The expansion of franchises ought to be planned. You must decide where and when to open in new markets if you want to be successful. You must decide which markets to pursue as your main goals, which to pursue as your secondary markets, and which ones you cannot expand into because you will not be able to support your franchisees profitably.
Without a plan, expanding can be risky because it costs money to sustain remote, remote sites, which will take up valuable early financial and human resources. Your entire system may suffer from a disregard for quality standards if you overextend yourself.
A variety of factors are taken into account by MSA when creating an expansion plan for one of its newly established franchise clients. They ascertain the franchisor’s financial and human resources after first comprehending the franchisees’ initial and ongoing assistance needs. What is crucial is that the company’s initial franchisees are successful, even though they discuss the company’s contractual duties to franchisees, which must be fulfilled.
A franchisor’s primary objective should be the success of its franchisees. This is particularly valid for the first franchisees of a franchisor. Remember that your original franchisees base a large portion of their investment decision on your ability to help them and your belief in their future profitability. It will be advantageous for future franchisees to speak with current franchisees about how well their businesses are doing as well as your capabilities and degree of support.
We will go over the important steps to think about while organizing a franchise expansion in this post.
Step 1: Check your current location (s).
Examine your past and present before beginning to plan for the future.
Your franchise might appear to be performing well at first glance—possibly even very well! However, before growing your company even further, you should carry out a comprehensive assessment of your existing restaurant or restaurants.
These are some questions you ought to be asking yourself. Give thoughtful, sincere responses, and invest the time and energy to research the figures and explanations behind each one:
One last piece of advice: if you have the money, you might want to hire a third party, like a restaurant consultant, to help with your restaurant audit and provide you with frank comments on your room for improvement.
Given that opening and starting a restaurant site might cost hundreds of thousands or even millions of dollars, over two thirds of prospective franchisees intend to speak with a franchise consultant prior to launching. In this regard, a consultant may prove to be your most important investment.
Step 2: Consult With Other Franchisees with Multiple Locations
Even if all of your statistics and data would suggest that you should grow your franchise, there are some specifics and anecdotes regarding growth that statistics don’t always reveal. You’ll need to turn instead to those who have knowledge and experience growing franchises.
If your business is big enough, ask your franchisor if they can connect you with other profitable multi-location restaurants, ideally ones that are similar to yours or that fall into one of the three location types (rural, urban, or suburban).
They will have the knowledge necessary to provide you a realistic picture of what the franchise expansion process will entail for you, allowing you to make an informed decision and get ready for what lies ahead.
Step 3: Choose a location
Upon evaluating your present performance and consulting with more seasoned colleagues, you’ve made the decision to proceed with growing your franchise.
You then require a location.
At this point, deciding whether to buy an already-existing franchise or start a new one is an important decision.
Acquiring an established franchise significantly reduces startup expenses and the initial capital outlay. If few franchisees are selling, though, it may restrict your alternatives; if so, there might be a good explanation for this, such as low sales, excessive running expenses, or problems with employee retention. Before making this decision, you should investigate any potential hazards and conduct your due diligence.
More money and work are frequently needed when opening a new site, especially when it comes to the process of locating, evaluating, and contrasting potential locations. If you want to advance quickly and don’t have the option of buying an established franchise, this option offers you the best course of action.
Step 4: Make a feasibility study
The location you ultimately decide on should enable you to proceed with your feasibility study for a restaurant. You can assess the viability of your expansion concept through the study by providing answers to the following questions:
- Will the concept of my franchise be unique from other eateries in the area I’ve selected?
- What is the number of locations that are close to my ideal location, and is it a benefit or a drawback?
- Will consumers in this market find the notion appealing? Why not, and why not?
- What is the expected cost of opening compared to the anticipated revenue?
- Will I reach my financial objectives? When, if so?
It’s important to keep in mind that this is not your business plan. It is essentially the preliminary work required to decide whether or not a business strategy is even necessary. Why even bother with a business plan, after all, if the business as originally envisioned is not viable in the long run?
Feasibility studies may indicate that you shouldn’t proceed with the business idea as is. whether this is the outcome of your research, we advise returning to the earlier phase and thinking about a different place before repeating the study to see whether the new site affects the findings.
Step 5: Draft a Business Plan
You can start writing your restaurant business plan as soon as it is decided that your idea is realistic.
We won’t bore you with the specifics of what makes a successful business plan because this is (at least) your second business and you should have prepared one by now.
We will state that this business plan, however, needs to be entirely different from any other company plans you have ever created.
Recall that you are launching a completely new company. Although certain elements from your prior business plan(s), such as your menu items and branding, might still be relevant, your location-based market study, operations plan, and financials section should be completely different from what was included in those earlier plans.
Step 6: Obtain Funding
It’s not always simple to locate and obtain funding, such as a restaurant business loan. However, you might find it easier with your business strategy and the familiarity of your franchise’s brand than launching a whole new company. Lenders will be persuaded of your entrepreneurship abilities by the success of your prior franchise.
Searching for a different source of funding this time? Think about looking at:
Banks
Cash Advances for Merchants
Angel Investors
Friends & Family
Step 7: Assign a Group to oversee Your Current Location(s)
It’s time to focus your efforts on making your new location a reality after you’ve chosen your place and secured funding.
Nevertheless, starting a firm can quickly turn into a full-time job, which reduces the amount of time you’ll have available to oversee your current locations. You should think about assigning managers business-critical responsibilities or moving team members up to higher roles to guarantee the success of your new and current location(s).
The prospect of business expansion oftenaccompanies this addition of responsibilities. For instance, letting potential restaurant owners know that you’re willing to promote the manager of your new site internally should stoke their ambition.
Step 8: Get ready for Opening Day
Building can begin as soon as all the paperwork is completed and the appropriate individuals are hired.
The building and remodeling phases of opening preparation typically take the longest. In order to maintain brand compliance, you will need to coordinate with your franchisor, obtain permissions, and collaborate with suppliers and contractors.
You should take advantage of the construction phase to take care of additional pre-opening logistics, like:
- Hiring and recruiting staff
- Ordering and installing equipment
- Obtaining the required authorization
- Enhancing your revenue targets and sales projections
- Creating social media and marketing strategies tailored to each location
- Getting PR and mentions in local news
You should also have your technology set up from day one. This involves setting up procedures such as:
- An POS (Point of Sale)
- Tools for scheduling
- Software for online ordering
- Loyalty software and gift cards
- A processor of credit cards
To maintain consistency with pre-existing business-wide systems, your franchisor will frequently have them pre-selected for you; therefore, before making any significant decisions on your own, with your franchisor.
Step 9: Open
The great opening of your restaurant is finally approaching.
You’re ready to handle this. As a seasoned restaurateur, you are familiar with the pleasures and difficulties of opening day. Sales for an established franchise may soar as soon as the doors open, which could be worrisome if your personnel lacks the necessary experience.
To combat this, think about doing a soft opening to acclimate staff members to the new environment.
As soon as your doors open, you should start tracking and evaluating sales to determine whether later revisions to your sales projections are necessary. In order to make the necessary course corrections as quickly as feasible, you should also be monitoring the following metrics and trends:
- Variations in food costs and spills
- Waste and inventory turnover
- Rate of employee turnover
- Customer feedback and satisfaction ratings
- Peak times and shifts
Step 10: Rinse and Repeat!
You have demonstrated that you are able to own and operate several restaurant franchise sites, assuming all goes according to plan.
So why stop there?
Start exploring for more locations, carrying out additional feasibility studies, and making plans for even more franchise development if the market requires it. Lean into your success and start gratifying more customers with a targeted, sustainable development approach. There’s a reason your restaurant franchise is well-liked throughout the city, state, nation, or even the world.
There are three issues with franchise expansion strategy.
- Make Your Franchise Unique From Competitors
This strategy is predicated on the idea that the new franchisor’s franchise offering ought to resemble that of their rivals. Sadly, being a “copycat” is not a tactic. It’s usually a surefire way to go wrong. To attract a franchise buyer who has a choice between them and their more established rival, a new franchisor needs to set themselves out from the competition. This distinction may be seen in the franchise structure, franchisee support and training programs, franchise marketing campaigns, or consumer offers. And each of these will have an impact on how the franchise offer is put together.
2. It’s Risky to Go Up Against a Popular Franchise Brand
This method is predicated on the idea that both firms have comparable resources, even in the event that a comparable technique is employed. Every company approaches franchising from a distinct place, bringing with it unique advantages and disadvantages. Going head-to-head in a domain where an existing franchisor excels can be a grave mistake.
3. Your Franchise Brand May Be Adopting a Failing Strategy
This strategy makes the assumption that a new franchisor’s rivals first executed it well. What if they just picked things at random? A franchisor may frequently take years to recognize that an early choice is having a negative impact on profitability.
Take a look at this example:
A franchisor hopes to sell 100 franchises in the first year, and they anticipate that their potential franchisees will have an average unit income of $500,000. However, they chose to charge a 5% royalty rather than a 6% one.
Taking into consideration just one franchisee, it does not appear to be a significant error. It simply implies that the royalty revenues will be $5,000 lower for the franchisor. However, franchising is growth on steroids, so this error could be increased by a factor of 100 or more. Furthermore, this $5,000 error directly affects the bottom line because there are no accompanying charges.
So do the math:
$5,000 in lost royalties per year times 100 franchisees equals $500,000.
Five million dollars multiplied by a ten-year (or longer) franchise term
$5,000,000 is the lost enterprise value assuming a 10X earnings multiple after exit.
ENTIRE LOSS: $10 million
And a new franchisor will make a lot of different business mistakes early on that could affect long-term success; an inaccurate royalty is only one of them. A handful of the numerous others are as follows:
- Fees for advertisements
- Fees for technology
- Product margins
- Type of franchise (person, representative for an area, development, etc.) offered
- Organizational structure
- Compensation structure
- Regional expansion plan
- Rights to territories granted to franchisees
- Reservations of rights for the franchisor
Additional Strategies for Expanding Your Franchise
1. Add more units
Adding extra units is a simple approach to increase in size. It’s easier said than done, though.
You must be successful in your first franchise unit before you can become enthused about adding a second and third. Successful multi-unit operations rely on well-maintained systems and operational expertise.
2. When you can, assist your franchisor in expanding
A franchisor’s network of franchisees determines how successful it is. Your brand performs better overall as your firm expands. The more you do it, the easier it will be to expand in the future. Many franchises reward their best achievers with additional resources and incentives.
3. Join the council for franchise advisory
Enroll in the franchise advisory council (FAC) of your company to become more active in the broader organization. By doing this, you will have more in-person interactions with the company’s leadership and establish yourself as a reliable resource for all things related to franchisee life. You’ll be able to contribute to the overall expansion of the company and have a powerful voice.
4. Diversify with a different franchise brand.
You have two options for expanding: either buy more of the current brand or look to a different franchise brand. Having a solid track record and shown success can increase your appeal to other franchisors. Additionally, a varied portfolio might assist you in reaching various market niches in your locality. Just be careful that the brand you select is sufficiently distinct from the franchises you already own to prevent cannibalizing your own company.
An unfocused approach to market growth, whereby the markets chosen for development are based on the phone calls or emails received from potential franchisees, will make the organization, as a whole, reactive rather than proactive. Without a plan for market development, you might not register your franchise in the markets you should be targeting or you might register and advertise in places where you shouldn’t be expanding yet, resulting in needless costs.
You must base your decisions for expansion on quantifiable standards. It’s important to know which expansion strategies to pursue, such as single- or multi-unit franchisees, company-owned development, and meeting critical mass requirements in various market segments.
Determining the number of locations necessary to reach critical mass for your brand requires an understanding of the distance customers would travel to each franchisee’s location and the population (people or companies) required to sustain each franchisee’s operation. A franchisor can more effectively manage its field service and distribution expenses per unit and take advantage of local marketing opportunities by having a thorough understanding of critical mass requirements, among other benefits.