Consumer Discretionary

Is My Business Model Franchisable?

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<p><span data-contrast="auto">There is a deep-rooted belief that practically any business model can be franchised because "if it works for me, why shouldn't it work for others"!</span><span data-ccp-props="{&quot;335559685&quot;:102,&quot;335559737&quot;:350,&quot;335559740&quot;:259}">&nbsp;</span></p><p><span data-contrast="auto">And while this axiom has some truth to it, it is also true that the matter is much more complex!</span><span data-ccp-props="{&quot;335559685&quot;:102,&quot;335559737&quot;:281,&quot;335559738&quot;:161,&quot;335559740&quot;:256}">&nbsp;</span></p><p><span data-contrast="auto">In fact, to&nbsp;define franchising in a few (very few) words, we could say that it is simply the "reiteration of a success".</span><span data-ccp-props="{&quot;335559685&quot;:102,&quot;335559737&quot;:441,&quot;335559738&quot;:166,&quot;335559740&quot;:256}">&nbsp;</span></p><p><span data-contrast="auto">That reminds me of my days at Subway where some franchisees said that Fred Deluca, the founder of the company, had&nbsp;really only&nbsp;had one good idea in his life and then repeated it more than 40,000 times!</span><span data-ccp-props="{&quot;335559685&quot;:102,&quot;335559737&quot;:213,&quot;335559738&quot;:165,&quot;335559740&quot;:259}">&nbsp;</span></p><p aria-level="1"><span data-contrast="auto">But back to the subject that interests us here, what are the main criteria to be considered to determine if a business is Franchisable?</span><span data-ccp-props="{&quot;335559685&quot;:102,&quot;335559737&quot;:830,&quot;335559738&quot;:160,&quot;335559740&quot;:256}">&nbsp;</span></p><p><span data-contrast="auto">I do not want to get here into analyzing the 3 necessary and well-known elements for a business to be considered a franchise, but rather look at the economic aspects.</span><span data-ccp-props="{&quot;335559685&quot;:102,&quot;335559737&quot;:101,&quot;335559738&quot;:165,&quot;335559740&quot;:259}">&nbsp;</span></p><p><span data-contrast="auto">Nor do I want to go into how to analyze and model a business to determine the right level of Royalty, Product margin or marketing; that would be the subject of another Post as we too often hear things like:</span><span data-ccp-props="{&quot;335559685&quot;:102,&quot;335559737&quot;:281,&quot;335559738&quot;:159,&quot;335559740&quot;:259}">&nbsp;</span></p><p><span data-contrast="auto">&ldquo;5% Royalties sounds like the right number" "5 % is fine to be in line with the&nbsp;competition".</span><span data-ccp-props="{&quot;335559685&quot;:102,&quot;335559737&quot;:4113,&quot;335559738&quot;:160,&quot;335559740&quot;:388}">&nbsp;</span></p><p><span data-contrast="auto">"You know, more than 5% is difficult to justify!"</span><span data-ccp-props="{&quot;335559685&quot;:102,&quot;335559738&quot;:3}">&nbsp;</span></p><p><span data-contrast="auto">No Gentlemen, this is not the way to determine the level of Royalties but again I am straying from the topic!</span><span data-ccp-props="{&quot;335559685&quot;:102,&quot;335559737&quot;:471,&quot;335559738&quot;:183,&quot;335559740&quot;:259}">&nbsp;</span></p><p><span data-contrast="auto">But anyway, in this case, I just want to limit this Post to a very simple question: "If the profitability in terms of EBITDA, of my pilot unit(s)&nbsp;is, for example, between 5 and 10% then is my business Franchisable?"</span><span data-ccp-props="{&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559685&quot;:102,&quot;335559737&quot;:268,&quot;335559738&quot;:159,&quot;335559740&quot;:259}">&nbsp;</span></p><p><span data-contrast="auto">No serious entrepreneur can be spared this question before thinking of developing into a Franchise.</span><span data-ccp-props="{&quot;335559685&quot;:102,&quot;335559737&quot;:522,&quot;335559738&quot;:160,&quot;335559740&quot;:259}">&nbsp;</span></p><p><span data-contrast="auto">Indeed, all other things being equal, the Franchisees will necessarily make less margin than the pilot unit because they will have to pay something to the Franchisor, be it Royalty, Margin on products, Marketing, Technical Assistance, etc.</span><span data-ccp-props="{&quot;335559685&quot;:102,&quot;335559737&quot;:242,&quot;335559738&quot;:159,&quot;335559740&quot;:259}">&nbsp;</span></p><p><span data-ccp-props="{&quot;335559740&quot;:259}">&nbsp;</span>And if this "something" equals or even exceeds the margin of my pilot unit, then the answer is very simple: "I cannot Franchise!&rdquo;&nbsp;</p><p>A business is Franchisable as long as, thanks to its nature, its cost structure, its differentiating elements, its exclusive Know-How, its competitive advantages, its technology, etc., it offers, in addition to a powerful brand, a model that is superior or even far superior to the average of the industry sector.&nbsp;</p><p>And although it is not a guarantee of success for the Franchisee, it is the duty of the Franchisor to market a model with these characteristics as well as to make available to its Franchisees all the necessary tools to maximize the chances of success of its Franchisees.&nbsp;</p><p>It must also be done in a medium to long term perspective.&nbsp;</p><p>You can see those who privilege the short-term coming from afar as among other things, they always charge a high or sometimes even very high opening fee, but do not be surprised if next year they are no longer on the market!&nbsp;</p><p>Although it sounds a bit crude, franchising is about using other people's money to leverage and grow your own business and is therefore a very serious matter that should not be played with.&nbsp;</p><p>But if understood and used correctly, Franchising is probably the most powerful tool for growth, and it can create a virtuous circle from which both Franchisees and Franchisors can benefit in a balanced relationship.&nbsp;</p>
KR Expert - Thierry Rousset