When can I franchise my business? Six things to consider

When to franchise a business is an important consideration for entrepreneurs.  The life stage of the business could have a significant impact on the potential success of franchising.  Here are six things to consider when deciding on the best time to franchise a business.

  1. The business should have a proven track record

While a start-up business could be exciting and promising, it’s best to wait for at least a year before considering franchising.  This will give the entrepreneur time to build a solid track record to prove profit potential and sustainability prior to franchising.  A proven track record will be important for funders and potential franchisees alike.  

  1. There must be a pool of potential franchisees

While enquiries about franchising is encouraging and shows demand, these potential franchisees should show the ability to invest in a business.  On the other hand, entrepreneurs should be wary of rushing into franchising because of franchisee enquiries.  It is advisable to approach franchising with a solid business plan in place, preferably with professional assistance from a franchise consultant. 

  1. The industry should be sustainable

The pandemic and the fallout created by it has shown us that many industries were more vulnerable than others to lockdown restrictions.  Restaurants continue to take strain, but measures such as kerbside collection can alleviate the pressure.  Other industries like industrial cleaning and courier services are thriving under these conditions.  Before franchising your business, consider the long-term sustainability of your industry, not just in the current market but also when taking automation and other future trends into account. 

  1. There should be room for growth of multiple outlets

Franchising works best when there is potential for multiple outlets, since the franchisor derives its income mainly from ongoing royalties (a percentage of the sales achieved by franchisees).  If the market or the category is limited in terms of growth potential of the number of units, franchising may be too onerous and expensive.  

  1. Head office must be financially stable and in a growth stage

Sustainable franchising needs a sustainable franchisor or head office.  Franchisees will look to the franchisor for support, training and marketing and the head office should be able to deliver on these.  While it is possible to grow the infrastructure to support franchisees over time as the network grows, it’s important that the franchisor is profitable and has adequate resources to support franchisees.  It should also show growth in company owned outlets to prove that franchisees can expect growth in their own businesses.

  1. The business should own some of its own outlets

This goes hand in hand with financial sustainability.  It is ideal for the head office to own at least one outlet, if not more.  This provides the franchisor with additional income, promoting its sustainability.  It also offers a testing ground for new products and methods.  

How to achieve financial sustainability in social franchising

A recent virtual seminar hosted by the Rosenberg International Franchise Centre at The University of New Hampshire (USA) showcased successful social franchises and how they achieve financial sustainability.  The seminar featured speakers from social franchise brands, V’Ice, Jibu, Kidigo and South Africa’s own Unjani Clinics.  

Social franchising offers a successful method to scale social impact organisations operating at the bottom of the pyramid (BoP).  It involves the replication of a proven model that goes together with support mechanisms such as training and quality assurance.  The growth of impact investing has been beneficial for social franchises, as impact investors are looking for successful investment vehicles.

Social franchises should consider the following factors when it comes to financial sustainability:

  1. Start-up capital remains a challenge

Whether seed capital for a new social impact organisation or start-up capital for franchisees or replication partners, securing start-up capital can be challenging.  Jibu Water still finds that franchisees are most successful in securing funding from friends and family.  The organisation now partners with Kiva, a crowdfunding platform.  Kidigo funded an early childhood development centre from their own resources prior to franchising and Unjani Clinics still relies on CSI funding of its corporate donor to establish new clinics.

Despite these difficulties, once the proof of concept is successful and the organisation can show impact, obtaining grant funding and other forms of funding becomes more viable.  Therefore, it is important to implement and test the concept rigorously prior to replication.

2. Aim to cover operational expenses from operational activities

Kidigo has reached a stage where operational expenses are covered by franchise fees (although the franchisees pay minimal fees), while research and other “above the line” expenses are covered by grants. Jibu Water created a successful model for the distribution of water in areas in Africa where there is a lack of access, and franchisees can run a profitable business once established.  

3. Important stakeholders can unlock opportunities

Stakeholder engagement is critical in social franchises since most of these organisations have impact on the poor and disenfranchised citizens where they operate.  Kidigo works with the government in Kenya and their online curriculum went onto television during this period of lockdowns in various countries.  Unjani Clinics aligned their standards to South Africa’s health standards for primary care clinics, so that they are poised to become a delivery partner when a national health system is implemented. 

4.There is a market in the middle

While many social impact organisations continue to service the poorest of the poor and are unable to charge for services, the social franchises participating in the conference have proven that there is a market in the middle, consisting of people who earn enough so that they are willing to pay for clean water, better education and health services that are readily available.  An important aspect is to prove the quality of the service and to raise awareness of the impact of enhanced quality.  Kidigo spent a lot of effort proving the impact that better childhood care has, to gain market acceptance.  They now aim for at least 20% market share in all markets they enter.

5. Franchise associations can play a role

The only active franchise associations in Africa seem to be in South Africa and Egypt.  The Jibu franchisee in Tanzania believes that a lack of understanding of franchising detracts from funding opportunities.  Franchise associations can play a role by promoting franchising at both a commercial and social impact level.

6. Consultants add value to model design and long-term sustainability 

Both Jibu Water and Kidigo paid tribute to the consultants who helped them to design their models for scale and advise other social impact organisations to get consultants involved in the design process.  An experienced franchise development consultant can help social impact organisations to design their models for a higher propensity to succeed from the initial stages of development and can also provide advice on ongoing training and quality control to maintain the standards required to achieve impact.