options and where and when you should expand will be required.
You will also need to decide how you will expand into the markets.
Entering core markets and tertiary markets will likely require different
strategies. Will franchisees that meet the requirements of each
type of market be available?
None of the elements of a franchise system really stands on its
own. Each element rests, to some degree on your ability, to achieve
the others. However, realistically assessing your potential through
a feasibility examination will enable you to determine not only
whether you should expand but will also assist you in determining
what may still need to be accomplished before you are ready.
But, conducting a feasibility examination is only your first step
in franchise development. Developing legal agreements is still far
down the path.
Designing the franchise system
You should view the feasibility examination as a 30,000-foot high
look at your future franchise system. The process of designing and
developing a franchise program will bring you down to ground zero.
The design and development of a franchise system will requires
that you evaluate each element of the future franchise system, determine
how it integrates with other elements, make changes based upon the
information collected and begin the development of the tactical
elements you will require.
The process will differ for each company and each industry but
the elements will contain similarities. If the feasibility examination
was conducted properly, you will be able to build and expand on
the elements you reviewed during the feasibility process.
Some of the broad strategic and tactical elements will include:
- Existing management's capabilities and other staff that you
will require in managing and growing the franchise system
- Competition both at the franchise and consumer level
- Potential conflicts between the franchisor and franchisee
and methods to reduce or eliminate these problem areas
- Economic impact of franchising on the franchisor and franchisees
including investment, cash flows and return on investment
- Financing requirements and exit strategies for the franchisor
- Market strategy including market approach, targeted markets,
critical mass requirements, franchisee profile, structure of the
franchise relationships used, selection criteria as well as marketing,
closure and sales compliance strategies.
- System information and management including accounting, IT
and point of sale systems, among others and the use the system
makes of the information available
- Policy formation including, real estate, advertising, territorial
rights, supply chain management, terms of the franchise offering,
equipment, signage, etc
- Training programs and manuals including what is included
in the training programs and manuals, participants who will attend
training, other training required or offered, costs for training,
locations, procedures, training staff, etc
- Monitoring mechanisms including site selection and development,
operating standards, financial management, sales and marketing,
trademark usage, in-system operating and qualitative evaluation,
competitive analysis, etc
- Support programs including headquarters support, field support,
ongoing visits, contact reports, research and development, motivation
programs, franchise relations programs, system communication,
- Ongoing services and programs including cooperatives, advisory
This is only a preliminary list but only after these and a host
of other elements are evaluated for inclusion into the system, their
cost for development and implementation is determined and their
impact on the revenue and expenses for the system, at all levels,
are determined, can you properly determine the fee and other structural
elements of the franchise system. Only then can you truly provide
proper information to your legal counsel for the development of
the required franchise legal documents.
The reason usually given for why franchisees are better prepared
to operate their new businesses than independent business owners
is that the franchisor is prepared to provide them with the necessary
tools and structure. Where new franchisors shortcut the process,
skip the necessary evaluations and the development of the underlying
components and move directly into the development of legal documents,
it is unlikely that the benefits of franchising can truly be realized
for either them or the franchisees. Planning and evaluating the
underlying system is the first step in providing franchisees with
the tools they require to succeed.
Copyright, 2003, MSA