Business mentor: Keys to success in franchising

Q. Taking a great, well-run business and multiplying it seems to be an obvious way to increase my wealth, even more so with franchising, given that the franchisee fronts up with most of the capital rather than the franchisor. What do I need to think through before embarking on franchising?

A. Small-business sector specialist Sarah Trotman asked Grant Watson, vice-president of operations for McDonald's New Zealand, for advice:

The first and most important question to be considered is: Do you have a business and a brand that is scalable?

The key to scalability is clearly defining what your brand stands for and ensuring you have clearly defined systems and procedures in place.

Systems and procedures will help to ensure critical standards are met and, therefore, your brand promise is executed consistently in each potential location as your franchise network expands.

Systems and procedures range from operation and marketing to product quality and distribution networks.

Performance measurements need to be in place for each critical business standard to ensure you maintain the integrity of your brand. Without measurement, you will not have accountability and cannot expect performance.

The success of any franchising relationship is having a mutually beneficial partnership between the franchisee and franchisor. The foundation for this needs to be clearly set out in a franchise agreement.

Your returns as the franchisor will typically be derived from a one-off franchise fee and a continuing royalty, which is often a set percentage of sales. The size of the franchise fee and royalty will largely be driven by the strength of your brand and the systems and procedures you can provide.

In return, franchisees will expect a healthy return based on their investment and the risks associated with the business they are entering into.

You need to have a thorough understanding of your financial business model as the franchisor and also from the perspective of the franchisee.

As a franchisor you will also need to be competent in - or surround yourself with experts - real estate, construction, marketing, training, purchasing and human resources.

Before franchising you should also consider:

* Legal and financial advice from firms specialising in franchising.

* Understanding your recruitment and training processes.

* Considering carefully the tenure of your franchise agreements - the pros and cons to short- and long-term agreements.

Although this may all appear a little daunting, there are three good reasons to franchise:

* Ownership in results rather than management of results. An owner having hard-earned money on the line will usually produce greater results than a manager with a bonus on the line.

* Community profile. A local owner putting a face to your brand creates a local identity in every community in which your brand has a presence.

* Franchisee equity financing rapid growth. You can put your financial resources into expanding your business network, rather than investing significant amounts into each site.

On the face of it, franchising is appealing, but several complexities need to be considered. Failing to do your homework can be costly, if not crippling.

Providing you have a business that is ready to scale, and that your plan is comprehensive, franchising can be very rewarding.