Roadmap for setting up a franchise

Why should we undertake in this market? Perhaps because it has a turnover of almost 26 billion euros and employs approximately 242,000 people? This business formula -which, at the end of 2013, had 1,087 franchise chains and 59,131 establishments, according to data – offers a series of advantages with respect to traditional trade systems.

In general terms, the franchisee benefits, among other things, from a brand image (the ensign), from a know-how (the experience) and from economies of scale (for belonging to a network). Obviously, not everything is a bed of roses and setting up a franchise implies a series of burdens for the franchisee.

Before starting to walk, think!

We are not going to deceive you by telling you that the choice is easy, because it is not, but that should not be a problem either. Think that there are more than a thousand different brands operating in Spain (both national and foreign) and your starting options are at least 1,000, which are the ones with activity. Ufff… Don’t worry, now we have condensed in this article the steps to follow to become a franchise.

By way of introduction, and before starting to examine sectors, brands and markets, the first thing you should do is analyse your possibilities and your profile as a future franchisee. That is, you as an entrepreneur.

The first question to deal with is whether you are willing to belong to a franchise network, because it must be clear to you from the beginning that entering this system implies assuming a series of rules. It is true that the franchisee is an independent corporate entity, in other words, your relationship with the franchiser will not be one of employee-company, but of company (you) to company (the franchiser), although you will form part of a network that is governed by a series of internal guidelines marked in the franchise contract. And that means, among many other things, that the decisions you take (independently of the degree and negotiating character of the head office) will finally be taken by the franchiser, for the good of the whole network.

This is the first starting point that will mark your future relationship with suppliers, customers, employees, etc. and that you must assume as such, if you want everything to work perfectly, because the opposite can be ‘the mother of all wars’. If you are not clear about this, the best thing to do is to start on your own and not with a central franchiser and under the shelter of a network of establishments.

Do you want to be a manager or an investor?

The next link you must overcome is what type of relationship you want to establish with the brand, do you want to be a mere investor or participate in the management of your business unit? Answering that question is not easy either, because the risks you will acquire will be very different depending on one aspect or another, as well as the demands (both financial and management skills) that you will be asked to meet.

On your way, you will discover that some franchises are only looking for investors and others prefer to have managers who are on top of the business on a day-to-day basis.

Along the same lines, ask yourself if you are going to dedicate yourself exclusively or part-time to the business, because the involvement and the risks will also be different.

Just as if you decided to set up a business other than a franchise, you should analyse your level of training and your degree of experience, both in the business world and in the sector in which you are going to work. Experts recommend that you undertake – if possible – activities that are related to the attitudes and aptitudes of entrepreneurs, because it gives you a certain degree of security.

Ability to learn new things and adapt to change

In this sense, many brands look for candidates who meet a series of requirements in line with the activity of the brand -especially if it is very specialized-, but it is also true that there are other franchises that discard among their new associates those who have worked in a similar activity, to avoid the resabiado, because they may have problems adapting to the rules of the franchise chain.

What is true is that one of the requirements demanded by 100% of the franchises is that you are willing to learn new things and adapt to the changes that will mark both the market and the central franchiser.

With these first questions answered, the next step you must ensure is in which sector or sectors you have business options. Choose the two or three that attract you the most. The question now is: what should you value in them?

As we have said before, your previous experience and/or training may mark your first steps and will help you choose markets where you might feel more comfortable. But there is also no written rule to ensure your success by undertaking something you know. It is true that you will have more guarantees of success, but never a hundred percent.

What kind of activity I’m interested in

Perhaps you should value the market for its growth opportunities, thus avoiding entering those that are very saturated or where the competitive advantages between one brand and another are not very noticeable. Analyze those franchises whose business concept is innovative, even though they operate in consolidated markets. In that sense, you can opt, for example, for a brand that operates in a consolidated sector whose business model, due to its degree of innovation, is scalable.

You should also consider whether you decide on a product or service franchise. Choosing one or the other implies, in many cases, different management concepts, as well as different investments and contractual conditions that may make you change your mind about one sector or another and even discourage you from undertaking.

Don’t forget either if you choose a business concept that requires premises or not. The difference here will mainly be the higher or lower investment cost, which will directly affect your profit and loss account, the payback period, etc. In this sense, premises and employees are the two items that will increase your financial plan the most.

What resources do I have?

The next step is for you to choose a couple of brands per sector. To do so, evaluate them taking into account the following aspects:

What resources do you have and what investment costs will you have? Remember -as if it were your life- that whenever you start a business, regardless of the type of business, you must have a minimum of your own resources to cover the investment.

Think that if you are looking for investors for your project (whether you do it alone or as a member of a franchise network), nobody will risk their money if they do not see that you are the first to bet (with your resources) on that project. That is why it is important that you calculate how much money you can count on (your own, family and friends).

In addition, each franchiser will establish or advise that you have a minimum of your own resources to meet the initial investment. It would be a big mistake to go ahead with the process if you have not been able to achieve that minimum. So, with the own resources that you have or values that you can get, calculate what kind of investment you would be willing to endure. And when we talk about investment – as we have warned on other occasions – not only should you calculate what it costs you to enter a franchise (entrance fee, if any; civil engineering work, if it requires premises; purchase of first products and stock, among others) but also how much money it will cost you to maintain yourself until customers start coming in.

In the last point lies much of the success or potential failure of a business -whether it is a franchise or not-, because many entrepreneurs strive -others, not- to get the money needed to start a business and forget or underestimate the financial resources they will need for the day to day, to hold on until they get, first, customers, and then cover the cash flow gaps, which in a high percentage you will have either by lack of self-management or by the market conditions in which you operate.

Are you sure you’re up to the task?

You should also take into account what profile the brands you have chosen are looking for. It is important to know if you adapt to the franchiser’s requirements: if they are looking for a self-employment profile, a manager, an investor, a mixture of these last two…

It also assesses whether the concept of these labels is proven or new. That is, if the head office already has other franchised units or only has its own establishments. And where is the problem there? The logic says that when a company decides to expand through the franchise, it studies the viability and scalability of its model. To do this, it first tries it out by opening its own establishments (traditionally, there has been talk of at least two of its own) and, once the business is up and running, it opts to open franchised units. It is true that this is not a rule marked by blood and fire, because there are franchises that have been operating in the market for years with good results and do not have their own premises. But if you can choose a brand that has already tried the concept on its own, you will have fewer surprises. Knowing if you are going to be the guinea pig implies risks that, evidently, you will have to evaluate if they are worth it, and of which the ensign should warn you.

It is also important that you know what kind of support and specialized advice the network offers to its members. If that support is continued over time, in situ, that is, in your future establishment, in the head office, in another business unit; if it has any kind of cost, among other aspects.

Is the plant solid?

Of course, don’t forget to analyse the financial situation of the central franchiser to know if it has the economic strength to deal with the entry of new franchisees, and that this – the lack of liquidity – is not to the detriment of the rest of the associates, including you. One possibility is that you look for economic and financial information about the brand, either in the Trade Register or by using the services of risk analysis companies. Another possibility is that you study the expansion plans that the head office has, which will allow you to assess – by studying the market and the competition – whether these plans are viable or risky for the whole chain.

An indicator of reliability is to study the number of closed premises -either in the last year or in the history of the franchise chain-. However, do not value so much the number of closures -which can be large or small- as the reasons for the closures and the strategies that the head office has followed to solve these closures. We tell you this because many times the closures are due to the fact that the franchisees have moved away from the path of the network and have made war on their own. Other times, it is due to readjustments made by the headquarters that want to maintain a line and consolidate the units that work best for them. But, in other cases, the closures are due to the fact that the franchisees have been neglected and abandoned by the central. Therefore, it is very important that you know in detail the reasons for each of the closures of the business units.

Ask other franchisees

Another indicator is that you visit several locations, first in the style of the mystery customer to find out how the franchise works, and then by introducing yourself as a potential franchisee. At that point, do not hesitate to talk directly to other franchisees, to know first-hand how the relationship with the headquarters is.

At this point, choose a brand and analyse the following elements in depth:

First, what initial outlay will you have to make. As we have pointed out before, the investment will go up or down depending on whether the activity requires premises, if it is a product or a service, etc. In the same way, calculate the investment you will have to make once the business starts to roll. It will be your capacity to generate cash flow that will allow you not only to survive, but also to grow without stress.

Another aspect to evaluate is what percentage of your own resources is recommended by the head office to cover the initial investment. It is important that you know if they have initiatives that soften or help you to finance yourself, such as renting, leasing, deferment of payments, etc. Or if the franchiser has preferential agreements with banks and suppliers to deal with payments for raw materials, products, stock, etc.

Find out what the estimated income of a unit like yours is. Many brands argue the difficulty of calculating them because the income will vary according to the location, the type of service and/or product, the commercial ease of the franchisee, etc. And that is true, but any serious company -and the vast majority of franchises are- has plans for the viability and profitability of its business concepts, and even more so when it has proven that solvency in other units. Don’t forget to ask about the time of recovery of the investment.

The famous know how

What do they offer you in return? Mainly, the famous brand know-how, advice, support and training and, in the event that such support has any kind of cost, how much and how it is paid. Ask to be given the opportunity to meet other franchisees, as well as the facilities and services of the headquarters. And also be guided by the degree of information transparency that the franchiser offers you.