Top 10 elements of a Strong Franchise System

Franchising, by its nature is a business strategy that is designed to capture and keep disproportionate market share. It has often been called one of the best business strategies ever invented, in part because franchising enables the franchisor to grow rapidly; across multiple markets – without the massive overheads required for the same business if it were to expand corporately. When done right, franchising uses leverage to the highest degree – strong franchisors leverage other people’s time, efforts, relationships, experience, money, etc. Strong franchisors harnesses this combined resource pool to grow strategically, and to continually improve their and their franchisees’ business processes and results. Another significant factor in the success of franchising is that good franchising also harnesses the human independence factor – most people will readily admit that they would work much harder for themselves than for an employer.

While there are over 1,000 franchise systems to choose from in Canada and over 3,000 in USA, this doesn’t mean that they’re all good, so you’ll want to ensure that the franchises you’re considering have all or most of the criteria:

  1. Reasonable Track Record of Success: A strong franchise system is one that has been up and running as a franchise system for at least five years. This means that they’ve had the opportunity to help a number of people (15 or more) start a franchise and where most of these people have been able to achieve “lifestyle success” with their franchise system.
  2. Strong Leadership: You’ll want to buy a franchise with a strong and experienced leadership team; this experience needs to be on at least two levels
    1. Some of the franchisor’s leadership team will have direct and current experience for the industry that the franchise is being offered in, ideally in various roles (sales/marketing, operations, etc), so that they can provide strong guidance to the franchise system;
    2. The franchisor should have someone who has direct experience in growing/leading a franchise system, because growing and managing this type of business requires a unique set of skills and perspective that is very different from traditional business.
  3. Strong Business Systems: The five year timeframe mentioned above is a long enough time for operating so that the initial franchisees have survived through the “beta test” phase, where through trial and error, the franchisor’s core business systems have been proven, and where appropriate, continually optimized. The result of surviving this initial growth stage is that future franchisees reap the benefit of having a business where a lot of things have been figured out and business efficiencies are in place so that they can launch and grow faster, while also being able to reach higher levels of success.
  4.  Strong Marketing and Business Generation Strategies: This is part of the franchisor’s proven business systems, but important enough to be mentioned separately. Most franchised businesses fall into one of these five main categories: food, retail, automotive, business-to-business (B2B) services, and business-to-consumer (B2C) services. Each type of business requires slightly different to very different business generation strategies; a strong franchisor will have been tracking their efforts and results for years, and thus have a very clear understanding of how to reach their ideal customers for their particular business, and in different markets and/or regions. They are thus very well-equipped to help the new franchisee launch much more quickly; as well, they’re able to help their existing franchisees continually adjust to changing customer demands and buying patterns.
  5. Strong Initial/Ongoing Training and Field Support: Training and ongoing support is one of the critical components that sets top franchisors from the rest of the pack. Excellent initial training is critical because this is what enables the new franchisee to quickly and effectively  get their business up and running; the ongoing training, coaching and support is what enables the franchisee to continually improve their skills and optimize their business. Strong franchisors focus their training/coaching efforts on these critical areas: business generation (sales, marketing, networking, etc), staffing/hiring, and business systems /operations. A strong franchisor also fosters a culture of sharing experience and learning between franchisees; they hold annual conferences as a great venue to learn and share ideas/experiences
  6. Culture of Success: You’ll find that the best franchise systems celebrate success of individual franchisees as well as the franchise system in general; they often have a good PR strategy to broadcast this success out to the public. A healthy part of this success culture is an awareness of “fairness” – where the business model enables the franchisees to meet and exceed their financial goals while also ensuring sufficient profitability for the long-term health of the franchisor .
  7. Strong Financial Base and Creditworthiness: A strong franchisor has a reasonably strong balance sheet. Their key financial ratios are at or above their industry benchmarks; they have strong operating cashflow and reasonable reserves. The credibility of the franchisor’ leadership is also a factor here – have there been past bankruptcies? Are there any active legal claims?
  8. Strong Franchisee Selection Processes: Selecting the right franchisees is critical to the long-term success of any franchise system. Top-performing franchisors are very careful about who they “award” a franchise to. They often invest in developing an ideal franchisee profile (which is based upon the skills and traits of their existing top-performing franchisees); then compare franchisee prospects against that profile. They also have thorough interviewing  processes to ensure that a new franchisee has a strong skills fit with the roles required to drive the business and a strong culture fit with the franchisor’s vision and values.

10. Happy Franchisees! This is perhaps the most important determinant, because if the majority of existing franchisees are happy (meeting and/or exceeding their lifestyle and financial goals), then it’s a reasonable assumption that many of the other elements herein are in place and working well. Also, well-run franchise systems have an effective conflict resolution program in place, so that problems are dealt with quickly, and where litigation is used only as a last resort.

  1. Active Member of the Canadian Franchise Association (CFA) or International Franchise Association in the USA (IFA): Supporting the franchise industry at large and subscribing to the core values of the CFA and IFA is another mark of a strong franchise system. Both the CFA and IFA are very active in maintaining a high level of ethics in franchising; both organizations offer numerous events and resources to help franchisors continually improve their ability to provide excellent value to their franchisees.

Many franchisors will not have all of the items on this list, but that doesn’t mean that they’re not a good franchise system. We suggest you consider the franchisor partner you’re thinking about aligning with, and then reflect on these top 10 items to identify which are most critical to you. What areas of strength do you have that will compliment and leverage what the franchisor brings to the equation? What skill gaps do you have that must be able to be mitigated by what the franchisor brings to the equation?

May 25, 2014