Challenges in Developing a Successful Franchise Business

A franchising operation has been one of the popular business models. A number of very successful businesses around the world, such as McDonald’s, Subway, Seven-Eleven and Dunkin’ Donuts, are franchise-modelled operations.

 

The concept of a franchise business is simple as it just entails using a business model of another firm. The firm that owns the original business model is the franchiser. The firm that uses the franchisor’s business model, it trademarks and other specifics, is called the franchisee. In exchange for using the business model, the franchisee pays the franchisee a certain fee.

 

Developing a successful franchise, however, is not an easy project. It is complicated as it is complex. The success of the business does not only depend on the brand name or robustness of the supply of the franchisor, it also depends on the success of the franchisees.

 

So, how can one develop a successful franchise business?

 

Panos Mourdoukoutas, a contributor to Forbes.com, cited five factors that could make a franchise business successful. These are:

1)      The right business model;

2)      Scale;

3)      Scope;

4)      Location; and

5)      Market saturation

 

According to Mourdoukoutas, a franchise business should be able to enhance customer value vis-à-vis the competition. A franchise business should offer a model that would distinguish itself from the traditional way of bringing products or services to the target customers.

 

He added that scale would play a big role in terms of costs since the bigger is the production scale of a firm, the lower costs it would incur – thus resulting to bigger profit margin. He also cited scope, which could refer to the variety of products or services that a franchise firm is offering to customers. He noted that usually, those with larger scopes post higher return on assets.

 

Mourdoukoutas also emphasized the role of location in the success of a franchise business. A franchisor whose franchisees have chosen to do business in prime locations would eventually find its operating margin as well as return on assets surging. Another factor to consider for the success of a franchise business is market saturation, since a franchisor could not post growth in a certain location if it has already penetrated the market deeply.

 

AllBusiness.com’s Sara Wilson wrote on the challenges that franchise firms should hurdle to make their businesses successful. One of these challenges is having enough capital to support business operations. While franchisees take care of daily operations, franchisor typically should the burden of creating the franchise system and the cost of supporting new franchisees. These costs usually outweigh the income coming from royalties and franchise fees. MSA Worldwide senior consultant Kim Ellis told Allbusiness.com that franchisors should always consider the amount of capital required to buoy the franchise to a point where it already could sustain itself.

 

Another challenge would be building a solid infrastructure that would primarily serve as the backbone of a franchise. Christian Faulconer, CEO of the Franchise Foundry, told Allbusiness.com that new franchisors may overlook the importance of systems, procedures, and support in a franchise business. He emphasized that franchisees will always need the franchisors’ support, and a solid infrastructure would be a key to it.

 

Allbusiness.com also underscored the importance of tapping the right franchisees. A franchisor should not just do business with anyone seeking to be a franchisee. If a franchisee fails, it would place a great burden on the franchisor. Likewise, it might blemish the image the franchisor is building. Thus, a franchisor should focus on tapping the right people to become franchisees. Qualified franchisees could help the franchise business grow on the long term. It is also important for a franchisor to build a positive relationship with its franchisees.

 

A franchisor also needs to have internal staffs that have the right qualifications to handle its operations. A franchisor would need the right employees that would allow it to interact well with and support its franchisees. Getting the right internal personnel is part of the firm’s role as franchisor. They are needed to fulfil a firm’s role to add, train, and support franchisees.

 

Overall, there are a number of factors and challenges to consider in order to develop a successful franchise business. A franchise business is about building a relationship between a franchisor and its franchisees – something that could only be achieved by blending well the right business model, the right infrastructure, the right franchisees and the right employees.