Dollinger index

414 ENTREPRENEURSHIP

The Franchiseable Business

Certain types of businesses are appropriate for franchising. The first and primary requirement is

a successful series of pilot stores, locations, or operating units. The franchisor bears the cost of

developing the formula during the pilot period. The franchisor must learn enough about how to

make the business a success to be able to train others to succeed. This means learning the key ele-

ments of accurate site selection, efficient operations, internal and external financial keys and

ratios, operating cost control, a consistent and workable pricing policy, and training procedures

for both potential franchisees and their employees. In addition to systematically perfecting each

of these areas, the potential franchisor must be sure that after all costs are met, enough is left over

for the franchisee to earn a respectable return and pay the royalty to the franchisor.

Table 10.2A summarizes the key cost drivers that a franchisor must consider.

Businesses suitable for franchising often have a number of common elements. They have a

product or service that satisfies a continuing demand. Because it will take two or three years for

both the franchisor and franchisee to see a return on their money, the franchise idea cannot be

based on a fad or a quick make-a-buck opportunity.

The format of the franchiseable business must be simple and mechanical. A high degree of

customized personal service or individual flair and skill are difficult for a franchisee to duplicate.

Uniform standards of quality and appearance for the stores or outlets are important. This means

that the franchisor must give serious thought to what quality means to the customer and be able

to define and measure it accurately. The franchisor looks for a simple, easy-to-remember name

for the business. Strong advertising and promotional support are crucial. The franchisee locations

must be good enough to support the business but not so expensive that they absorb all the prof-

its, which is why site selection criteria are vital.

The administration of the franchise system should be kept simple. The franchisor needs a way

to ensure that sales and profits are reported accurately and royalty payments are correct and time-

ly. If possible, the franchisor should arrange for a bank or financial syndicate to provide financial

assistance to prospective franchisees.

Even the best business format franchise system cannot long endure if the original pilot oper-

TABLE 10.2A Cost Drivers of Franchising

Research and Development Costs

Associated with the creation of the initial product, market research for the product and the franchise

system, and the franchising blueprint.

Creation of the Franchise Package

Requires the hiring of a legal team to prepare the Uniform Franchise Offering Circular (UFOC) for

the U.S. Federal Trade Commission. Franchisors are also highly regulated by state authorities.

Marketing the Franchise

Will cost money for advertising the franchise’s availability, recruiting and selecting franchisees,

further product and service development, and additional operational expenses.

Working Capital

SOURCE:Adapted from R. Justis and R. Judd,Franchising(Cincinnati, OH: South-Western Publishing, 1989).

For ongoing operations such as training franchisees, continued promotions, further development and
refinement, and possible financial capital to help franchisees get started, plus some extra in
reserve.