Case Study-  Bringing a franchise idea to life through franchise incubation

 

Problem

A new client came to us with an idea to franchise their booming youth based personal training business.  The client had been operating for a number of years and had expanded into several locations within the city, and had reached the point where they realised that the only way to expand further was to commence franchising the concept.  The client had little idea of how franchising operated, and the business wasn’t properly set up to commence franchising.  However, the idea was brilliant, and the runs were on the board in terms of the existing business.

 

Issues

Successful business people with proven business concepts often look to franchising as the next step in expansion.  Similarly, those with just a simple idea and no track history quickly think that franchising will bring rivers of gold.  In both cases, the prospective franchisor is ill equipped to commence franchising without some initial work.  In our client’s case, she was a sole trader who had commenced the business as a side gig, but the success of the concept had occupied her full time.  A nice problem to have, however the structure as a sole trader was unsuitable moving forward.  Similarly, the client had a few processes in place, but was a long way from producing an operations manual capable of replication to prospective franchisees.  She knew ‘how’ to run the business, but all that knowledge was in her head.  Other matters such as trademarking the name and logo also needed addressing.

 

Solution

We advised the client to commence our franchise incubation process, whereby we provide the client with a (long) list of ‘to-do’ items while we take care of matters such as company registrations and trademarking.  Acting more like a business coach than a lawyer, we consult and mentor the client through the process to keep them motivated and on track with the project plan.  With this particular project, the central task was the completion of the operations manual, which she did ahead of schedule.  We then advised on the development of a franchise marketing plan and recruitment policy (including creating a franchisee ‘avatar’, specifying the qualities and experience required in a franchisee, which then informs the franchise recruitment process).  We also benchmarked the concept against similar franchise systems and established a cost of the franchise, along with all the financial forecasts and details required for a Franchise Code compliant franchise disclosure document.  At the end of the franchise incubation process, the client had fully formed processes and procedures and we were able to complete the template franchise agreement and disclosure document (and associated documents) quickly and efficiently, ready for the client to go to market.   Needless to say, the franchise boomed and its success was identified by a key player in the fitness industry who acquired the system from our client.  We were lucky enough to be engaged also by the purchaser, who expanded the system into all Australian States, and into several overseas countries.  The franchise brand is now an international leader in the field.

 

Lessons

  • A good idea is a good idea, a great idea is a good idea well supported – Our client had a booming business, and we knew pretty quickly that they had the motivation and qualities to successfully start franchising. And by participating in our franchise incubation process they had everything they need to succeed out of the gate.
  • Incubation is crucial – While our client was successful, this is not always the case. While we have had many success stories, we have had a number who have decided during the incubation process that franchising might not be for them.  We don’t consider these to be ‘failures’, but also ‘successes’ as the ultimate success of a franchise brand depends almost as much on the owners and managers as it does the concept itself.  Those who pulled out of the incubation process gave it a shot, and it wasn’t for them.  They are lucky in that the expenditure required to participate in the incubation process is relatively small when compared to the cost of going straight to documentation only for it to sit on the shelf as a stagnant franchise system.
  • Always look at the exit strategy – When we were engaged by the client, she was a sole trader and had no intention of ever selling the business. When we advised her about the benefits of incorporating a separate company to act as franchisor, one of the benefits we advised her on was the relative ease of that type of structure to sell if and when an opportunity arise.  At the time, that was well down the list of her priorities, but she took the advice anyway and we incorporated a franchisor entity.  Part of the attraction of the eventual purchaser of the franchise network was the fact that it was operated as a company, and had a totally separate set of accounts and assets (including the franchise agreements that had been put in place).  The sale was straightforward.  The point is that regardless of the intention at the outset, one eye should always be kept on the exit strategy.  This applies not only to franchises, but to businesses in general.  When we conduct our ‘business audits’, an issue we often identify is issues with the business structure in place.  Businesses of all types to take the time to look objectively look at their business through the eyes of a prospective purchaser.  Are all supply arrangements documented?  Are the staff on proper employment agreements?  Are things like trademark registrations in place?  All these things are relatively simple, but are incredibly important to prospective purchasers.  If you were buying a house and discovered that it had a relatively minor, but obvious, plumbing issue would you would probably suspect that if the owner can’t be bothered doing the simple things to fix the property, that more significant issues exist.  It’s the same with business.  If a purchaser sees that the basics aren’t done, they will doubt assurances about more substantial issues.

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