- If the profits from Franchisor (Headquarter) and Franchisees (Branches) are calculated separately, and the franchisee’s profit is low, the business is not Franchise-worthy.
- Maintaining a strong brand identity is the heart of running a successful franchise business.
A profitable business model is the main condition in transforming to a Franchise business. Not only profitable for its own, but also for all franchisees, which means the company/business should be evaluated as a profitable business model and fit to expand their business into branches.
There are clients who have faced the same challenges and approached us before. Their existing business model is completely impossible to gain and maintain a huge customer base to support their franchise business. They have to change their business strategy before diving into the franchise industry, or else it will be difficult to survive for a long time.
We have also encountered retail companies focusing on Everyday Low Pricing (EDLP) strategy extensively in the market.
There is an established retailer who is active domestically and operates through a number of branches that seems really making money. However, when they break the accounts of headquarters and branches separately for our further analysis, it shows that the branches did not make good profit.
After discussion, they are not advised to transform into Franchise model but could only do chain operations, which expand and manage multiple branches by themselves. They may not have issues in keeping a large customer base but there will be difficulties for the franchisees to stay profitable and having restrictions in business development in the future if they transform into franchising.
Ensure Franchisees Profitability
Usually people owning/investing in franchise businesses are mostly retirees, corporate adults and investment companies. The franchise investment funds will be coming from your own pocket, or through bank loans, and there will be requirements such as targeted annual salary income to be fulfilled to proceed with bank loans.
If the profit margin is low and only as much or even less than the usual monthly salary, the franchise investment package will not raise interests since the business is not making money (if the investor is looking for building wealth).
Thus, for the major retailer focusing on EDLP business strategy as mentioned above, the headquarter earns its profits primarily from the combined profits of its multiple branches, which amounts to a significant sum. However, the profits for each individual store may not be particularly ideal.
Hence, the companies that operate with such business strategy are unsuitable to transform into Franchising due to the inability of franchisees to sustain the business in the long run, as it will eventually resort to more discount/sales events, or closing down, withdraw franchise, poor service (may be due to shortage of manpower or unable to hire competent workers because of tight budget), unethical practices such as cutting corners or stealing products from other companies, or not following the headquarters’ instructions, etc.
Ensure proper SOPs in place
Franchise stores serve as a form of brand advertisement and promotion for the headquarters’ brand and business.
Any issues arising in the franchise stores can significantly impact the brand reputation, especially for new brands. Nowadays technology is advancing at a rapid pace and negative news can spread widely through social media platforms causing the brand reputation to be greatly affected.
Another key aspect of franchising is the brand. The brand encompasses all hardware and software elements and is one of the essential considerations for the future development of the franchise.
In addition to the brand registration that is commonly known, another important aspect of actual operation is investment in brand management.
The headquarters must try their best to manage the brand, but the actual operation depends on the cooperation of franchisees.
Therefore, in order to launch a franchise package, besides exploring a profitable business model, we have to ensure proper and complete Standard Operating Procedures (SOP) are in place. Full training should be conducted so that the franchisees could deliver quality service and results consistently which helps to maintain good brand image.
- What is Standard Operation Procedure (SOP)? Why is it important?
- 6 factors to check if your business is Franchise-Worthy!
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