FRANCHISE: The franchisability test

In determining your brand’s readiness to franchise, you run some questions through your current operations.

The answers reveal what you need to do before attempting to franchise. We continue exploring if your brand really avails a franchise opportunity to justify growth through franchising.

Is the franchise opportunity likely to appeal to the right kind of person? When you draw a franchisee profile, you describe your ideal franchisee, this must fit perfectly with the business opportunity e.g, if your franchise is in art, are there enough people with a passion for art and enough financial resources to become your franchisees?  

Do financial projections show a realistic break-even date for franchisees? Franchisees lose faith if they have to absorb operating loses for long. In the process they start cutting corners to the detriment of your brand. Your franchisee profile should define the estimated period of losses that the franchisee has to persevere.

Can suitable candidates be found who can afford the necessary investment? Franchisees come in two shades; young, keen to work but poor; mature, rich and not too keen to work. Your franchisee profile should take this into account, given that owner-operated stores are more likely to succeed than absentee owner-manager-operated ones. The richer franchisee will employ managers.

The poorer one would hustle untill (s)he makes it-but has no cash!

A franchisee financing scheme is normally necessary if your franchisee profile specifically requires a hardworking and energetic person to run your franchise. You would lease sites, kit them out and stock them then rent out at a small premium to the young poorer franchisee (who must pay joining fees and provide working capital). Monthly royalties are agreed at standard rates.

Profits are used to buy the store infrastructure from you and over time, the arrangement evolves into a standard franchise.

Alternatively, the franchisor can arrange external franchisee commercial funding using the franchisor’s balance sheet at a their bank, but loans are expensive.

A more attractive option is private equity if you find one with favorable terms. We have arrangement with such from local, Europe and North America who would invest 50% of what franchisors require to roll out franchise networks.

They go further to invest 50% of what franchisees require to run the franchise, in both cases exiting after five years. More details are available on request.

Are there credible commercial lenders in your sector. Some sectors have difficulties attracting credible lenders. During electioneering and at the height of terrorism attacks in Kenya, commercial lenders shun away from tourism-related lending.

Further, capping of interest rates in Kenya has reduced the number of lenders willing to support SMEs owing to their higher risk profiles, though the risk profile of a franchisee is lower than that of an independent operator.     

Have you received unsolicited requests for franchises outside your current territory? If yes this is an indication of trust in your brand and you should not have problems finding the correct franchisees.

The foregoing is a quick franchisability test. Chances are that your business does not meet all the requirements. Subsequent articles will address how to fill the gaps before finally franchising your brand.

We particularly encourage businesses seeking growth to consider franchising as a viable option and use our tried, tested and trusted sources of private equity to access cheap growth funds.

The writer is a franchise consultant helping indigenous East African brands to franchise, multinational franchise brands to settle in East Africa and governments to create a franchise-friendly business environment.

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