Perfect Pilot Franchises

For the fledgling franchisor, the prospect of rolling out a network can be as daunting as the original business launch. However, with the right decisions as to when is the right time to launch, a smooth entry into the franchise industry can be achieved as Lime Licensing Group’s Managing Director, Andy Cheetham, explains.

Every franchise network has to begin somewhere, so once there is some trading history then “wanna be” Franchisors start thinking about offering their first franchises for sale.  This means getting the first “satellite” area or location running.  Most franchisors would call this a pilot scheme. Others may refer to a test franchise, a trial franchise or a template franchise. I’ve heard lots of descriptions, but they all amount to the same thing.

A thorough test of a concept’s commercial viability is one of the elements that should distinguish a franchise from any other form of business opportunity.  Ideally that commercial test will be carried out by a standalone individual operating in the same way a franchisee would.  It is well worth saying, however, that lots of successful franchises have been sold without a proper pilot scheme ever being run and given certain characteristics of the original business it is perfectly feasible.

One of key problems I’ve found with franchising per se is that it is an unregulated industry where no franchisor has had to meet any specific criteria to qualify.  This means that I could, for example, go down the pub this evening, dream up a business idea with somebody I just met (as often happens anyway) and launch a franchise operation with him or her tomorrow.  Now it might not be a great franchise setup, or even a good one, but there’s no one to stop us doing this.  There is, of course, the British Franchise Association, (BFA), a trade association for franchising in the UK, all of whose members abide by a code of conduct. But if I choose not to join, I’m not in breach of anyones membership guidelines or indeed any law.  In fact, I know of many BFA members that are totally ethical businesses, but who haven’t run franchise pilots before rolling with a network.

So what is the problem with this in relation to the my new pub business?  Firstly, those first franchisees who are road-testing mine and my new business partner’s franchise are going to run into some teething problems as the core business learns how to integrate it’s first franchisees.  These early adopters of our scheme are test pilots who may have thought they were buying a tried and tested franchise but never asked, or were never told.  Secondly, they are taking on a much greater personal and financial risk than a bonafide franchisee running to a proven business model.  Having said that, there are also distinct plus points for the  franchisees joining (sorry, creating) our new franchise network.

The plusses are that, as early takers, they will usually get far greater attention from the franchisor than those who come on board later.  The reason for this is if they don’t succeed the network as a whole will struggle to grow.  Why? Because it’s essential for all candidates who follow to hear a positive endorsment of the franchise from the first franchisees in the network.  Because the first franchisees literally drive the network forward, new franchisors must ensure that they are kept happy, and therefore provide a level of support that is often out of kilter with what’s required.  Another major plus for early franchisees is that their entrepreneurial spirit in joining an immature network will almost certainly attract a heavily discounted price on the franchise fee.  It may also give them better negotiating powers, and enable them to secure first refusal on additional territories, or larger territories and other such benefits.

The minuses on the other hand are mainly about risk. For example, given the history and the potential resources available to the individual franchisee, how genuinely replicable is the business?  For instance, I have met franchisors who have proudly told me that they have completed a pilot scheme only to discover that, although the franchise is designed to be a one-man operation, the pilot they spoke of benefited from additional sales people, a huge advertising budget, massive marketing and PR support, no territorial restrictions and numerous highly experienced individuals running it!  The true costs involved were being swept under the carpet.  In these situations, it is the short term commercial interests of the franchisor that have led to a massaging of the figures.  And while the numbers might look impressive, it’s clearly unethical to present a business as an owner-operator outfit when it requires a team of people to replicate the figures being presented.  In a situation like this, any franchisees attempts to become profitable would later collapse under the weight of the concealed overheads.  Hardly fair, but such smokescreens and mirrors approaches to setting up a new business are commonplace in the franchise industry, and many large networks have been launched this way.

Another way a pilot franchise scheme is often run is through the use of what I call ‘connected individuals’, where a member of the franchisors staff is paid a salary to run a pilot.  In addition to calling these people ‘connected individuals’, I’ve also dubbed them ‘pet franchisees’, and that’s because they are incredibly well looked after by the franchisor who is intent on making sure that the pilot does well.  Despite the somewhat demeaning name, the ‘pet franchisee’ is actually in on a great deal because he or she is getting a guaranteed income and, most likely, a portion of the business at the end of the term, or maybe even be given the license should they want it, or have the carrot of becoming a Franchise manager from a shortlist of one!   Because it’s such a good deal for them, ‘pet franchisees’ will tow the line and eulogise to other franchisees thinking about buying in.  What the franchisor has done is effectively engineer a positive endorsment for the business since the ‘pet franchisee’ is unlikely to bite the hand feeds it.  The second franchisee on board (or the first paying one) will take comfort in knowing that he is not the first franchisee to join the network even though he is in reality.

With new, and often inexperienced franchisors, these pilot schemes are commonplace, and while they do the job there are far better ways to lay down solid network foundations.   A perfect pilot scheme should be run just like an ordinary franchisee’s.  In other words, the franchisor should not excessively support it, and should also make sure it adheres to the same restrictions – geographical or otherwise, that are incumbent on all future franchisees coming into the network.   More importantly, a franchise shouldn’t be made available until the franchise pilot has an established trading history that proves the commercial potential of the core business model. Or in the case of no pilot being run that the core business is representative if what a franchisee would do anyway.  Essentially, it is up to each franchisor and their consultant to decide on the timelines and content involved in this, and that creates a very debatable question as to how long to run a pilot for anyway – but there are no hard and fast rules as to how long a pilot should trade.  What really matters is that the new franchisor can demonstrate a replicable business model that, when placed in the hands of a franchisee, will be profitable – even in the face of things such as seasonal ups and downs.

It’s not an ideal world but a pilot should have performed the function of highlighting where problems might exist for franchisees, and eradicating or minimising such problems before the launch of the network. Removing all warts and ironing out the wrinkles before launching a franchise creates better relationships for everybody, though the length of time this process takes will be different in every case.  Other benefits to an effective pilot are that the management team and/or their consultant are in a strong position to decide on appropriate levels for the franchise fee, ongoing royalties and other costs.  In fact this is a major point to consider because, if you get the figures wrong, you’ll be licking your wounds for the entire lifespan of any franchise agreements affected, and that could be 5 years or more!  You have been warned.

I am often asked by clients where pilots come from in the first place and, in my experience, most are connected individuals.  If not, they are usually entrepreneurial franchisees taking advantage of special offers they’ve seen advertised, or people who have been introduced to potential franchisors through a pilot launch service, such as that offered by Lime Licensing Group.

In multi-brand franchise companies, pilots often come from the other company-owned networks because the Franchisor already knows the competance and motivational level of the individual concerned.  The individual is also liable to benefit from such a move as he or she also knows the franchisor.

When all is said and done franchising should only ever take place once a succesful business has been tried and tested. If you are a franchisor and all that amounts to your efforts thus far is a theoretical business then you have a business opportunity and not a franchise and under those circumstances you haven’t got a replicable business to sell, and it follows that you don’t therefore have a franchise…at least not yet.

If you are a potential franchisee then pay attention to the situation that led rise to the franchise launch – is there a pilot?  If not examine the core business and satisfy yourself that the business is replicatable based upon its trading experience to date and the points made above.