It’s Time to Work on an SME IPO Funding Strategy for a Franchising Business!
Franchising has proven to be a robust and mature business model, gaining significant traction across the globe. From the United States and the United Kingdom to New Zealand, Australia, and various European countries, franchising is becoming increasingly popular. This trend is now evident in Asian countries as well, with South Asia, particularly India, leading the charge.
India, with its vast population and growing middle class, is a fertile ground for franchising opportunities. The rise of the franchising model in India is reminiscent of the IT education boom that took off three decades ago. While the IT education industry experienced a dramatic rise and eventual decline, it demonstrated the potential for substantial financial gains. However, it also highlighted the risks involved, as many entrepreneurs faced losses as the market cycle came to an end.
In the current business landscape, franchising offers a promising avenue for small and medium enterprises (SMEs) seeking growth. Unlike the IT education industry, which had a finite life cycle, franchising benefits from a more sustainable growth trajectory, supported by diversified sectors and continuous market demand.
To capitalize on this growth potential, SMEs in the franchising sector need to consider an Initial Public Offering (IPO) as a strategic funding option. An IPO can provide the necessary capital to expand operations, enhance brand visibility, and attract a broader customer base.
After the boom in IT education, preschool education emerged as a popular franchising concept. Concurrently, the salon industry gained momentum and has been steadily growing for nearly 25 years (“as long as hair grows, the business grows”). More recently, EV charging stations and electric vehicles have become prominent in the franchising landscape.
Currently, tea shops and eateries are experiencing significant branding efforts, leading to a major shift in the food and snacking industry. Franchising is undergoing phenomenal changes, with wellness and health industries gaining popularity. People are increasingly focusing on lifestyle changes and aiming to look good and stay fit. Spas offering authentic Ayurveda treatments for rejuvenation and addressing ailments like pain are becoming popular. Additionally, many hospitals and diagnostic centers are being franchised.
Looking ahead, it is expected that most businesses will adopt the franchising model. This presents a significant advantage for SMEs, providing opportunities for entrepreneurs to start their own ventures with a proven business model. Success is likely if the franchisor offers adequate support to help franchisees thrive.
Caution: Based on my 35 years of experience, I have seen many franchisors fail after a few years because they do not know how to manage their franchise business effectively. While these franchisors may have initially found success on their own, franchising requires them to take responsibility for the growth and success of their franchisees as well. Often, franchisors make mistakes such as not hiring the right team or compensating them adequately, failing to invest in marketing and brand building, and treating their franchisees poorly rather than as partners.
On the other hand, some franchisees also contribute to the failure by not cooperating with the franchisors, not adhering to the franchisor’s policies, and cutting corners, which dilutes the brand and ultimately drives away customers who expect consistent quality. When franchisors attempt to build their brand using other people’s money without continuing to invest in brand development and market support, problems arise. Franchisors need to provide consistent guidance and support to their franchisees. In India, collecting royalties from franchisees is becoming increasingly difficult. This challenge is exacerbated by the absence of franchising laws in the country.
Mistrust between franchisors and franchisees is a significant issue. Often, promises made by managers during the sale of a franchise are not honored by the brand, leading to dissatisfaction among franchisees. Feeling cheated, franchisees are reluctant to pay royalties.
When franchisors fail to deliver on their promises, it is often because they lack the funds to do so. These small-time franchisors frequently use franchise fees to run their company, which is not a sustainable way to build a brand. A successful brand needs to be substantial enough to support its expenditures. Franchisees should carefully choose franchisors who are capable of investing in and growing the brand.
For franchisors to succeed, they need to secure capital. If they can’t raise funds from friends, relatives, or other sources, they should consider pursuing an SME IPO. Although this requires giving up a portion of the brand’s shares, it can be worthwhile for building a strong and reputable brand.
A brand can allocate funds for expansion, timely staff payments, technological advancements, new product development, operational excellence, and effective branding and marketing.
What is an SME IPO? An SME IPO (Small and Medium Enterprise Initial Public Offering) is similar to a regular IPO but specifically issued by small and medium-sized enterprises. Investing in an SME IPO can be a rewarding opportunity for investors seeking to diversify their business portfolios and tap into the potential growth of small and mid-sized franchise companies.
For businesses with 75 to 100 stores, an SME IPO can be a viable option for scaling up using public funds. This approach also helps protect franchisees’ interests, as franchisors who raise money from the public are more accountable to both their franchisees and the public. Consequently, this leads to improved and guaranteed products or services for customers.
Many franchisors fail because they lack the working capital needed to run their businesses effectively. An SME IPO can provide the necessary funds to help them succeed. Companies interested in pursuing this option should appoint an underwriter, who will assist in determining the offering prices and underwrite the risks associated with the IPO. It is also advisable to consult with your auditor for more details on the process and requirements for an SME IPO if additional capital is needed to scale your business.
Conclusion
Franchising offers a lucrative growth opportunity for SMEs, and an IPO can be a transformative step in scaling the business. By adopting a strategic approach and preparing meticulously, franchising SMEs can attract the necessary funding, enhance their market presence, and achieve long-term success. The lessons learned from past industry cycles, like the IT education boom, underscore the importance of strategic planning and execution in navigating the journey from a private enterprise to a publicly traded company.
The author is the Founder and CEO of Franchising Rightway, based in Chennai. Dr.Chackochen Mathai holds a PhD in franchise management and has over 35 years of experience in the franchising field in India. Currently, he consults for large franchising companies, assisting numerous organizations in their growth paths. Dr. Mathai can be reached at 9884051455 or chacko@franchisingrightway.com .