Belfast Telegraph

Franchising is a complicated undertaking

By Bronagh Bourke, director, audit and assurance, Grant Thornton

All businesses, irrespective of industry and sector, aspire to grow in size, become more profitable and develop a strong brand in their marketplace.

However, turning that aspiration into reality can be challenging through organic growth alone, and a significant number of entrepreneurs are considering the franchising model as a cost-effective way to achieve their growth plans.

Although potentially cost-effective, franchising is not necessarily an easier option. Whilst it may seem obvious, a full understanding of the franchising model is critical to ensure a successful, sustainable franchise is created.

The franchisor needs to carefully assess all the advantages and disadvantages, the level of management input required, and the proposed timing of investment returns. Only then should the decision to become a franchisor (or not as the case may be) be undertaken.

Clearly, not all businesses are suitable for franchising. Those that are successful tend to demonstrate four traits that form the solid foundations for a successful franchised network.

First of all, the business model should have a track record of success and profitability — profitable to both the franchisor and franchisee. The business must have a distinctive brand and image — after all it must be attractive to the franchisee.

It has to be easily replicated — specialised or niche businesses will have a limited target market. Also necessary is an ethos built on collaborative working relationships — relationships built on mutual trust, respect and support, working towards a common goal will deliver better results.

As noted, franchising offers the franchisor a number of advantages, and these need to be carefully considered and balanced against the disadvantages to allow an informed decision to be made.

Among the advantages of the model is scalability. The ability to scale the business rapidly and geographically is key and it brings other advantages, such as collective buying power that will deliver better purchasing deals throughout the network.

Critically strong franchise models also attract motivated individuals with a vested interest in the success of the business and developing the brand. As such they require less supervision and if quality training and support resources are available franchisees will require less direct time input from the franchisor.

The franchisees will tend to undertake their own site research and fund the necessary investment to acquire premises and staff, which can make expansion much more cost-effective.

Failure to develop the appropriate franchise model will, however, cause challenges for a prospective franchisor.

Compared to organic growth, a franchise arrangement may be less profitable as the bulk of profits will inevitably fall to the franchisee.

The franchisor may lose a degree of control, as innovative and future decisions may require negotiations with franchisees who may be resistant to change.

Also, if the franchisee recruitment process is not robust, the franchisor risks brand contamination, as a non-performing and/or non-compliant franchisee presents a reputational risk. The cost of management time and lost return from unsuccessful franchisees can be significant.

Franchising a business is evidently not an easy option to growth; it brings with it specific challenges and obstacles to be overcome, but managed in the right way, it can provide a solid foundation for growth and expansion in which both franchisor and franchisees are winners.

  • For further information or advice, Bronagh Bourke can be contacted at bronagh.bourke@ie.gt.com
  • Grant Thornton (NI) LLP specialises in audit, tax and advisory services

Belfast Telegraph

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