Being in the franchise industry over the past decade, many potential franchisees and candidates have asked this question repeatedly. Everyone is seeking for an investment with the highest returns for the least amount of risk.
Just like in investment, we know that high risks equate to high returns, and the opposite is also true. If indeed there is low risks with high returns, market forces and competition will correct this relationship to force equilibrium. My honest reply to this question will be: “If indeed there is a franchise which gives the best returns with the least amount of risk, it will not have gone unnoticed and someone probably already took the idea and made millions out of it.”
Returns on Investment (or commonly known as ROI) is one of the factors for potential franchisees and candidates to consider. In fact, it should be the main consideration factor as franchising is a business, and every business exists to make profits. Franchising aims to provide a higher chance of success and thus higher possibility of making profits as compared to starting a business or concept from scratch.
However, even franchising does not equate to or guarantee success for the franchisee’s operations. Many reasons exist to account for franchise failures. These may be due to poor franchise systems and unsupportive franchisors, to over-expectation of franchisees and lack of communications between both parties, just to name a few.
In fact, besides financial considerations (ROI) as one of the factors, candidates should consider some other factors before deciding which franchise to pursue or invest in. Some of these factors include:
Experience or commitment level
There is a Chinese saying that “every trade produces remarkable leaders and achievement.” The same can be said of every franchise trade available in the marketplace. We have seen numerous success stories of franchisors from the food & beverage, retail, fashion, education, automotive, professional services, executive coaching, cleaning, elderly care industries and the list goes on.
The common denominator for these success stories evolve around the commitment and the dedication of the franchisees. Each and every successful franchisee invests countless hours of time and involvement to ensure that the franchise system works for their market. They seek communication with the franchisor, they learn from the franchisor and they share their experiences with the franchisor.
Over time, they gain the experience in running an effective and efficient franchise. Their initial investment of time and learning translate to invaluable experience to “automate” their franchise operations and eventual “autopilot” their path to franchising success.
To get a successful franchise, the franchisee first has to invest his time and energy to learn, understand and exemplify the unique advantages and strengths of the franchise. Experience in running the franchise will indirectly contribute to the efficiency of the cycle, providing the desired results and financial returns that the franchisee expects at the inception of the franchise relationship.
Involvement in the franchise operations
There is an ongoing debate on whether the franchisee should run the operations or should he appoint a management team to do so, while freeing his time to concentrate on the strategic roles. Some franchisees are investors and they prefer to stay on the sidelines while a professionally appointed team of managers execute the responsibilities.
Over the years, I have witnessed successful franchises with both approaches. However, there are more successful case studies from personal involvement, rather than those with a professionally appointed team, at least for the initial stages of the franchise.
Involvement in the initial stages allows the franchisor to understand the bolts and nuts of the franchise. We strongly recommend the franchisee to be involved prior to moving on to a managerial position to oversee the strategic development of the business. The reasons are two-fold. Firstly, it allows the franchisees to understand the intricacies of the operations and empathize with why and how some of the operations are conducted and when issues arise, they are in a better position to provide solutions. Secondly, as the business grows and if the franchisee continues to be involved in daily operations, he will face delegation issues and inevitably, become a stumbling block to the growth of the franchise/business.
Here, we are not concluding that appointment of a team of managers is the less favored approach. Much depends on the structure of the franchise. For example, some education franchise recommends that the franchisee be involved as one of the trainers/teachers, so as to lower the initial running cost of recruitment and to support operations should there be a shortage of trainers/teachers should the need arises. In such cases, it will be favorable for the franchisee to understudy as a trainer/teacher for the above reasons, but to move on to a strategic/managerial role as business increases, as his time and knowledge can be put to better use.
In some other situations such as a retail franchise of renowned brands, franchisee is unlikely to be involved at the outlet level as one of the staff. These franchisees tend to be financially sound and have invested millions of dollars to acquire the franchise rights. Considering the scale of operations and the need to establish multiple outlets in a short span of time, franchisee will appoint a team of staff, supported by various outlet managers to ensure a smooth business process. All else being equal, franchisees will do well to at least understand the operations prior to moving up to a managerial/strategic role in the franchise hierarchy.
Passion – follow where your heart lies
An implicit factor contributing to the success of any franchise is the passion of the franchisee/candidate towards the business. Passion can make up for lost grounds and lack of strategic advantages in a franchise. Passion towards a certain franchise or industry can edge a franchisee towards additional commitment and make good the shortfalls over the franchise relationship. Passionate franchisees contribute to the growth of the system, resulting in a cohesive franchise relationship and improvement in the franchise system for the benefit of the brand.
While passion is critical for any business success, it is not the main factor. A franchise system is assumed to be robust, well-planned, well-supported by the franchisor and established in its foundations. However, a franchisee operating a franchise without any passion is like a body without a soul. Franchisee without passion almost never succeeds.
So next time someone asks you which franchise gives the best returns or which franchise is the most profitable, your answer could well be: “With commitment, with involvement, with passion, every franchise will give you best returns and be most profitable.”
Gary Loh is the Director of Purpleclay Consulting Pte Ltd, which is a franchise consultancy firm and grant application specialist. Purpleclay Consulting has assisted many promising franchise brands for local and overseas expansion, as well as assisting these brands in winning various business accolades and awards. This company is an approved SCOPE-IP Business Consultant under the Intellectual Property Offi ce of Singapore (IPOS) and an I-Advisor under International Enterprise Singapore (IE Singapore).
Gary can be reached at +65 6561 3011 or email at email@example.com. For more information, visit www.purpleclay.com.sg