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THINKING OF FRANCHISING?

 

 

John Ong, our CEO and Principal Consultant, shares 8 important questions you need to ask yourself first.

 

 

1. What are my company’s objectives in franchising?

 

Is it to supplement existing distribution channels? Is it for brand building purposes? Or is it to allow penetration into high risk markets?

Whatever the reason, franchising should always be treated as a long term strategic consideration and not merely a quick fix for an immediate problem such as the need to build greater brand presence in the marketplace. Ultimately, if your franchisees do not believe that you also have their interests at heart, and sense that you are simply using them for your own benefit, they are less likely to be motivated and to feel a real sense of ownership of the brand. 

You should also consider if franchising is the ideal solution to meet your company’s objectives. For example, if the goal is to grow the business rapidly at the lowest cost possible, franchising may not serve your purposes as well as another channel such as distribution. Or if the company prefers to retain a high level of control over the operations, and they don’t mind taking a longer time to expand, it may be preferable to roll out company owned outlets.

 

2. Is the business’ profit margin sufficient to support all parties in the franchise system?

 

In a franchise system, the franchisee typically has to pay on-going royalties and other fees to the franchisor in consideration of the franchisor’s efforts to maintain and support the franchise network. These fees are over and above the franchisee’s monthly operating expenses. If royalties are 5% of gross sales for example, this 5% comes straight out of his profits. If there is an added tier of a master franchisee acting between the franchisor and the single-unit franchisee, the royalty might be further bumped up to say 8-10% as the master franchisee also takes a cut of the royalties.

A heavily tiered franchise system may not enjoy sufficient profitability to support all the parties involved. And since a franchisee needs to be profitable to stay in business, the franchisor needs to watch carefully how he structures the franchise deal. If the business model in general is one that inherently has a slim profit margin, then franchising may not be a viable tool for expanding the business.

 

3. Is my business model/operating concept easily replicable and transferable?  Is it highly skills- dependent?

 

Architecture firms, fine dining restaurants, upmarket tailor shops – these are all examples of businesses that are harder to franchise simply because it is highly dependent on a specific skills set that is hard to acquire. This severely limits the ability of the business to duplicate itself, since so much of the success of the business is dependent on a specific person or group of people.

 

4. Will my company still be able to exert sufficient control and influence on the franchisee once the business has been “taught”?  

 

One very real fear that all franchisors have is that after having taught the franchisee the ropes of the business, the franchisee will then break away and set up his own business to compete head on with the franchisor. This is more likely to happen if the franchisor does not have any unique factors or control mechanisms that make it harder for franchisees to leave the system.

For example, if the franchisor is able to exert control on the supply line, or if the franchisee is dependent on the franchisor for centrally provided services, or if the franchisor provides unique products and/or services to the franchisee – these all serve to strengthen the motivation for staying in the system. Companies that do not have strong control factors may have to rely on a strong brand to keep franchisees in the system.

 

5. Is the whole organisation embracing the franchising initiative?

 

Many companies fail to anticipate the amount of effort that setting up a franchise system requires of its employees. Often, choosing a franchising strategy entails a shift to the existing business model, and employees across the board need to be prepared to make the adjustments. They need to recognise that franchising involves building relationships with business partners (the franchisees), and this is significantly different from dealing with customers or employees.

It also needs strong commitment from the top leadership in order for the strategy to work. This is especially true at the start of the process, where heavy involvements is required of mid-level and senior managers, who need to take time off their usual operations in order to develop the franchise business and trouble shoot operations in the start up phase.

 

6. Do I have enough money to invest in developing a robust franchise system?

 

 Franchising is by no means a quick and easy way to expand one’s business and reap great financial rewards without putting in much work. In fact, the opposite is true. To develop a solid franchise system that has a good chance of succeeding, the franchisor must be prepared to invest time, money and people resources both during the upfront development phase, as well as on an on-going basis.

While it can be extremely rewarding and beneficial to franchise your business, you must also count the cost of investing in the franchise system itself.

 

7. Do my products and services have long-term sustainable demand?

 

Products and services that have been proven to have long term appeal have a much better chance of succeeding as a franchise as growing a franchise network takes time. It is not uncommon for franchise tenures to be as long as 20 years. If the product or service is faddish in nature (as some food and fashion products can be), it may be difficult to franchise.

 

8. Who are my supposed target franchisees?  Is there a large pool of them, or only a few would qualify because the investment is so huge, or the business model is so complex.

 

It’s important to be able to accurately pinpoint your target franchisee pool so that you are better able to plan how to market your franchise to them. More than that, answering this question may give you some insight into how easy or difficult it will be to sell the franchise opportunity. If your franchise is likely to appeal only to a small, select group, or if the barrier to qualifying as a franchisee is high either because the start up investment is high or the business model is complex, then it may be hard for the franchise to really take off.rolex replica watches replica watches uk replica watches cartier replica watches replica Iwc

 

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