BEFORE YOU FRANCHISE: FIVE PILLARS FOR A STRONG AND RESPONSIBLE START

Dr Callum Floyd of Franchize Consultants explains what you should do to prepare your business for long-term success if you are thinking about adopting the franchise model for growth.

Franchising is one of the most powerful ways to grow a multi-location business – and leaders across many industry sectors have used it to scale locations and penetrate markets in ways they could not have otherwise achieved. Industries such as accommodation, retail, food and beverage, trade services, home building, financial services, education, and home and commercial services have all seen businesses expand nationally and internationally using the franchise model.

Franchising works because it can enable a business to expand by leveraging capital, capability and local knowledge from franchisees – who are typically more motivated and invested in business success than traditional employees. Alongside other potential advantages, it also allows for rapid scale, bulk purchasing, group marketing and the multiplication of a proven business model across territories.

But franchising is not a shortcut to business growth and performance. Franchising will not grow sustainable profit and value from an existing business that is inherently weak, lacks systems or leadership and market experience. Poorly planned or rushed franchising is dangerous. It can jeopardise the quality of what potential franchisees are actually purchasing and the long-term viability of the whole business for the would-be franchisor. And thus, while the franchising model can be highly scalable, it is only as strong as the foundations it is built upon.

Sustainability

At Franchize Consultants, when we consider our long-standing work, including revitalising already nationwide franchise networks, we believe the best franchise systems are built well before the first franchisee is signed. Sustainable franchising starts with strong business foundations, a robust feasibility assessment, great business and aligned franchise structure (including agreements and manuals), excellent management (including franchising training) and a clear strategy.

This article introduces five essential pillars that help ensure businesses contemplating a franchise growth journey start from a position of strength and responsibility.

And while not every element need be 100% complete from day one, these pillars represent critical foundations that should be well underway by the time you make the final decision to embark on franchising your business. Many aspects – such as finalising trademarks or fully documenting operational systems – can be refined and tested during the franchise development process. What’s essential is that the underlying business is strong, and the leadership is committed to responsible preparation and continuous improvement.

Why Pre-Franchising Foundations Matter

Franchising is not simply expanding a business – it is transforming it. Becoming a franchisor means shifting from operating a business to supporting others to do so. That role comes with new responsibilities, new systems and structure, and a fundamentally different mindset.

Building the right foundations enables you to:

• Ensure your business is truly franchise-ready and replicable

• Establish realistic expectations for both franchisor and franchisees

• Create clear, consistent systems franchisees can follow

• Attract higher quality franchisees and build trust from the outset

• Provide for a long-term sustainable franchise system

• Undertake a comprehensive franchising feasibility study

This is at the heart of what the International Franchise Association refers to as Responsible Franchising – practices that ensure long-term franchisor and franchisee alignment, profitability, and collaboration.

We believe Responsible Franchising starts with responsible preparation. Without a strong base, even the best marketing or franchise sales efforts can lead to fragile long-term outcomes.

The Five Pillars of Pre-Franchising Foundations

Pillar 1: Strong business performance and validation

Fundamentally, for a potential franchise system to succeed, there should first be a strong underlying business model that works reliably, profitably, and repeatably. The business needs to be able to provide for a strong profit and return on investment to the franchisee after paying franchise fees to the franchisor. And these fees should be sufficient that the franchisor, in turn, can project a suitably viable and profitable return once ‘critical mass’ has been achieved. Critical mass refers to the viable minimum number of unit franchises that will sustain the normal operations of a franchisor business without additional cash injections.

Although franchised outlets often perform better than managed outlets, franchising is not a silver bullet for improving poor profitability at unitlevel. Whether you have a single pilot operation, or an existing chain of business units, performance levels and business strength need to be there from the outset. Remember that these existing levels of business returns will also be what potential franchise buyers and their advisors will/should be looking to validate.

Examples of indicators of strong performance include:

• Consistent and growing sales, margins, and returns.

• Strong unit-level profit and return on investment.

• Performance that has been validated sufficiently over time.

• Ideally, existing business model proof across multiple locations.

• In-depth understanding of customer segments and buying behaviour.

• Winning local business/industry awards.

For the business owner looking to expand, ensuring that you have strong performance indicators will be an important contributor to a comprehensive and valid franchising feasibility study.

Our 2024 New Zealand Prospective Franchisee Research survey also found that having a proven business model and an established brand are amongst the top three reasons prospective franchisees give for buying a franchise. If the business isn’t yet delivering reliable returns – or if its success relies heavily on you, the founder – more work is likely needed.

Pillar 2: Strong brand with distinctive competitive advantage

Our research shows that franchisees want to align with something recognisable, respected, and clearly differentiated – but this is also important for a long-term sustainable franchise system. A strong brand builds trust with customers and helps franchisees feel confident in their investment; it can also contribute to pricing power.

Long-term competitive advantage solidifies brand strength but can also help deliver more sustainable returns – above industry norms. Sources of competitive advantage can be numerous. Examples we’ve dealt with include ownership/rights to distribute proprietary products, marketleading technology, an industry-leading distribution/franchise structure, vertical or horizontal integration (e.g., owning supply, complementary or competing businesses), business innovation/change capabilities, and existing large scale and market penetration.

These advantages can and have on occasion crucially helped to deter future dominant international companies looking to enter New Zealand. Conversely, strong international companies sometimes enter and dominate existing local networks that lack compelling sources of competitive advantage.

Indicators of strong brand and competitive advantage include:

• An established or emerging brand that communicates quality and consistency and achieves high levels of recognition.

• High levels of customer satisfaction, loyalty, repeat business and referrals.

• A unique business model or customer experience that’s hard for competitors to replicate.

• Differentiators such as exclusive products, processes, pricing advantages, service approaches, or technology.

• A protected/protectable name and visual identity, with trademarks, potential patents, and supporting IP.

• An established dominant market position.

Your brand and competitive edge should contribute strongly to a franchising feasibility study and make a prospective franchisee feel they are joining something they couldn’t easily build themselves. That sense of value is key to attracting quality franchisees – and keeping them committed. The second pillar, like the first, also contributes to long-term, sustainable returns, for both franchisees and the franchisor.

Pillar 3: Robust information and insight

One of the first areas we’d advise any would-be franchisor on, is starting to establish a strong base of reliable unit and performance information – including the types of information that will be important for refining product and service offerings, optimising processes, and validating business performance.

As you can imagine, a strong base of valuable information covering areas such as sales and gross profit composition, marketing effectiveness, customers, customer satisfaction, profitability and returns, will help as inputs into a comprehensive franchising feasibility process and also help early prospective franchisees validate the opportunity. This information can be vital for helping new franchisors better understand their growing business and where improvements are needed.

Moving forward, this information (including its structure) will also be vital for franchise network benchmarking, helping individual franchisees identify strengths, weaknesses and associated actions for improvement. Put simply, reliable data is the lifeblood of a franchise system, from founding to maturity. Without strong information, you cannot design a sustainable model or support franchisees effectively.

While companies vary in this foundation, great indicators here include:

• A suitably structured and detailed Chart of Accounts

• Accurate and timely financial data, including revenue composition, cost of goods, labour, and profitability

• Customer information (e.g. demographics, satisfaction and loyalty)

• Measures of sales effectiveness, such as lead conversion

• Measures of marketing effectiveness (e.g. cost per lead and jobs won)

• The ability to benchmark performance over-time, and between locations/regions or even staff (if applicable)

• The tools and reporting systems needed to underpin this information

As identified, this data not only informs franchise feasibility analysis (including royalty structures), but becomes critical in coaching franchisees, setting standards, identifying future business model changes, and ensuring long-term franchisee and franchisor profitability.

Pillar 4: Developed systems, processes & IP

Franchising as we most popularly know it, with companies like McDonald’s for instance, is commonly defined as ‘business format franchising’ – and involves the transferral of knowledge, capability and disciplines required to build and grow a franchised unit, replicating the established proven model.

This form of franchising is called business format franchising because it involves licensing an entire business model or format to franchisees, as opposed to one or a selected range of areas of operation from the business. Business format franchising encompasses standardised and required elements (including mutual obligations) in areas like the brand, products/services, methods of marketing and sales, uniforms, vehicles, premises, human resource management, health & safety and so on. In great businesses these areas will be optimised in the existing business ready for franchising, and associated Intellectual Property will be protected/protectable.

The developed systems, processes & IP then underpin not only the business’ franchising feasibility, but also the writing and optimisation of future franchise management manuals and training. A business can’t be franchised unless it can be taught and repeated, consistently.

And thus, well-developed systems and intellectual property form the backbone of scalability.

Franchise-ready businesses should have:

• Established operational processes procedures covering key core business areas either documented or ready for documentation

• Service standards, performance checklists, and quality controls

• An emerging stack of relevant technology systems covering areas like accounting, payroll, CRM, job-management, health and safety etc

• Protected or protectable intellectual property, including trademarks, relevant patents, branding, manuals, and proprietary tools

Effective franchising depends on franchisees (and their teams) being able to learn and follow proven systems.

Pillar 5: Organisational readiness and strategic intent

Franchising isn’t just about growth – it’s about a total transformation –involving changes to the existing business model, the development of an aligned optimal franchising structure, and the development of new leadership and management approaches – different from those required by a conventional company-owned business. The business will need the leadership capability, clarity of purpose, time, resources and internal structure to support the franchise model’s success.

One crucial factor, particularly for small companies looking to franchise, is demonstrable industry knowledge and leadership. It is important that a business model and aligned franchise structure can be developed with the long-term future (included anticipated changes) in mind. Decisions that are finalised for the duration of the franchise agreement will impact the future sustainability of the franchise model. Key indicators are:

• Clear knowledge and positioning of the existing business relative to key current and potential future competitors.

• A strong sense of how the business model will need to adapt to future forces (e.g., changes in technology and legislation).

• Founders and leaders ready to become franchisors – mentors, coaches, and system stewards.

• A willingness to invest in a comprehensive franchising feasibility study, manuals, support systems, compliance infrastructure, and franchise management training.

• An ability to conduct long-term planning.

Importantly, it also includes the ability to commit to continuous improvement, change management, and collaborative planning with franchisees. These are hallmarks of responsible, long-term franchising.

Market Context

While not an internal pillar in itself, a supportive market environment is crucial for expansion and franchising prospects. Key examples of a supportive market would include:

• Growing and enduring customer demand in your sector

• Interest from prospective franchisees, including internal staff

• A fragmented competitive landscape without existing dominant national brands

These indicators can signal that your model is well-timed for franchising – but they don’t replace the need for foundational strength.

Responsible franchising begins with strong foundations

Rushing into franchising can lead to costly mistakes that may not become evident until well into the future. Without a solid foundation, you may struggle to support franchisees, replicate performance, or sustain the brand. Franchisees and/or the franchisor may experience poor returns, and the reputation of the system may be undermined.

In contrast, strong foundations enable the ability to conduct a comprehensive feasibility analysis, confident franchisee recruitment, great franchisee support, and successful long-term planning. They underpin robust manuals, clear franchisee expectations, and a business model capable of performing in changing market conditions.

Franchising is not just a growth decision – it’s a legacy decision. Build your franchise business on solid foundational pillars, right from the start.

About the author

Dr Callum Floyd is Managing Director of Franchize Consultants (NZ) Ltd, six-times winner of the Service Provider of the Year title at the Westpac New Zealand Franchise Awards. Franchize Consultants has helped many NZ (and divisions of international) businesses to transform into successful franchise models over the past 35 years.