Annette Dhami, from Impact Hub Islington and Brixton, is something of an expert on franchising. On 11th June 2015 she agreed to share with participants on the Impact Hub Scaling and BENISI programmes some of the key issues to think about when franchising their social enterprise.
The training was so good we wanted to share some of the key points that we learned from this content packed and enlightening session. So, with thanks to Annette, here they are:
1. Write a separate business plan with forecasts for yourself as a franchisor, rather than including it in the business plan for your core business. It might help to think of your core business as one of the franchisees.
2. Select your pilot franchisee super rigorously. Doing so will pay off later, helping you to avoid sorting out messes created if you picked the wrong person. Find people with values that align with yours as well as the skill and motivation to make the franchise work.
3. Running a pilot franchise to iron out teething problems before offering franchises more widely is highly recommended.
4. Plan how you are going to market your franchises and find excellent franchisees.
5. Create a manual or portal with guidelines for your franchisees. How much you include will depend on how much you want to dictate how they do things and how much is up to them.
6. Create other resources to share with your franchisee. This might include Customer Relationship Management (CRM) systems, branding guidelines and materials, human resources templates, finance systems or templates, communications tools and templates, products and services.
7. Typical things for a franchisor to provide to a franchisee as they start up, in return for their ‘Initial Franchise Fee (IFF) are: the licence / permission to use the branding, intellectual property (IP) and operating systems; a pack of start-up materials (such as business stationery); a training course; and support on a marketing launch.
8. For a commercial franchise, the fee paid to the franchisor can range from £10-20K for owner operator to over £20K for larger management businesses. It is considered good practice for commercial franchises to seek to only cover their costs with these fees, not to make a margin. Social franchises often charge less because they want to maximise the impact and spread their idea, but they still need to meet their costs, some meet this gap by charging a higher MSF (see below) until they re-coup that cost, some offer a more slim-line package to their franchisees to reduce costs.
9. Typical things for a franchisor to provide to a franchisor on an ongoing basis in return for a Management Service Fee (MSF) are some or all of the following: mentoring or peer support networks, administration or finance support (e.g. accounting), lead generation support, technical support, marketing support, product/service and systems development, IT (website and email), software set up such as CRM systems, ongoing training.
10. For a commercial franchise a typical MSF would be 8-10% of the turnover (not profit) of the franchisee, or a fixed fee. On top of this, there may be a charge of 1-2% for national marketing campaigns, such as press or TV campaigns that benefit all franchisees.
11. A franchise is a reciprocal arrangement. Both parties benefit from the franchisees success – finically and reputation-wise. For a social franchise you are also growing your impact.
12. Commercial franchises tend to operate on a top down basis, with the franchisor in charge. Some social franchises are more bottom up and democratic – with some aspects in common with co-operative systems. An example is the Impact Hub network where the ‘franchisor’ organisation’s key decisions are decided by a majority vote by the franchisees.
13. Creating a clear franchise agreement is vital. It can be as long as 50 pages and details what each party is providing to the other, and makes clear what might happen in a range of scenarios – e.g. if a party wishes to exit the agreement or is unable to run the business.
14. A franchise is normally offered on the basis of a territory, which is calculated based on the number of potential customers in the area. So, a franchise in a city would be smaller because the population is denser than a franchise in a rural area. In the UK there are territory mapping services that can work out suitable territories for your specific market.
15. Franchise agreement terms tend to last five years and franchisees normally have the automatic right to renewal (on successfully fulfilling the agreement) unless actively broken at that point.
16. Franchise agreements tend to include non-competitor restrictions that stop your franchisee operating a similar business or using your training and IP within a certain number of years in the same territory under a different brand.
17. Start by working out what materials you need to prepare, and how much resource you need to prepare them. Next work out what resource you will need on an ongoing basis to provide support to your franchisees and deal with queries and problems.
Be careful not to underestimate the resource and time these will take. Build these into your forecasts and see how it will affect your business before you make any commitments to others.
For those interested in setting up a governance structure for an international organisation, our next training is a webinar on global governance on the 22nd July. Details coming soon.