INNOVATION EXPERIENCE RESULTS. FRANCHISE DEVELOPMENT IN CANADA What Makes a Business Franchisable?

Transcription

1 FRANCHISE DEVELOPMENT IN CANADA

2 Franchising is now a worldwide industry with 17,500 franchise systems, 1.2 million franchisees and 12.5 million employees generating US$1.4 trillion annually (Portman, Franchise Africa Symposium, 2002). Canada is the second largest franchise market in the world (after the USA) Canadian franchises sell over $100 billion worth of products and services every year. Canada offers a great opportunity for new franchise concepts and for established international franchisors to establish new markets. The Canadian economy is vibrant, robust and growing and has not been as severely impacted by the economic downturns that have hit the USA and EU business sectors. Much has been written about how franchising, especially in North America, is the low-cost, business development strategy which is guaranteed to be successful. While many brands that have embraced franchise development as a growth and financing strategy with great success, there are equal numbers who have tried and failed due to a combination of factors that are addressed in our review. Reasons for Franchising Let s start by asking why business owners should consider franchising their business in the first place. There are three principal reasons, and all other reasons are typically variations of the following: Using franchising as financial leverage to grow a business faster than one could with only one s own capital Expand in unfamiliar areas using the local knowledge of franchisees The belief that franchise owners (franchisees) will have more significant impact on the sales, customer satisfaction and the bottom line than paid employees. Can any business be franchised? Well, let s take a look: As a rule, a business can be considered franchisable if it meets five basic criteria: 1. It can be reproduced 2. It is profitable 3. There is an added-value to the potential franchisee 4. There are the financial resources to support a franchise system 5. That you are the right fit as a Franchisor. Page 2

3 Franchisees as Entrepreneurs It is important to understand that, in most cases, potential franchisees are not entrepreneurs themselves. Typically, they are either employees of other businesses wishing to improve their current situation or have recently left full time employment with a financial package and are not yet ready to embrace retirement. The commonality with both groups is that they want to own their own business but perhaps realize they do not have the required business skills or industry experience. Franchisees seek to take advantage of proven business systems which will provide them with all of the key benefits of business operations while removing some of the risks and learning curves associated with starting and learning to operate their own businesses: 1. An established brand and proven business model 2. Mass purchasing power 3. Co-operative Advertising 4. Operational Support and Training 5. R&D, marketing new products and services 6. Access to financing and site selection, where applicable. The Franchise Business Model Criteria #1: The business can be replicated and scaled In this scenario, an example of a no-go situation is the case of a new entrepreneur who has a great idea, which he or she thinks is a sure bet for a franchise. However, the entrepreneur cannot wait to find franchisees to prove him or her right. or wrong. You cannot launch an unproven business by asking a franchisee to do what you are either unwilling or financially incapable of doing yourself. After all, the prospective franchisee is going down the franchise route because they are looking for a total support package (see above). Most franchise consultants in Canada are approached by entrepreneurs and business owners on a regular basis to help them launch a business idea using capital from franchisees. Franchising is not about using other people s money to try out something new. If you have little or no capital to start your business, there are alternative methods and financial resources in the market to help you. As a general rule, before considering franchising as an expansion strategy, your business should be operational for at least three years with a second unit opened and established operating systems in place providing similar or even greater success than the first one. The business must be profitable, with positive cash flow and with sustainable operating systems in place. Of equal importance, it should be capable of being wholly replicated and scaled. Another example of a no-go situation is a concept which depends solely on its founder (e.g. a creative chef, a unique knowledge-based service, etc.) where the recipe for success cannot be reproduced in documented procedures or through a training program. This does not mean that other stores cannot be opened with success, but if it requires day-to-day supervision by the founder, you need to ask, What is the value of a franchisee for this concept? Page 3

4 Criteria #2: The business is profitable The second criterion is about return on investment and profits. Most people go into business to make a living, pay the debt incurred to acquire the business, and make some profit for a nest egg when it is time to retire. While some people don t care about the money, they are a rarity. Therefore, it is hard to franchise a business that is not profitable. The franchise concept must be profitable to both the franchisor and franchisee. As simple as that sentence sounds, some franchise systems go one way or the other, which cannot work in the long run. Franchisors must make money as well in order to retain the staff needed as the system grows and cannot depend solely on initial franchise fees to sustain this. Obviously, the reverse is also quite true. Franchisees will quickly become disillusioned if there is no profit after a reasonable amount of time. The consequence can be extremely tense in terms of relationships between franchisor and franchisees and a grinding halt in expansion as current franchisees negatively influence new franchise candidates. Criteria #3: Added-value to potential franchisees Some franchise model offers seem to suggest a franchise is something that anyone with a reasonable mind can do by themselves. The problem with that is, of course, perception. Why would a franchisee pay an initial franchise fee and ongoing franchise royalties for a business that they might be able to start themselves? The added-value of a franchise is not necessarily related to the product or service. It can be about unique training or support, the supply or pricing of the product, the unique strength of the brand or the marketing. Think of some of the most successful franchises in Canada. A pizza is a pizza, a doughnut is a doughnut. Why would one buy it at one franchise as opposed to another? Often, it is not the uniqueness of the product but everything else, like the consumer experience and brand strength. Franchisee recruitment is the same. There must be some perceived added-value from the franchisee s perspective. Before launching a franchise system, careful analysis must be made to ensure that there is enough profit for both parties. The balance of profitability for the franchisor and franchisee is a fine line but franchising is a symbiotic relationship and one party cannot take advantage of the other one and expect to survive. Page 4

5 Criteria #4: Financial Resources to support a franchise system Another common misconception that would-be franchisors have is that capital will come entirely from franchisees. This perception is incorrect. In addition to the three criteria outlined above, your business model must be designed and a business plan must be developed to define your unique value proposition. This includes an in depth business and financing plan before marketing and selling your franchise concept. Some of the components you will need to address include: Market Research, Franchise operations manual, systems and support Financial projections including profit and loss pro-formas. Brand development for logos, image, customer experience Territory Planning, Trademarks Consumer Marketing, advertising, sales process and campaigns, Franchise sale, advertising and recruitment. You will be required to develop Franchise Disclosure Documentation (FDD) in most jurisdictions and register your franchise concept. In some jurisdictions, you are required to provide audited statements as part of annual filings. The development and launch of a new concept is similar to a financing prospectus for a new business and requires extensive disclosure on the concept, the financial strength of the franchisor and the franchisor s management. Strict rules must be followed in the franchise sales process and what can and cannot be disclosed as part of regulatory compliance management. New franchisors will be required to invest heavily in marketing and sales to recruit new franchisees, establish territories and monitor deal flow and compliance. Eventually when candidates seek you out, enter into meaningful dialogue with you and before they are willing to invest their hard-earned money and leave their job, they will expect that you have everything set up to run this business. Page 5

6 Criteria #5: Franchisee Relations - Are you the right fit as a Franchisor? So what do you do if you have met all the above criteria? Do you launch your business as a franchise? There are a few more questions to first ask yourself: Are you the type of person that needs to be in complete control all the time? Are you the type that cannot stand to share anything with anyone else? If, in your mind, people are a necessity that you could do without and you dream of the day when you could clone yourself, franchising may not be your thing. You cannot be of a dictatorial nature. You should possess the abilities to explain, demonstrate and persuade franchisees to accept your advice. The result will be informed, supportive, profitable franchisees and a revenue stream from royalties and rebates that will allow you to defer your costs and make yourself profitable. Franchisees are partners in your business. They have invested their time and, in most cases, a lot of their own money to own a business. If you cannot accept that franchising is about relationships, sharing ideas and working together, this business model is not for you. Page 6

7 The Canadian Franchise Sector As far as what type of business can be franchised, there is great news. Franchising has expanded over the years from restaurants to a large segment of retail and services. Today, there are bricks and mortar systems in areas such as food, retail, automotive, business-to-businesses, pets, beauty and more. Home-based franchises provide blue collar and white collar services ranging from maintenance, cleaning and accounting to teaching, training and internet services. The Canadian Franchise Association (CFA) website lists over 46 categories of franchise offerings in addition to an Other category! There are some interesting facts surrounding the Canadian Franchise Market. Did you know that? Canadian franchises sell over $100 billion worth of products and services every year, making Canada the second largest franchise market in the world (after the U.S.) There are over 1,000 franchise systems operating in Canada, representing almost 76,000 franchise system outlets More than 4,300 new franchise outlets open in Canada each year every two hours, every day The average franchise fee is $25,000 The average franchise investment in Canada is between $150,000 and $200,000 A record 1.5 million Canadians are employed by franchise operations 92% of new franchises pass the critical first five years a rate nearly four times higher than independent businesses 86% of the franchisees opened in Canada within the last five years are still under the same ownership In the restaurant sector, 35% of all sales are from franchise operations In the retail sector, 45% of all sales are from franchise operations The fastest growing demographic of franchise buyers is women More and more manufacturers are using elements of the franchise business model to motivate their sales force/distribution network with the objective of creating a business format for people who worked solely on commission before. Of course there is a fine line between licensees, wholesalers and franchisees, but in some cases, this format is closer to franchising than other forms of distribution. Is it worth considering Franchising as a growth strategy for businesses in Canada? YES, provided of course that you meet the criteria. If you are considering entering the Canadian market or are exploring the development of a new franchise concept, Plutus Consulting Group can provide the expertise and guidance from start up to launch to growth management to operations improvement. Visit us at Call us at Tel: or info@plutuscg.com Page 7

8 ABOUT PLUTUS CONSULTING GROUP We have senior management experience in business and in the non for profit sectors. We have built organizations, led management teams, worked in great times and have the knowhow gained through the pain of making it through tough times. We understand entrepreneurs, small organizations, fast growing businesses, not for profits and the corporate world. We understand how to build business value as well as organizational values and cultures on a sustaining basis. Our core of expert management consultants represents a number of different and complementary business disciplines. We work in total synergy with each other to deliver management consulting services that work hard to improve your innovation, productivity and profitability, but do so in the most cost effective way possible. We go beyond review and planning our approach is to work actively work with you and your team to implement the agreed changes. Our core specialities are: Business & Strategic Planning Organizational Design Financial Planning Financing Mergers and Acquisitions Business Succession & Transfer of Ownership Human Resources Marketing Sales Business Turnaround Management New Product Development Executive Coaching Franchise Development Franchise Operations We are not a company that simply presents you with an expensive and cumbersome report and walk away. We act as your Project Management Team, assign a lead Principal, report regularly and see the job through. Our goal is simply to deliver the agreed solutions to enable you to reach your target of competing profitably in your chosen market. We provide clear, meaningful and objective management information and practical advice, plus the added value of working with the organization through implementation of the projects necessary to get your business on track. Contact Information Plutus Consulting Group 353 Iroquois Shore Road, Unit #200 Oakville, Ontario L6H 1M3 Tel: Fax: info@plutuscg.com Page 8