WHAT MAKES A QUALITY FRANCHISE?

Buying the right franchise can take the fear out of starting your own business – but how do you choose a good one?

If you’re looking for a business opportunity, how do you go about finding a franchise that can deliver what you want? Buy a good franchise and you stand every chance of success. All the effort you put into developing and marketing your new business will be directed towards activities that really work, offering a product or service that people really want. But buy a franchise that isn’t so well developed and you’ll use all your energies trying to overcome the flaws; worse, your efforts might just multiply problems you can do nothing about. That’s why you need to choose your franchise carefully.

What are the differences that make one franchise successful while another one struggles? Let’s look at the ingredients that make up a quality franchise system. These can be broadly divided into seven main categories:

1. The business and industry

2. The franchise itself

3. Establishing new franchisees

4. Systems in place

5. Ongoing business management

6. Maximising Return on Investment for franchisees

7. The franchise culture

1. The business and industry

For any business to succeed, it must provide a product or service that people actually want, at a price they are willing to pay, and which delivers a profit to the business owner after all costs are taken into account. The key ingredients here are:

Proven product or service

If you are looking at any franchise, you need to be certain that the main product or service is a popular one with a real market. If the business has been operating for some time that should be quite easy to confirm. Talk to the franchisor, to franchisees and to customers. Have a look online to see what people are saying about the brand and what feedback they give about its products or services versus those of its competitors.

Real market

Successful franchises not only have a great product or service; they have a large enough market to sell it at a profit on an ongoing basis. New Zealand has a small population and if a product only appeals to a niche market, then it may not work here – even if it is successful overseas. But be aware that new niches are developing all the time: concepts such as Katsubi and Bricks 4 Kidz have been made viable by changing demographics. Equally, new technologies and new legislation constantly open up more opportunities: for example, the rise of online shopping has created massive demand for InXpress and Pack & Send, changing legislation makes Accessman or Jim’s Test & Tag a very interesting business option, while new technologies have inspired SkyTech (drones) and FiSBO (AI-enabled property auctions).

Strong brand

For a business to attract customers, it has to communicate what it stocks or what it does, and what advantages it offers compared to others in the same market: price, service, quality, convenience, range or whatever. Having a well-known brand means that the business can short-cut that communication. If you see the McDonald’s logo, you know it stands for speed, cleanliness and a value range: if you open a new store with their name above the door, you will have a ready-made fan base. The stronger the brand, the more the franchise is worth – provided that it has the rest of the elements for success in place. A big customer base is only worth having if every sale makes a worthwhile profit. Which brings us on to …

2. The franchise itself

For a business to be successfully franchised, it must be capable of being reproduced in other locations and run by other people – the franchisees. Crucially, the level of profitability must be high enough that both the franchisor and franchisee can make a fair income from the business.

Proven business model

Good franchises have the experience to know what a franchisee needs to achieve in order to be successful, and have proven it across multiple locations. They have target percentages that have to be met in key areas such as rent, staff costs, power bills, fuel costs, wastage and so on. They have target figures for foot or vehicle traffic past a location, or the population numbers and type within a particular territory.

With this information, they can evaluate the probable success of any new venture and if the numbers don’t stack up, they won’t proceed –whatever the would-be franchisee might think. If the numbers do stack up, they are able to give the franchisee a good indication of the level of sales they need to achieve in order to build a viable business.

Financially healthy franchisor

For a franchisee to succeed, they must be on a sound financial footing with adequate finance and borrowing capability in place. The same applies to the franchisor – if the franchisor is not sound, the investment of all the individual franchisees could be in danger. As Grant McLauchlan of CrestClean, 2021 Supreme Franchise System of the Year, says, ‘It’s a big responsibility when you’re half-way across the river developing your franchise system, and you’ve already taken a franchisee’s money – that’s a hell of a time to realise that you haven’t got your strategy and funding in place, no matter how good your business model is. When we created CrestClean, we knew we wanted to create a brand that would be recognised throughout the country, and we planned accordingly.’

A good franchisor will provide would-be franchisees with a viability statement with key financial information and/or an independent audit. In fact, it is a requirement for members of the Franchise Association of New Zealand to include this within the disclosure document.

3. Establishing new franchisees

If the franchise you are looking at has all the above ingredients, that’s a good sign. Now you need to look at how the franchisor can help you establish your own business as a franchisee. Once again, there are some key elements that quality franchisors will offer:

Recruitment procedures

These vary greatly between franchises, but the best franchises have systems in place to ensure that the franchisee is selected for their ability to succeed and receives all the information necessary for them to make up their mind about the business. Part of this process is helping the would-be franchisee have a clear understanding of their role in the business and realistic expectations of what they can hope to achieve. And they shouldn’t just suggest you consult a franchise-experienced lawyer and accountant to help you get to this stage – they should insist upon it.

Initial training

When you buy a franchise, the chances are that you will be moving into a business – and possibly an entire industry – of which you have little or no experience. That’s not a problem as long as the franchisor has a good training programme in place. Franchisees are required to take in an enormous amount of information of varying types in order to learn not just how to operate the business (make pizzas, mow lawns or whatever it might be) but how to market it, manage it and handle the administrative and time-management functions that come with being self-employed.

A good franchise does not dump all this information on the trainee at once, but provides a series of stages that allow the franchisee to become comfortable in all their various roles before, during and after opening their business. They also provide manuals to refer to in the future.

Site selection

Because the franchisor has established various figures and percentages that they know will make their business model work, they can accurately assess the potential value of any site. I know one very successful franchisee – a previous Award winner – who had a very successful business in a particular location. When the circumstances of that location changed, the business model became unsustainable. That was not the fault of the franchisee or the franchisor, so there was no point crying about it – with the franchisor’s assistance, he simply found a new location where the model would work. Good franchisors can calculate whether a location is realistic.

4. Systems in place

Having the right product or service, the right people and the right location are all vital – the final element in establishing a new franchisee successfully is having the systems in place for them to follow.

Documentation

A good franchise relies upon using procedures which are the result of years of learning, development, fine-tuning and experimentation. These systems need to be properly taught by franchisors to franchisees, and by franchisees to staff, in order to ensure that the customer’s expectations of the franchise are met and that the franchisee is operating in a safe, efficient and profitable manner. Quality franchises document and present their systems in a way that franchisees and staff can easily follow – usually online, these days.

Information management

A quality business model means knowing what the franchisee needs to achieve in terms of both costs and sales in order to be profitable. However, this has no value unless you can measure the same figures that you are actually achieving in your own franchised unit on a regular basis and compare them with the targets, and with the figures being achieved in other comparable units of the same franchise. This is called benchmarking.

For benchmarking to be useful, the franchise has to have good information systems in place that are applied consistently throughout the franchise. These days, many such systems use cloud-based technology and may bring together accounting, payroll and point-ofsale software to make comparisons easy. However, it does require franchisees to be willing to share information for everyone to get the best from any benchmarking system.

Purchasing power

Large franchises often have considerable purchasing power; quality franchises make the most of that power to offer real competitive advantages to their franchisees. Purchasing power is not all about getting the lowest possible price: it’s also about terms, service, marketing assistance, rebates and many other factors. A wise franchisor mixes all these elements to get the best possible outcome for the franchise. You can learn more about this at www.franchise.co.nz/ articles/2947 – it’s one of the greatest benefits good franchises provide.

Transparency on fees

Whatever the financial relationships between franchisors, franchisees and suppliers, good franchisors reduce the possibility of confrontation by ensuring that any rebates, commissions, mark-ups or contributions to marketing funds are not concealed from franchisees. (see page 40)

Structure

Quality franchisors believe that in order for them to be successful, they need to ensure that their franchisees are successful. That is not to say that they have never had a franchisee fail – franchises can run into all sorts of problems, not all of them business-related. What it does mean is that they have a substantial proportion of successful and satisfied franchisees who have proven that the model works and that the business is structured in a way that enables franchisees to make a fair return on their investment and labour.

5. Ongoing business management

Once a new franchisee has been established, that’s not the end of the story. Ongoing success depends on continual input and response to change by both the franchisor and franchisee to help every franchised unit achieve its potential.

Re-investing in the business

Good franchises have always had a policy of re-investing in their businesses through product research, systems upgrades, adoption of new technology and other forms of support and marketing. Similarly, they insist upon franchisees upgrading their own premises or systems on a regular basis. If they do this well, it pays off – franchises that reinvest during economic downturns, for example, usually find themselves in a very strong position with increased market share and improved relationships with both customers and franchisees.

Competitive edge

New competitors come and go, markets change, customers’ tastes change. Good franchises can demonstrate a solid track record of managing issues and opportunities well, of learning from past mistakes and maintaining their advantage over competitors.

New technologies

Technology can be a great way to waste time and money for a small business owner, but good franchises adopt new technology early when it can be demonstrated to provide real business advantages for franchisees. Columbus Coffee’s highly successful Rewards app has over 350,000 users, while Storyteq’s software allows individual franchisees to create localised promotional material and easily upload it to a variety of social media platforms. It’s not just about marketing, either: Xero and MYOB have revolutionised accounting, new franchise management systems can improve benchmarking and project management, while online training was rapidly adopted during the pandemic, improving processes while reducing costs.

6. Maximising Return on Investment for franchisees

Measuring and benchmarking franchisee performance is part of the process of helping franchisees to maximise the return they receive for the time, money and effort they put into running their business. A quality franchisor will have procedures in place to monitor and compare information from throughout the network, to spot trends and anomalies and to draw issues to the attention of individual franchisees at an early stage.

Improving profitability

Markets change, tastes change, opportunities change. A good franchisor uses both their industry knowledge and the information they collect to look for ways to boost franchisees’ profitability and protect their bottom line. This may involve increasing buying power, reducing overheads, increasing sales or improving performance. These are all activities the Franchise Awards judges look for in selecting winners and finalists – so should you.

Auditing of standards

The value of any franchise lies in its reputation for consistency and reliability, whatever product or service it offers. That’s why good franchises have various auditing procedures in place to ensure that every franchisee is meeting the required standards on everything from product quality to service time, image, cleanliness, layout, uniform and many other key measures. It’s not to check up on you – it’s to protect the brand, and every single franchisee’s business from rogue operators.

Support

Most franchises offer some form of ongoing support to their franchisees at different levels, but the best always go beyond the basic in-store consultations. Good support is not just about encouraging operational excellence – it’s about providing encouragement and assistance with sales skills, marketing, profitability, cash-flow management, calculating break-even, cost control, security, personnel management, insurance, staff recruitment and training, goal setting, business planning and so much more. It’s about ongoing education and improvement.

Acting on advice

It has to be said that while franchisors can offer good advice, franchisees are not always willing or able to take it. That’s one reason why, even in the best franchises, you will always find a small percentage of under-performing franchisees. It’s also why good franchisors help poor performers to get out of the business.

And good franchisees don’t just expect the franchisor to provide everything for them – they look outside for learning opportunities, too, upskilling themselves in areas from financial management to sales. They’re always working to smooth out their personal Wheel of Fortune, as Bill McGowan puts it on page 28.

7. The franchise culture

The final characteristic that distinguishes quality franchises from the rest is the culture: the mood within the franchise, the sharing of common aims and ideals and the level of trust that exists between franchisor and franchisees that each will do their best for the good of all concerned. This is developed in a number of ways:

Aligned expectations

Good franchisors ensure that new franchisees have a clear understanding of their roles and responsibilities, along with realistic expectations of what they can hope to achieve in the franchise. This helps to build trust right from the start.

Communication

Having a variety of communication tools helps keep everyone informed and on target, and helps to prevent misunderstandings. Phone calls, emails, regular meetings, conferences and visits all help. Quality franchises also encourage both formal and informal communication between franchisees, with intranets and online discussion boards proving especially valuable in systems where franchisees may be far apart.

Franchisee input

Franchisee consultation and participation in strategic planning is actively welcomed by the best franchises through advisory councils and, in the larger franchises, committees on sub-topics such as marketing. Involving franchisees in decision making not only enables a wider understanding of the issues that the franchise faces; it encourages buyin to the decisions and produces better results.

Dispute management

All franchises experience disputes occasionally. Franchising is about business and personal relationships, and relationships can go wrong. The mark of a quality franchise is not that it doesn’t have disputes, but how it handles those disputes when they arise. Good franchisors respond quickly, listen to issues and seek early agreement on the way forward. If agreement cannot be reached, they seek mediation. However, if there is a problem that affects the franchise as a whole, they take firm and decisive action to protect the brand and the investment of other franchisees.

Confidence in leadership

According to Greg Nathan of the Franchise Relationships Institute, ‘Effective leadership is the single most important factor in the long-term success of a franchise network.’ The market is constantly changing and no franchisor will make the right decision 100 percent of the time. Even within the same system, what works for one franchisee will not work for another. But if the franchise has a leader who can set a clear direction and communicate it to everyone involved, who is seen to listen to franchisees’ concerns and is trusted by them to deal in an honest and straightforward fashion, it will enjoy a culture that makes facing the challenges of business life a much more positive – and successful –experience for all concerned.

It’s important that a new franchisee be familiar – and happy – with the culture of the franchise before they finally decide to buy the business. If you are comfortable with your new colleagues and share similar goals, you are far more likely to achieve your ambitions.

It’s a marathon, not a sprint

Buying a franchise isn’t about ‘getting rich quick’ – it’s about investing in a proven business model that will help you make the most of your investment and provide the rewards you seek.

The quality of a franchise is not measured by immediate financial return – success in any business is more of a marathon than a sprint. But you want to be confident that along the way you will get great advice, great deals and great systems to help you make the most of your investment. You also want to be confident that someone will be monitoring market changes and thinking up ways to make the most of each new opportunity.

A quality franchise will reduce the risks involved in starting up your own business, increase your chances of success and make it easier to raise finance, manage your business and maximise the return on your investment.

So take your time, do your homework and get the best advice you can. Buying the right franchise can transform your life.

About the Author

Simon Lord is editor of Franchise New Zealand media and has worked in franchising in NZ and the UK for over 40 years.