Franchising

Franchising is the big idea of the moment, especially since most aspiring entrepreneurs find it to be one of the easiest ways to start a business. And where there's demand, there are enterprising individuals ready to supply the solution. Moreover, franchising is currently the favored way of expanding one's business, hence many business owners are jumping at the first opportunity to offer licenses to their brand.

However, getting into franchising should not be done on a spur of the moment. Rudolf Kotik, owner of RK Franchise Consultancy and who has 27 years of experience in franchising, says preparation and a lot of self- and business evaluation must be done before one makes the leap to franchising.

 

Kotik enumerates seven things a would-be franchiser must decide on before going into franchising:

 

1. Readiness of the Business
The most important thing to determine from the onset is if the business is franchise-ready; in short, if it can be replicated in other places, and if other people can operate it. Ask yourself: Is the business too easy to be replicated that others will no longer be interested in franchising it? Or, is it too complicated that it would be too difficult for others to operate it, as it would take months or years of training?

The business owner must also ask himself if he's willing and ready to deal with franchisees. Remember that the franchisees are business partners that you have to share your experience and expertise to. If you are not keen on spilling your trade secrets to a would-be franchisee then, maybe, franchising is not for you.

2. Franchise Fee
This is the amount the franchiser asks from the franchisee in exchange for using the business name and the operating system. This is not so easy to decide on, as it is the value people are willing to pay to get a piece of the business. The challenge to the franchiser is being able to set the right price--neither too high nor too low. One factor that should be considered in setting the franchise fee is competition.

3. Royalty Fee
The royalty fee can either be a fixed amount or an amount based on sales which the franchisee must pay the franchiser weekly, monthly or quarterly, depending on what is stipulated in the franchise agreement, for the continuing use of the trademark and other proprietary marks of the business. As with the franchise fee, some research is needed to determine this amount.    

The usual franchise packages include the crew's uniform, marketing collaterals, opening assistance, and initial inventory, among others. Some include the construction of the store in the package while others only provide the design.

"If you set the total investment cost at P1 million, the actual cash out of the franchisee must be less than that amount," Kotik advises. "The franchisee would then be happy that he still has 'savings'. If you set it at P1 million but the franchisee's actual investment ends up to be more than that, he'll be disappointed," Kotik explains.

5. Investment Recovery Period
Every franchisee who invests in a business has a right to know when he can recover the money he has put into the venture. If the business owner has operated the business for quite some time, he should already have an idea of the average earnings per outlet. He can thus use this as a basis to compute when a franchisee can recover his investment.

6. Required Space
The franchiser must also set the space requirement for the business. Does the business need a garage, a space in front or a spacious kitchen area? This will help the would-be franchisee determine what location is suitable before he even applies for a franchise. It will also help the franchiser estimate how much investment is needed to replicate his business.

7. Target Market
One of the reasons why a franchiser needs to have one or more established outlets before franchising is for him to know the specific market the business will thrive in. Will the business click in schools, business centers or malls? A franchiser who has not identified which market segment will patronize his product or service will not have the credibility to say the business will do well in the franchisee's location.