The Franchising flywheel

I've long believed that franchising, done well, is an excellent way to scale a successful business.

By replicating a small, self-contained part of the business and delegating its management on a performance related basis you can keep the centre lean, avoiding the increasing bureaucracy of growing a single business ever larger.

Franchising is a flywheel for expansion. Once you get it going, it's possible to open several, even many branches per year, even to go international, at low capital cost. New franchisees invest in setting up branches, banks are happy to finance a proven, profitable business.

But that flywheel is very hard to get going.

Creating or turning an existing business into something that can be franchised successfully, takes time - at least two years - plus effort and deep pockets.

You have to:

  • Make sure the original business is extraordinarily profitable - you're going to give most of the profit to the franchisee - the delegated manager of a branch, so there needs to be enough for them to make a decent living and for you to make a return on your investment.
  • Capture exactly what it is that makes the original business distinctive enough to command a premium - the source of your extraordinary profit.
  • Make sure there is a big enough market to make the investment worthwhile - being successful where you are doesn't necessarily mean there will be enough potential customers everywhere. At the same time, 'big enough' doesn't mean 'everyone'.
  • Make sure you can protect your customer base by continuing to improve the customer experience - its fine for your customers to try a competitor, just make sure they always come back to you for what nobody else can give them.
  • Make sure there is a big enough pool of people, willing, able and properly motivated to take the responsibility of being an Outsourced Manager for your new branches - there will be plenty of people who are willing, and you can train most people to be able, what matters is that they are properly motivated.
  • Document the customer experience that generates that extraordinary profit - so that someone who is not you can replicate it. This isn't the mere mechanics of what the business does, it's the whole shebang of what the business does to make its customers come back time and again for more recommending friends and family as they do.
  • Document the franchisee experience that will keep them happily generating extraordinary profit on your behalf - as a franchisor your customers are your franchisees. You need to offer them an experience that is at least as compelling as that you expect them to give customers.
  • Protect the intellectual property behind all this effectively, but fairly, through trademarks and franchise agreements - because once someone with deeper pockets spots your brilliant idea, they'll try and copy it.
  • Test your documentation on a real, live guinea-pig - you already know the business idea works. You don't yet know whether someone other than you can replicate that success.

At the beginning of all this, it can feel like the flywheel is hardly moving, even going backwards. You have to use your own money, because at this stage the franchise is unproven, and banks won't lend to franchisees, although if you're lucky and have other assets they might lend to you.

But getting this stage of franchising right is crucial to success.

If your business is not extraordinarily profitable and able to prove that, you'll struggle to attract good potential franchisees and you'll struggle to cashflow initial growth.

If your customer experience is not distinctive enough, if you don't engender loyalty in your clientele, you won't be able to generate extraordinary profits, and you won't be able to protect yourself from being copied.

If there isn't a big enough market it will be hard to get a return on your investment.

As you work through this process you'll find that momentum slowly builds, until that flywheel is well and truly running so fast you'd find it hard to stop it.

Franchising is a brilliant way to scale a successful business.

That doesn't make it easy.

But then, Discipline makes Daring possible.

Ask me how.