Colin Bell, our Business Growth Director, discusses the advantages of franchising your business.
Some of the world’s most scalable businesses are franchises. When the formula is right they can scale at a phenomenal rate. So if at the top of your new year’s resolution list is ‘grow my business’ then learning lessons from franchisors could help you to devise a scalable business model.
So what can we learn from franchises?
- In most franchised businesses, increased revenue has a marginal impact on the franchisor’s costs base. Accountants are likely to call this high operating leverage and investors like high leverage because as the business scales, they can see margins increase in parallel. However for the franchisor, the opposite is often true: as they expand, their costs increase at a higher rate hence the franchisor has moved the costs increase from them to the franchisee.
- Franchisees provide investment capital. In most franchised businesses, franchisees purchase the franchise upfront; so without incurring much cost the franchisor receives a cash injection that can be used to further expand and invest in their business.
- Franchisors build it once and sell it many times. To develop a franchised business at some point, the franchisor has made the decision to break from the day to day and to begin working ‘on’ rather than ‘in’ their business. This enables them to figure out why customers buy from them, what is it that they do that adds most value and then refining and structuring the business model in such a way that they can easily educate others (franchisees) on how they too can build a successful business based on their model.
- Franchises attract highly engaged talent. Franchisees have invested significantly in the franchise and unlike employees they can’t just walk away and get a new job. The result is that they are likely to be much more engaged and motivated than a branch manager appointed directly by you.
- Franchises can result in reoccurring and predictable revenue. Franchisors normally receive a predictable and reoccurring revenue stream from franchisees through both royalties and the purchase of materials. As well as contributing to the bottom line, reoccurring revenue can be used to cover operational costs.
Key questions to consider:
- How can you develop a model that means when sales increase your costs don’t?
- How can you develop a model that is cash flow positive – receives cash upfront before incurring costs?
- How are you going to release the time required to work ‘on’ your business rather than ‘in’ it?
- How are you going to truly engage and motivate your people?
- How can you lock customers in and generate predictable reoccurring revenue streams?
Research has shown that 71% of business leaders felt that they would be able to grow their business quicker if it were easier to find mentoring and a professional support scheme locally and they worked effectively (source: Scale Up Institute: Scale Up Review 2016) and the North East LEP want to help make that happen.
We have recently launched our Growth through Mentoring programme, where we match experienced leaders who have grown a business themselves, with ambitious SME owners who have the drive and ambition to grow their business.