by Rudolf A. Kotek
The principal benefit, which Franchisors hold out to prospective Franchisees, is the opportunity to run a business which has already proved its capacity to deliver products or services profitably to an identified market. You cannot sell an idea as a franchise. You must have proven in practice that the idea works and that you can successfully transfer the “know how” to another person operating at “arms length” from you.
You will need to draw up and prove a comprehensive operations manual that details what a franchise does, how to do it, and to what performance and quality standards. The manual will need to cover the setting up phase as well as continuing operation. You will also need to develop and prove an initial and continuing training program that ensures that the “know how” contained in the operations manual can be transferred successfully to a third party within the time available.
The work involved in proving and documenting your operating and training systems is extensive and ordinarily calls for highly skilled and experienced advice. A critical phase of the development of a franchise program is the first operation or the creation of prototype business to test and refine the concept of the business to be franchised.
In its prototype businesses, a prospective Franchisor can test operational systems, controls, décor, designs, layouts, equipment, training methods, advertising and marketing programs, products and services, job requirements and descriptions, financial models, etc. The prototype is a laboratory at which problem areas can be identified, enabling the company to develop solutions and truly see if the business can be franchised.
Before franchising, a company should have been operating outlets successfully at least at one, and preferably several, locations to verify the viability of the business and its profitability.
A minimum period of time to test the pilot outlet would be one year to take into consideration seasonal factors and to ensure that the business is producing attractive results. Two or three years of actual experience gained from the operation of exiting outlets are ideal.
The business to be franchised must be capable of producing a reasonable return on the Franchisee’s investment, after deducting the value of the Franchisee’s labor. If Franchisee is merely buying a job, his motivation and loyalty to the network may be short lived. The business must also be able to generate sufficient revenue to the Franchisor.
A Franchisor can capture only a portion of the gross revenue of a franchise outlet through continuing fees or royalties and the gross profit realized on sales of goods and services to the Franchisee.
If a business cannot generate a sufficient rate of return on the Franchisee’s investment and sufficient revenue to support essential Franchisor services and a sufficient profit to the Franchisor, the business is a poor candidate for successful franchising.
Rudolf Kotik is the founder of RK Franchise Consultancy Inc, which developed more than 350 Filipino Companies into Franchise Systems, with address at G/F Minnesota Mansion, 267 Ermin Garcia Street, Cubao, Quezon City. Tel. 9122946, 9122973, Cebu Tel. (032) 273.3827, 238.3933 Email: rk@rkfranchise.com; Websites: www.rkfranchise.com, www.franchise.ph
