Franchising - The "F" word?

Posted by fshsfhsfh on Sunday, April 24, 2011

I happened to visit a Franchise expo a few months back and was amazed at the number of food businesses trying to franchise. I have also seen a number of people (some of whom I know) investing large sums of money in picking up a franchise of a food business. Here is my take on franchising in this space.

As a franchisee you will be giving away anywhere between 6 and 10% of your revenues (not profits and whether you are profitable or not) to the franchisor. That is a lot of money and means that your operating margins have to be over 25%, for you to atleast generate 15% profits for you - Not an easy task. Plus there will typically be an upfront franchisee fee of 2 to 10 lakhs. Be assured that the franchisor will also charge you for every single piece of tissue & toothpick that they supply to you from their central purchasing unit - nothing comes from the royalty you pay them. Royalty is pure Royalty. With so much at stake, a franchisor needs to absolutely offer the following, for you to even consider it:

1) A well known brand - i.e. if you open your store in an area, folks there should talk about it - "Hey, do you know that McDonald's has opened in HSR Layout". Essentially the brand needs to be strong enough to create a buzz about it and bring you customers because of the brand.

2) History with Franchisees - Probe their track record with franchising and ensure that you speak with current/existing/past franchisees to understand their experiences (both good and bad) - the more existing franchisees you can speak with (all if possible), the better it will be - pick a diverse mix (different locations/cities, age of the franchise etc). If they don't have an existing franchise, stay away - unless it is a large brand with multiple company owned locations and they are looking at franchising after their business has matured - you can negotiate a good deal with them in this case - no upfront fee, 4% royalty and that too only if operationally profitable. Even in this case, be very careful.

3) Businesses who understand the local market: Try and pick someone who is already doing business in the city/country/region where you are looking to franchise - the operational issues are too localized in this business for an external brand to simply come and be successful.

4) A Strong Franchise Support Structure: They need to have a dedicated team to support franchisees through the entire life cycle - decision making, contracting, location identification and leasing, franchise set-up, hiring staff, marketing material, tools and systems, hand-holding till operational break-even and ongoing support as required post that. If they don't have a dedicated team for this, they will not be able to support you anywhere close to the extent that you expect them to - period. Every franchisor claims they do all this - do your due diligence on this. My assessment is that a lot of them have very little knowledge and experience in franchising and don't really understand the expectations of the franchisee. So you will end up doing as much as you would in creating your own brand, but in this case, you will be paying a franchise fee and eating into your margins on an ongoing basis. The guys who convince you to pick their franchise (the dynamic personalities and people who own the business) will invariably stop showing up and assign a "TEAM" once they encash your checks and make you dive deep enough - so you will have no escape.

In summary, I would suggest that franchising will leave you disappointed unless it is a company with a very well known brand and takes an active interest in making their franchisees successful. According to me, there are very few of these around.
A lot of companies use franchising as an easy route to try and expand - essentially they learn how to grow and understand the operational difficulties with growth, using the franchisee's money. I can give a few examples here, but don't want to hurt the brands (some of them are still operational, are successful and one of them has even raised venture funding)

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