Hamilton Pratt

Setting up a Franchise

A franchise operation is established in one of two ways.  A prospective franchisor may have a successful existing business which it wishes to expand and will choose business format franchising to do so.   Alternatively, a newly formed business or an existing business with little or no experience of a proposed area of business activity may seek to enter this business area using  business format franchising.  The former method is likely to prove more successful than the latter.

As  with  all businesses a business plan should be  prepared  containing (in addition to those sections which are usually found in business plans):

  • Reasons for franchising;
  • Confirmation that the products or services can be distributed by way of a franchise;
  • A breakdown of the proposed management structure and an explanation of its appropriateness in a franchising context.

It is usually considered essential for a franchisor to develop and refine its franchise business by the use of a pilot operation.  Such operations are company owned outlets which are operated as if they were franchised outlets. Normally, pilot  operations should  be open for not less than  a  year  (and preferably  two  years)  and  ideally  there should be  more  than  one  pilot operation.   There  is a growing trend to start  franchising  without  pilot testing,  particularly when the proposed franchise business relates to a  “new activity”  which  the  franchisor does not wish third parties to  copy.   This approach should not be encouraged because a franchisor should offer a proven successful business to franchisees.  Without successful pilot operations franchisors will simply be using the experience of franchisees  to  develop their  business  and  cannot be said to be providing a proven  and  successful format.  The pilot operation will establish the following:-

  • Whether the business will be successful;
  • How the business can be improved;
  • Problem areas;
  • Marketing methods;
  • Applicable laws and regulations;
  • The positioning of outlets;
  • Staff selection/training/wages;
  • The most desirable combination of layout, equipment and staff;
  • Techniques for:-
    • management
    • training
    • accounting
    • stock control
    • quality.

One of the most important aspects of the pilot operation phase is the development of the operations manual.  This document, with the franchise contract, will regulate the terms on which a franchisee operates his franchise business.   The operations manual will deal with the day-to-day operational matters. Whilst no two operations manuals are identical  they often contain the following elements:-

Introduction

  • Brief summary of the franchise business.
  • What the franchisee will have to do in terms of commitment.
  • What the franchisor will provide.
  • Summary of existing franchise successes.
  • Business philosophy (ie service to customers etc).

System

  • Detailed description of the system and its constituent parts.

Operating Methods

A list of what is required in the business should be set out and should include:-

  • Equipment
  • How equipment is to be operated
  • Dealing with equipment failure
  • Stock requirements
  • Vehicle requirements

Operating Instructions

All matters relating to the operation of the business should be set out in detail and should include:-

  • Standard forms
  • Standard procedures
  • Financial records
  • Financial reporting
  • Payment of franchise fees
  • General accounting, VAT, PAYE and Income/Corporation Tax matters with information on how to complete necessary forms
  • Cash control and banking procedures
  • How to deal with cheques, cheque cards and credit cards
  • Staff requirements
  • Staff uniforms
  • Staff training
  • Procedures for taking on staff
  • Suggested employment contract
  • Procedure for staff discipline
  • Summary of employment legislation
  • Breakdown of job description for staff
  • Opening times
  • Trading patterns
  • Purchasing requirements and stock levels
  • Pricing policies
  • Insurance with particular reference to any discount or schemes offered through the franchisor

Advertising and marketing information such as :-

  • point of sale advertising
  • local advertising policy
  • recommendations concerning PR and advertising

Outlet

  • Suggested position of store
  • Store layout
  • Display and merchandising techniques
  • Cleanliness
  • Complaints procedures

Standard Forms

All  standard documentation and forms required to be used in  the  business should be set out.  This may include:-

  • Business Names Act notices
  • Accounting and financial forms
  • Order forms
  • Stationery
  • Contracts of Employment

Technical Support

  • If complicated equipment is used technical information is often provided.

Franchisor Directory

  • A list of the franchisor’s employees with their job descriptions and reporting structure.
  • Useful telephone numbers.