Developing the Franchise System

This is the third segment in MegaDox.com's Successful Franchising series.

To Franchise or Not to Franchise
So you have a great business concept and an operating, profitable corporate location, and you want to expand. Should you expand by opening more corporate locations or open up your concept to partners by franchising? Both expansion methods have merit but if you want to expand quickly and gain disproportionate market share the best way to expand is by franchising.

Once you have decided to expand by franchising it is important to formalize an expansion strategy, which will enable you to expand within the limits of your financial and human resources. The strategy should consider whether the company would offer:

• Single unit franchises,
• Multi-unit franchises,
• Sub-franchise an area to an entity that has the resources to act on your behalf as sub-franchisor,
• Find an Area Developer.

Each of these approaches has its own benefits and challenges so it is important to determine this format first.

Concentric Circles
Once this is done, look at the expansion strategy in terms of the areas that will be opened and their proximity to your base of operations. Generally if you are going to use the single unit franchise or multi unit franchise model, it is better to open locations in concentric circles out from your base of operations. This will enable you to provide the necessary support to the franchisees without overly taxing your financial and human resources. As locations are opened further and further away, having numerous locations closer to your base of operations will ensure that the royalties paid by the existing franchisees will more than cover the support costs of newer, more distant franchisees.

Sub-Franchisors and Area Developers
If your decision is to expand by sub-franchising or using an Area Developer, then the need to use the concentric circle approach is reduced. With sub-franchising you will be looking for an individual or group who has the financial resources and the business acumen to act as if they were the franchisor (you) within a specified geographic area.

Generally the Sub-franchisor or Area Developer takes on some of the responsibilities of the franchisor, in return for a significant portion of the initial franchise fee and ongoing royalty stream. These responsibilities include franchisee recruitment, training, location opening assistance and franchisee support. The Sub-franchisor will be a party to the franchise agreement. An Area Developer is similar to the Sub-franchisor except for the fact that typically the Area Developer is not a party to the franchise agreement.

Analyzing the Market
Before you start on your expansion make sure that you complete a detailed analysis of the markets where you want to expand. In particular, be sure to review:

• Customers
• Consumer buying indices
• Cost of real estate
• Critical mass
• Units needed to support critical mass
• Competition
• Employment statistics
• Government regulations

Pick markets where you have the greatest opportunity for dominance. Decide how this dominance will be measured.

What Now?
You’ve decided on the expansions strategy, both in terms of type of partner you want and the areas you want to expand into, and you've completed your market analysis. Now how do you find the perfect franchisee, sub-franchisor or area developer?

Come back for our next post when we will provide the nuts and bolts of the franchise recruitment process.


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