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There are essentially two points at which distribution model choices become hot current issues. The obvious first such event is the original business replication attempt. The client has one or several businesses established, and the intent is to project the success across geographic and/or functional market environments. The popularity of franchising as a model frequently brings franchising first to mind. Franchising is more frequently the first thought model because of its pervasiveness in our economy; it has the salutary characteristic of using other people's money; because people keep asking whether you have ever thought of franchising the business; and because much of the cosmetic/hype colloquialisms of franchising seem to apply to the business - - unique, special, different, wow factor, popular, profitable, growing business segment, and many others.
The usual first resort is to franchise consultants, because of a frequent misconception that they are the best resource to learn how to franchise the business. The problem with that is that the question is not how to franchise the business, but whether to franchise the business. Since franchise consultants are one trick ponies, they only make money by convincing you that the business can be franchised and that they are your mentors to achieve that goal. What they don't provide is what is most needed at that moment. Differential analysis of best mode replication choice is not available from a resource that only sells one model. And, since that is all they have to sell, franchising, the tendency is that you will always be told that franchising is for you, no matter what. The franchising landscape is strewn with the cadavers of businesses that were told by franchise consultants that franchising was the thing to do. Roughly eighty percent of franchisors fail in three to five years according to the latest surveys. Just looking at franchise offerings out there today tells you a lot about the inadequacy of this approach.
What you see is that a lot of businesses that look like a job, not a business, are offering franchise investment opportunities. Yard maintenance is offered as a franchise investment. Janitorial service is offered as a franchise investment. Cleaning out garages is offered as a franchise investment. If you can't go down the block and sign up yard maintenance and garage cleaning jobs, and put an advert in the Yellow Pages and in some direct mail, without spending $ 30,000 to $ 50,000 initial capital investment plus taking on a royalty and advertising obligation that can aggregate as much as ten percent of gross sales, you don't understand economics, accounting, or simple arithmetic. The same can be said of scrubbing toilets in small office buildings. These are not investment quality offerings, but franchise consultants regularly convince folks that the way to get rich mowing laws is to franchise lawn mowing, which is called yard maintenance or landscaping. DUH!
What else you can see by looking at any directory of franchise offerings is the relationship between the years a franchisor has been in the franchising business and the number of franchises that have been sold and are still in operation. That scrutiny tells you that there are hundreds of franchising investment 'opportunities' out there masquerading as real investment opportunities when in truth they are not succeeding in selling and supporting a sufficient number of franchised establishments to qualify as a real franchisor. Many that have been in franchising for over five years have fewer than fifty franchised locations. You can't maintain a credible support facility with that profile. You can't achieve effective market penetration to enable advertising and promotional cost efficiencies with that profile. You certainly can't achieve scale economics in group purchasing power with that profile, even though every franchise consultant's sales brochure trumpets purchasing power as one of the important reasons to buy the franchise. And if you don't have a coherent geographic plan as part of your sales agenda/if you will sell single units to anyone who will buy one, dispersion alone makes the benefits of market presence impossible to achieve.
Yet all these folks were also told by franchise consultants that franchising is the thing to do. Many more sit with their 'box of rocks' franchising package of brochures, advert kits, legal documents, with no idea on earth what to do, how to do it or the capital to sustain it. It is also their custom to provide gross underestimations of the resources needed to get a franchising program off the ground and up to effective functionality. It helps sales of franchise consulting services to make doing it sound like it can be done out of pocket change. FORGETABOUTIT!
The reason for these failures is the one trick pony syndrome. When franchising is all the consultant has to sell, they usually say that franchising is right for you. Whether it is is usually beside the point, and you find out the truth of the matter a few years and a couple hundred thousand dollars in unproductive expenditures later. The franchise consultants say that they don't make money unless you succeed, but that isn't true. They make more money if you succeed and if they are selling franchises for you for a commission, but they make money whether you succeed or not.
There are several tough questions that must be answered competently before you select any distribution/business replication model to expand your business. Hype is no substitute for competent analysis. The purpose of this tutorial is not to give away the store about how to grow your business. It is to provide an inkling of insight into what must be done before deciding which replication model is to be chosen. It isn't all legal and it isn't all business. It is a combination of legal and business analysis. Legal alone or business alone won't get you there. Your mentor must have the ability to provide both. Anyone who has only one thing to sell presents too great a risk for safety. For every success story told by the one trick pony resource, there are hundreds of darker scenarios that you will never be told about.
The second, and less frequently occurring scenario involves questioning whether an existing distribution model may be underperforming and another distribution model may be more likely to achieve enhanced comparative market penetration and revenue potential. The theory is most often thought of in terms of downstream resellers having an investment in the brand and therefore giving the brand better and more effective support. As all products and services move through the distribution chain through a combination of the pull of demand and the push of product support, that downstream investment in the brand starts to seem like a better mousetrap in many instances. While the theory sounds attractive, the realities may or may not support the enthusiasm, and diagnostic analysis is obligatory before resources are committed to such a program.
The first analytical step must be diagnostics. What is the brand doing? Why is it doing what it is doing? What are the possibilities for it to do better? What is being done by the rest of the brand population in its product/service market? Are there regionality/seasonality issues at work and that explain some of the brand's performance characteristics? What could be the inducements to convince downstream resellers to make a more serious commitment to/investment in the brand? Do I need to change the distribution/replication model from what it now is in order to create that investment incentive? If incremental resource investment is to be asked of the downstream resellers, how can I portray the prospect of revenue credibility to them that is not 'puffing' (or worse)? And how do I develop the basic data required to demonstrate revenue credibility sufficient to justify the incremental downstream investment?
These are the major categories of investigation that must be undertaken if one is to be able to say with any prospect of reasonable success what the optimum mode is to be from here on out. Making gestalt, epithetical, hype evaluations that pass for market research is always governed by the rule that 'Garbage in equals garbage out.' Reality based business analysis cannot be replaced by pseudo, knee jerk inquiries that always end up being slanted to the wished for result. One does not assume success and then build an inquiry syllogism skewed to reach the prediction that one might hope for. If you are not prepared to get a negative recommendation, the analysis is not honest analysis, and risk exponentializes. To be sure, there are many sub categories of inquiry that will pop up as you perform the major categories of due diligence, and all of them must be plumbed. While it isn't cheap, failure is far more expensive. And while it certainly does not guarantee success, it materially reduces the unperceived risks. Unperceived risks bury you more frequently than risks that you were able to identify and account for before you made the commitment. Simply stated, you can't plan for risks that you don't know about.
Oddly enough, one would not normally think of buying a company without doing this kind of due diligence. Changing the distribution/replication model is as significant a risk as buying another company.
Franchising is perhaps the most expensive replication/distribution model. Maybe consignment is as expensive, but no one wants to do consignment business if they can possibly avoid it. It should not be adopted as the replication model or as the alternative distribution model for any business without competent analytical investigation.
Copyright 1997 - 2010 || Richard A. Solomon
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