Perfect Pilot Franchises[Updated Feb 2022]
Perfect pilot franchises are for new franchisors. The prospect of rolling out a new franchise network can be as daunting as the original business launch. So what do you do before actually franchising your business? 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.
Why run a pilot franchise in the first place?
Every franchise network has to begin somewhere, so once there is some trading history “wannabe” 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. But given certain characteristics it is perfectly feasible to launch without one. Perfect pilot franchises however prove the commercial potential in someone else’s hands, that’s what they are for.
Is there a law for new franchises?
One of key problems I’ve found with franchising per se is that it is an unregulated industry. So no franchisor has to meet any specific criteria to qualify. This means that I could, for example, go down the pub this evening and dream up a business idea with somebody I just met (as often happens anyway). I could then launch a franchise operation with him or her tomorrow. Now it might not be a great franchise setup. Nor 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 members abide by a code of conduct. But if I choose not to join (although Lime Licensing Group is a full member) I’m not in breach of anyone’s guidelines or any laws. In fact, I know of many BFA members that are totally ethical businesses, but who haven’t run perfect pilot franchises before launching their franchise opportunity.
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 advantages of an early stage franchise brand
The plusses are that, as early adopters, 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 endorsement 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 discounted 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 salespeople, 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. 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 it. In a situation like this, any franchisees attempt to become profitable would later collapse under the weight of the concealed overheads. Hardly fair, but such smokescreens and mirrors approach to setting up a new business are commonplace in the franchise industry. I am sorry to tell you that many large networks have been launched this way.
Companies like Full Circle Funerals on the other hand have done it well. They had four branches up and running before franchising and so have thoroughly tested the concept in various locations which can only benefit each franchisee. As a result companies like this get the results and data as if they had run perfect pilot franchises in the first place.
Who runs the first test franchises?
A pilot franchise scheme can be run through the use of what I call ‘connected individuals’. This is where a member of the franchisor’s staff is paid a salary to run a pilot. In addition to calling these people ‘connected individuals’, I’ve also dubbed them ‘pet franchisees’. 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 endorsement 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/she is in reality.
With new, and often inexperienced franchisors, these pilot schemes are commonplace/ While they do the job there are far better ways to lay down solid network foundations. Perfect pilot franchises should be run just like an ordinary franchises. 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 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 franchise consultants to decide on the timelines and content involved in this. Now that creates a very debatable question as to how long to run a pilot for anyway. 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. This means that a pilot may need to run for several years, or it might yield what everyone is looking for in several months. It all “depends”.
The benefits of perfect pilot franchises
It’s not an ideal world but a pilot should highlight future problems that might exist for franchisees. Eradicating or minimising such problems before the launch of the network can then take place. 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. 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 competence 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.
The golden rules for perfect pilot franchises
When all is said and done franchising should only ever take place once a successful 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. Under those circumstances, you haven’t got a replicable business to sell. 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. Have one or more pilots been run? 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. Don’t think that your shortlist of new brands need to have all run perfect pilot franchises either. Remember the purpose of a pilot is to identify the wrinkles. Once those have been dealt with the franchise launch can be given the green light!
Call me if you’d like to delve any deeper!