Saturday, January 10, 2009

Talking About Franchising : Part I - Who wants a franchise?

I have spent an inordinate amount of time in my working life developing Education franchise networks. And, still doing the same boring thing :) But as it happens, I had little time to pause and think [and breathe], and put on record what I thought. Recently, however, I was mightily flattered when I was approached by an organization planning to pursue the franchising route. They thought I was an expert and offered board seat. I had to decline, of course, because this company is in Dubai and my visits to the Emirates are infrequent and always fairly busy. Instead, I volunteered to coach his team and share my experiences in franchising. I have now put the notes I prepared for this session. I shall share this here, just to claim the hallo of expertise that I enjoyed for a brief period of time. This is Part I, or Session I, of what we did.

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Expect no theory here, because I have none to offer. There are good books on franchising if you care to know more about the practise. There are, of course, Complete Idiot's Guide to Franchising and Franchising for Dummies, which, despite those titles, are fairly well written and extensive. If you want to get deeper in theory, try Seven Pillars of Franchising Success, a best practise guide, sort of, written by someone called Andrew Palmer, who looked at many companies that franchise, and spoke to people on both sides of the table, the franchiser and the franchisee. And, before we begin, I shall mention another book, just in case you are a bookworm. Franchising, to my mind, is a largely American affair, and therefore, it is worth reading Franchising Dreams: The Lure of Entrepreneurship in America.

Best of luck with you reading, then, but what we talk now is more of a personal experience - reflections, ideas, those sorts of things. Because I have been there, done that, and despite the fact I am trying to escape, my career seems inexplicably bound to franchising. And, yours will be too, I hope, if you love this thing as I do. It can be tedious, and may mean waking up to a phone call enquiring about stock availability on a Sunday morning - because franchisees, especially the good ones, generally do not sleep. In fact, I shall add, until you start getting those phone calls, you are not doing too well in franchising. I hope you get the point: because your franchisees are sleeping on Saturday nights and/or you still don't have the relationship so that they feel comfortable calling you on Sunday morning.

But before we get there, let's ask ourselves why people buy franchises at all, and why it is such a good business. Let's talk about the typical franchisee - why will she buy a franchise from you. The short answer is that franchising offers the shortest and the cheapest route to entrepreneurship for many people. It also offers an easy way into a new business arena for established entrepreneurs.

If you are now wondering whether there can really be an easy, short, cheap route to entrepreneurship, you are right. There isn't any. But, franchising takes some pain out of it and makes it 'shorter' and 'easier'. Let me explain why. Setting up a new business always has a number of challenges: some of it is legal, getting permissions etc, and some of it is logistical, like getting space, people etc. But then there is an intellectual part of the business too, figuring out how to do the business, what to offer, how to say what to say, carving out processes to achieve the results. This is where intellectual and experiential input is necessary. Basically, entrepreneurs have three alternative routes to cover this aspect: one, use own knowledge, if they already know what they are doing and have previous training or experience of doing it; two, hire knowledgeable people - basically pay a premium to someone who knows the trade and get them to do it; and three, take a franchise of a company which has already established itself in the field.

Entrepreneurs are doing all three all the time. If you care about how these options stack up, obviously the own knowledge route is the best. The obvious requirement is to know what you know - many a times, such enterprise fails because the entrepreneur missed out some key aspects. At one point of time of my career with NIIT, I felt I knew the business well enough and walked out and set up an independent training company. I indeed knew sales and franchising, and the business picked up quite rapidly. However, I was not an expert in training delivery, and did not take in a strong partner to cover the aspect. So, delivery nearly imploded and at one point, we were selling enough but the customers were not satisfied. I had to learn about training delivery the hard way - by becoming a trainer myself in the interim. But we lost time because of that, and gave away a crucial market advantage.

The next best route is buying a franchise. In fact, I shall say, it is possibly the best route - because work experiences are invariably spatial, and does not offer readily usable formats. A good franchise, on the contrary, offers complete business format, a more or less definitive answer on what needs to go in. It cuts down on start-up time, and often, despite significant franchise fees, start-up costs. This is almost always better than paying a premium to hire someone who knows, especially if the entrepreneur is just offering an employment.

My reasoning is simple: Why someone who knows the business so well and in its entirety will accept an employment in a start-up? S/he should start his/her own business or work in an established company, to my mind. And, then, it is hard to know a business completely through work experience. Well, yes, unless it was gathered at a very senior level.

So, as we were saying, a good franchise should offer a complete business format. Products, processes, know-how and identity - in summary. This is referred to as Business Format franchising, where the entrepreneur replicates what the principal, the franchiser, has already done. Subway and McDonald's are examples, and in our industry, NIIT. The format is set, and the deviations, while possible theoretically, are difficult to make and best avoided.

I am not saying all franchise offerings are so complete, but ideally they should be. That's what franchising is for. I have been told by franchise practitioners that they don't want to make their franchise offerings so tight that it cuts down entrepreneurship. That is nonsense. A business format is only one input in a business, and a clear business format can, in no way, undermine the requirements of entrepreneurship. All the franchise offers that promise that the entrepreneur has to do nothing to make money has to be taken with a pinch of salt, because there can be no such thing. The entrepreneurship is critical for success in any business - independent or franchised - and the entrepreneur has to contribute in a franchised business through his local knowledge, ability to take risks and to find ways out of trouble. We are all too familiar with 'moaning' franchisees - it is a problem of entrepreneurship.

Let's spend a minute on the propositions which are incomplete, because there are many in the market. In education, I know of many companies who offer a curricula only, but uses the word franchise to confuse the buyers [and create false expectations and charge higher fees]. The correct word they should use is Licensing, because all they want is people to buy their courses and books. Many a times, they also try to turn their licensing deals into franchise offers by overemphasizing branding. A business format is more than just brand and curriculum; in fact, what franchisees look for primarily is processes and proof of success, which these deals do not cover. Again, a personal example: I wasted a significant period of time in my career on one of such disguised licensing offers, and the fact that I understood the limitations late in the day cost me money, effort and face.

In the next session, we shall talk in more detail about the ideal profile of an education franchisee. But, one key thing is that the franchise propositions should be treated as route to entrepreneurship. If someone is looking for assured returns, s/he is not a franchise candidate. So is someone who wants to have a cool lifestyle. This search for entrepreneurship is important. Often, the criteria we set for selection of franchisees focus closely on financial capability and less on psychological attributes of entrepreneurship. This is a grave mistake, as even the franchiser needs entrepreneurship first, otherwise the burden of running businesses will shift upon them, a cost no franchise fee payout will not be able to cover.

Before we close this session, a note on people who wants a franchise as a route to get into new businesses. There are many such individuals, and it is great to have someone with previous business experience as a franchise. This also allows you have someone with a deeper pocket. However, they are usually not the best candidates, though such generalizations are hard to make. I have seen too many of this kind fail because they do not think the new, small, franchised business is worth their attention. The problem is more in education franchising, where the start-up investment is relatively small but the service delivery commitments are disproportionately high.

I think the qualifying question to ask here - why do you want to be in this business? Many such entrepreneurs would project this as their esteem projects - their foray into social entrepreneurship where people's lives are changed while they make money. My thumb rule these days - especially as the recession is setting in - that 'ego' projects do not work. [I took this advice from a stock analyst, who advised to 'stay away from ego stocks, like airlines'] If the entrepreneur says that the project is too small for his attention, and he is too busy, you should start reading the warning signs. Any business needs its 'entrepreneurship' phase - and there is no short route to success here. The only correct answer here is that 'I love doing this thing, and always wanted to do this'. Recently, someone, who is a successful entrepreneur by her own right, told me that the training franchise we are offering will give her a social exposure which she does not otherwise have [her business is trading spare parts], and because her other business is already established, she will sit in the training centre and look after the business herself. I was thinking, despite my aversion to 'second-business' franchisees, this one may actually work.

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