Writing a Business Plan for a Franchise – part 1

Writing a Business Plan for a Franchise – part 1

Writing a Business Plan for a Franchise (part 1)

The Wonders of a Franchise:

A franchise is a trading method in which a certain chain or brand, meaning the granter of the franchise, allows a company or an individual to purchase and use its brand name, its ideas, plans and its established reputation in order to sell products and services to the public.

In many cases, the franchising agreement includes assistance of the company in establishing a new branch, staff training and additional assistance and even after the branch is up and running, the company granting the franchise, which is also known as the franchisor, stays involved and supervises over the management and maintenance of the branch.

In addition to the investment costs which are involved in establishing a new branch which are take into consideration during the business plan writing process, the company or individual that purchase the franchise are also committed to pay a franchise fee of USD50,000 and more, monthly royalties that amount to between 4%-6% of the monthly revenues. The local franchisee will sometimes have to also co-pay between 1%-3%, in local advertisements.

In many cases, the franchisee will be committed to operate its branch in accordance to the franchisor’s rules and regulations and business plan, which creates in a mutual dependency between the two. This dependency must be considered by the entrepreneurs who wish to own and operate a franchise. In certain cases, the franchisee will be allowed to operate the branch as he pleases without a commitment to the company’s rules and regulations. In such cases, the dependency between the franchisor and the franchisee is reduced and he can operate more freely in his business.

The contribution of a franchise, to both sides involved, varies: For the companies that grant a franchise, this method is part of a business strategy as part of the business plan aiming to expand the company brand. This is stated very clearly while writing a business plan. Such business plan will display a business scheme which is based, amongst other things, on royalties paid by the franchisee. For individual entrepreneurs, the franchise method is the fastest way to ensure them an ownership of a business of high standards and minimum errors.

There are two different kinds of franchises: A partial franchise or a complete franchise.

A Partial Franchise: Enables its owner to use the brand’s trademark, without complying with  its maintenance and management rules and regulations.

A Complete Franchise: Enables its owner to use the brand’s trademark but also includes a commitment to complying with its maintenance and management rules and regulations.

Both types of franchises can be implemented in a local, multiple branch franchise, or in a single branch franchise. A local franchise refers to the option of purchasing and operating the brand throughout a certain geographical range and selling the individual branches in this range.

What are the reasons that might cause a company to grant a franchise?

The will to expand – A company that wishes to expand its business might choose to use the franchising method. The high investment costs that are involved in establishing an individual branch, are many times considered to be an obstacle for a company, and prevents a quick expand of business. When these costs are imposed upon the franchisee instead, the franchisor easily overcomes this obstacle.

Monitoring remote managers – The process of supervising all management techniques of the various managers located further away from the company’s headquarters, is difficult. Without proper supervision, the company might find itself investing in acts that do not match local branch performances. Granting a franchise can help overcome this difficulty. The franchisee operates his branch in order to increase revenues, due to the big investment that was made by him. This is obviously a great consideration to the franchisee. In addition, the success of the business will directly effect the franchisee’s cash inflow, which is not an issue for a standard branch manager who is a paid employee.

When a company decides to grant a franchise or not, it must select a structure of control. There are two types of such structures in a the franchise method which are different from each other in the source of investment, this is a critical issue in the process of a building a business plan:

Pure control: The franchisee is the sole investor, the franchisor receives a certain amount of its profits.

A partnership-based franchise: A partnership between the franchisor and the franchisee. The company is involved in the investment as well as in the profits.

Each structure of control is characterized by different business and organizational conduct. Let us distinguish between the two:

Utilization – improvement of existing routines: Experience based re-organization. Companies learn from the experience of their present resources and use the gathered information for future improvement. This learning method usually characterizes a structure of control that is not a franchise, but an actual ownership. When a branch is owned by a company and not by a franchisee, the operator of the branch has less motivation to research and develop new, more successful methods since he is a paid employee and doesn’t directly benefit from an increase in inflow, therefore, the company’s profits in the long run, are less relevant to him. In such case, renovation is usually rare.

Research – development of new routines: This allows the company to adapt to versatile markets. This learning method characterizes the pure control method. When one is in complete control of a branch, it is certain that the present and future success of the business is his number one priority since the more successful the business is- the greater the profits will be. The Research method is popular amongst coffee shop franchises. In some branches of a coffee shops chain, the menus vary and are creative, in order to meet the local customers’ preferences and tastes. Different menus might also include a certain gimmick or added value which match the branch’s design, service and are fitted to the branch’s design, atmosphere and clients.

So which option is better?

Neither one of the options is better when used separately. A company that implements only the utilization method, will not be innovative enough and sometimes even be considered old fashioned and ultimately find itself behind on business. At the same time, an organization that implements only the research method might fail to view the changes that have been taking place around it and ultimately find itself operating a routine that is not optimal business wise. Therefore, a combination of the two options should be implemented.