The growth in companies that offer service franchises over the past few years has been widely documented. You only need to look as far as the Harvard Business Review or the entrepreneur’s ‘Growing Franchises’ list to see substantial growth in health, beauty, property, cleaning, disinfecting and finance-related services. Service franchises came to public prominence when brands such as Ninja Van, Sureclean, MESG, Conrad Maintenance, Seriously Addictive Maths and others provide online enrichment, cleaning and disinfecting services, home improvement, logistics and other operations related services started to use franchising as their preferred model of growth. This has become even more prevalent in post-Covid times.
Since then, almost every company, as long as they have a strong IP structure, is easily replicable, has some supply chain management control, and the business owner is willing to invest in managing and sustaining the success of their franchisees, has started to explore franchise as a mode of growth. Today, in a post-Covid world, traditional business formats have evolved into numerous other areas that involve omnichannel online business formats. More importantly, the constraints of strictly needing to be a physical store have evolved into flexible online models. This has seen even traditional education and enrichment franchise models start to offer their franchises as services rendered online.
Why would I?
To justify any decision to grow your business, the benefits of your service franchise must be convincing enough to offer your franchisees some confidence they too will enjoy a healthy business that provides an acceptable return on their initial franchise investment. After all, what is the point of investing to build a franchise system when your franchisees are not going to grow the business with you in the long run? Before you decide if franchising will work well for your business, you must also ascertain that it is best for you and your business. Talking to franchise experts and other franchisors in the service industry can help you in your decision-making process.
Franchising service businesses provide several key benefits:
- Increase market share with your service franchise by expanding into new geographic areas at a greater speed compared to establishing an empire of your outlets. This provides your business with greater market coverage and an ability to service more customers with greater efficiency.
- Grow your brand value by increasing the number of franchisees and outlets in your network and ideally, the profitability of each outlet. It is crucial to emphasise the importance of the brand experience with any service business. Franchisees must replicate the quality of service as a vital experience for customers. You want your customers to associate their great experiences with your brand rather than the individuals delivering the service. This can be done by ensuring a great onboarding program for the service franchisees and frequent audits to ensure quality performance in each outlet and provide value to customers at each franchise.
- Develop and grow your recurring revenue by increasing overall network sales. Securing key individuals (franchisees) on long term contracts can provide greater certainty of recurring revenue, which is more likely to increase the capital value of franchisees and your company.
- Franchisors and franchisees can enjoy increasing economies of scale. Instead of buying 40 tubs of wax, shampoo, cleaning materials, or oil, imagine the increased purchasing power if your network is buying 4,000 tubs? This results in lower purchase prices and/or greater supplier rebates, or if shared with franchisees, more profit for their company.
- A franchise business allows you to avoid the significant capital costs associated with establishing company-owned outlets. Franchisees take responsibility for staff management and administrative requirements as a part of franchise investment.
- Franchisees will work harder to produce a better service than an employee. Why? Because they have trusted and invested in the business so they want and need it to succeed. This helps increase your customer service quality and ultimately provides a better experience for potential customers.
What are the important considerations in deciding whether or not to franchise?
Why is every professional service business not franchised? Check out the top franchise able sectors and see which sectors are naturally geared to the franchise and which require more creativity to develop into successful franchise models. There are important considerations to ensure that your professional service business is capable of franchising and providing a sustainable business model.
1. Buying a job versus building a saleable asset
One of the difficulties with franchising a service business is determining the recurring value a franchisee can create (eg. profit) and also what constitutes the assets of the service franchise. What can franchisees eventually sell to a new buyer (capital value), if ever they choose to exit?
2. Franchising adds value to the franchisee’s
Service franchises work best when the business offers more than just a salary for the Franchisee, and they can increase their wealth by growing the value of the business. If these service businesses are only meant to provide a salary and allow the franchisees to be a boss of themselves, the business model is not sustainable in the longer run. Ideally, franchisees can add value through sales and be able to employ their management team to grow from being a single-person contractor to a multi-employee business.
Other aspects of value building for the franchisee can come through the franchisee being able to have direct access to their customer base, network, or an exclusive specific territory
3. Return on investment opportunities
One of the main reasons many service companies shy away from the franchise model is due to the business is incapable of providing reasonable returns for individual franchisees and/or the franchisor. Although service-based franchises often have lower start-up costs compared to traditional store-based franchises (which is appealing to individuals who don’t want to invest larger amounts of money), franchisee returns can be limited by market-driven elements such as lower pricing and high levels of competition. This however means franchise owners need to be more creative in terms of the service offerings they offer as franchisors.
It is crucial to carefully develop your financial projections for a franchise model to make sure there is a sustainable return on investment for both parties (the Franchisee and the Franchisor). Many service companies choose a fixed fee royalty (eg. $500 per month, rather than a % of sales), but this can be risky if extreme care is not taken in setting the royalty amount. Franchisees that underperform are effectively paying an extremely high percentage of their sales to the franchisor, and franchisees who perform very well are sharing only a very small proportion of their income with the Franchisor. Your business must be capable of producing reasonable returns for both you (the Franchisor) and your franchisees. If not, develop a strategy to increase your sales!
4. Controlling the sales function from the Franchisor’s head office
Some franchisors are looking to retain part of the sales function at head office and allocate new clients to franchisees who then deliver the service. This can be particularly beneficial when businesses are negotiating national customer contracts as they can use all the skills and resources of the Franchisor to win the work. This reduces the risk of the Franchisee failing to close a sale and can create favourable sentiment toward the Franchisor.
5. Monitoring franchisee performance
One of the biggest challenges with franchisees winning their work is the Franchisor’s ability to track the Franchisee’s sales and ensure all revenue is reported. Many franchisors have implemented ideas to ensure their monitoring and quality control procedures are effective, such as:
- GPS to monitor the location of their franchisees.
- Shared calendar systems.
- Sophisticated POS/invoicing systems.
- Customer review procedures.
- Awards for posting invoices.
- Strict inventory control measures.
- Franchise management Technology
6. Ensuring the Franchisee understands what they receive in return for their royalty payments
One of the major challenges of service-based franchises is ensuring franchisees understand the value they are receiving from their royalty and marketing payments. The focus for service-related franchise systems should be on continually providing benefits to franchisees, and ensuring these benefits are well communicated. Quarterly newsletters, sales leads provided from head office, training programs, annual conferences, marketing tools, online performance reports, innovative customer solutions and enabling franchisees to offer further products or services are good ways of providing value for the royalty. Continually emphasising what value, the Franchise owner is providing will hopefully prevent conflict and retain franchisees in the network.
7. Distribution of online sales
Although on the surface the distribution of sales leads generated by online marketing activity seems both intuitive and logical (eg. the Franchisee with the territory closest to the customer enquiry is given the lead) this is often not the case. The increasing use of social media communications means customers may come from referral networks, and as such request specific individuals to complete their service. For example, how many times have your Facebook friends asked you to recommend someone to complete a service? So, although one franchisee owns a territory, the request may be for another franchisee to complete the work. It can become contentious if a franchisee from another territory completes the work and then retains the client. The franchise owners need to have a well thought out plan to ensure that franchisees work well together and understand that together, they build a stronger business rather than everyone trying to undercut one another for short term gains.
8. Leveraging Technology
Due to the advent of technology and digital business management, Franchisors can now solve a lot of the quality and territorial issues by leveraging Franchise management technology to help offer support, manage franchisee marketing campaigns, ensure consistent training and even carry out quality audits to ensure the brand name of the service franchise is maintained at the industry level and not only associated with the individuals and franchisees carrying out the service.
There are clear benefits to franchising your service business and it can be an effective way to achieve your growth objectives. However, when developing your franchise business, be mindful of the key considerations and ensure you prepare a carefully planned franchise strategy. Seek out Franchise Experts to shorten your franchise journey to ensure your service franchise has the maximum chance of long-term success.