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How to manage risks in franchising

Deal with issues ranging from copycats to quality control
By Toni Antiporda |

 

 

Finally, after years of growing your business, you feel like you’re ready to franchise. Yet something holds you back. Perhaps it’s the horror stories you’ve heard about failed food carts and their problem franchisees. You just don’t want that kind of headache.

 

“Once you open your doors to franchising, you can’t close it,” says Armando Bartolome of GMB Franchise Consultants. That is why most entrepreneurs are still hesitant to make that jump to becoming full-fledged franchisors, even with the promise of explosive growth for their business.

 

“Franchising has a tendency to accelerate everything,” says Francorp Philippines’ managing director Manuel Siggaoat Jr. But if not done properly, it can also accelerate the failure of your business.

 

“Franchising is not for everyone. And, to be able to weigh its pros and cons, you must really know your business and your vision for it,” he adds.

 

Franchising, if done right, can spell further success for your business, locally and even abroad. There are risks, of course. And you’re more than justified to worry about your business because the risks are real.

 

Here’s what experts advise about avoiding the common pitfalls in franchising.

 

 

Block copycats

Bartolome says one of the fears business owners have is of the concept, product, or service being copied if the business opens for franchising. “The fear of being copied is always there,” he adds. And this is cause for genuine concern. After all, franchising one’s business entails the transfer not only of knowledge but also of technologies.

 

Rudolf Kotik of RK Franchise Consultancy warns that there are indeed people who buy a franchise just to be able to copy its systems. Protecting your brand and its business processes are part and parcel of franchise development—from the way you prepare your products, to the way you present them. The key is to make sure that proprietary information—such as recipes and procedures—stays confidential, says Siggaoat.

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For example, if you have a food business you want to franchise, it’s best to supply items that are ready-to-cook, or have been pre-mixed and pre-packaged from your commissary, so that recipes remain confidential.

 

Still, consultants maintain that the best defense against copycats is constant innovation. “As a franchisor, you should never stop developing your brand, your products and your services. The copycats can copy you, but they stop there, there’s no innovation,” Kotik adds.

 

Related: Avoid these 3 pitfalls when investing in a franchise 

 

 

Keep franchisees happy

Entrepreneurs thinking of franchising also fear that they might just be training future competitors in their franchisees, who can put up a similar business once their contract expires, says Siggaoat. Bartolome says the key to preventing this from happening is by improving the way you deal with your franchisees.

 

This entails keeping your end of the bargain and ensuring that your franchisees are happy, says Siggaoat. “Your support services have to be there as promised. It should be regular, especially if the franchisee is paying you royalties—they expect a certain level of service.”

 

Realistic projections for return on investment, on top of reasonable fees—such as franchise, royalty and even marketing fees—also help keep franchisees happy. “When franchisees see that they are making money, they don’t put up their own business and just end up buying more of the franchise,” Siggaoat says.

 

 

Constantly improve

Bartolome says many entrepreneurs have second thoughts about franchising because they’re afraid to get out of their comfort zone. “They don’t know whether their products or services would be accepted by the market.” It’s a cause for concern, as franchising will expose your business to different geographies and markets, which may not all be receptive.

 

But staying in one place won’t help your business grow either. It’s better if you know which markets accept your products or services, says Bartolome. “Don’t just stay behind the counter. Talk to your customers and ask where they are from and how they heard about your business,” he adds.

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You can also use social media to gauge demand for your products or services. “People might be bringing your products to different places—might even have a strong following—without you even knowing it,” Bartolome notes, so try to market your products or services online and see if there is demand for it in a certain area that you have yet to serve.

 

 

Get ready to scale

While entrepreneurs hope growth will follow after they open for franchising, many fear that they won’t be able to back up this growth, because of lack of capital, manpower and logistics. “With small businesses, everything is usually reliant on the owner, which often makes it hard for the business to scale up,” notes Bartolome.

 

Having a development plan, which outlines your goals for the next five years, can help gauge if the company will be able to support this growth, says Siggaoat. “It still starts with planning, which is why we also look at the capacity of the existing business” based on revenues from sales and from franchisee fees, he says.

 

Bartolome adds that it will also be easier to scale up once documents, manuals, procedures, and processes have been standardized, as these would make knowledge transfer to franchisees easier.

 

Partnering with shipping companies, and tapping area developers that can build a commissary or production facility in a certain area on your behalf, can help strengthen your logistical support, notes Kotik.

 

You may also challenge key employees to step up instead of hiring new people to manage your fledgling franchise. “They might not have higher education, but they have the loyalty, dedication and the know-how, so it’s just a matter of teaching them how to delegate,” Bartolome explains.

 

 

Ensure quality

Worrying if you’ll be able to deliver a consistent product or service is a genuine concern. After all, a minor slip can tarnish your brand’s reputation. Having a well-prepared operations manual can ensure that quality remains the same across your franchised outlets. Procedures, control measures, training and even portioning of items are detailed in the operations manual.

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“Details such as cooking time, temperature, preparation, serving time and even hygiene procedures have to be exact so that there will be no variance in the product or service,” says Siggaoat.

 

Training franchisees and their staff also helps ensure quality, says Kotik. “If they are properly trained, they can actually perform,” he adds. As a franchisor, you also have to check in frequently to see if a franchisee puts his training into practice. “Training is not enough; you have to see its implementation,” Siggaoat stresses. Organize surprise visits or arrange for mystery shoppers to check out your store.

 

 

Screen all franchisees

Even if you have a good business plan, a solid operations manual and franchise agreement, all of that can potentially go to waste if you land the wrong franchisee, notes Siggaoat.

 

“The biggest challenge is finding the right person—it’s like finding a needle in a haystack,” seconds Bartolome.

 

Evaluating and picking the right franchisees starts out with the right mindset, says Siggaoat. “It’s really more of an awarding process than a sales transaction—it’s not enough for somebody to have capital to be deserving of a franchise, they have to have the right goals and commitment in the business,” he adds.

 

Screening franchisees requires a different set of skills altogether, something that you might not be accustomed to as an entrepreneur, but something that franchise consultants and developers can train you in.

 

“We train them to select the right people. Sometimes, people get excited to have their first franchisee that they’re willing to throw away all caution,” Kotik says.

 

Consultants and developers also have a dedicated module and selection process that can help franchisors weed out potential copycats and problem franchisees before signing them up. It might take you a while to land your first franchisee, though, and this could add to your anxiety, but like anything in business, screening franchisees takes time.

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Remember that even established franchisors encounter problem franchisees from time to time, but they always find a way to straighten them out. “The more you talk to franchisees, the better you get at screening them. You develop your intuition,” says Siggaoat.

 

 

Why not D.I.Y.?

Once you decide to franchise your business, you might find yourself shopping around for a reputable consultant or developer to help you out. But it can also be quite tempting to take the do-it-yourself route, especially when you consider the fees—which can go as low as Php 50,000 to as high as Php 3 million—and the wealth of available information about franchising. Should you decide to take this route, remember to proceed with caution.

 

“D.I.Y. franchising can be dangerous,” cautions Siggaoat. “Some mistakes are not only costly, they can also be irreversible,” he adds.

 

Bartolome notes that hiring a consultant or developer should always be treated as an investment, not an additional expense. “You would also get returns,” he adds, noting that consultants can also help you diagnose your concept and protect your brand by helping you draw up a solid franchise agreement.

 

Still, it is up to you as the business owner to decide which route to take, keeping in mind the nature of your business and your vision for it for the coming years.

 

 

*****

 

 

This article originally appeared in the May 2015 issue of Entrepreneur Philippines magazine. Minor edits have been done by Entrepreneur.com.ph.

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