Thinking About Franchising?
By Michael J. Childs
There’s a simple reason franchising is the number one method of business expansion in the United States. It works.
Even large, company-owned chains are taking advantage of the franchise model, converting employee-run locations to owner-run franchises by selling to existing store managers.
Franchise owners, usually with their life savings on the line, are highly motivated to make sure that the business is kept clean, runs well, employees are in uniform and following system standards, and the business makes a nice profit.
That's why with the same product, staff, décor, and pricing, but with an owner now running the business instead of just an employee, sales, profits, and customer satisfaction increase significantly.
First Things First
Before I get into the advantages of expanding your business through franchising, does your business concept have what it takes to be successful using the franchise model?
Successfully selling franchises pretty much boils down to these four, simple must-haves:
If your business model is unique and profitable, can be duplicated in other locations, and you have credibility in your local market, you have the must-haves you need to expand your business through franchising.
More about each one:
Different sells. The more your franchise offering stands out from the crowd, the easier it will be for you to sell franchises.
Being different can be a new/offbeat/quirky/fun/funky ambiance, distinctive menu, product or service, a smart marketing strategy, different target markets, the way you combine new or different ideas into one concept, even a unique way of pricing initial and ongoing franchise fees.
You don’t need all of these. The trick is to find a way to stand out.
Profit. It’s the number one reason people go into business for themselves.
The franchised business needs to produce enough net profit, allowing for any continuing fees such as royalty, so that within about the first 6 - 8 months your new franchise business owner can start taking out a salary.
By year two or sooner, there should be enough profit left over that your franchisee can start paying off the initial investment.
To successfully franchise, your business model should be documented, systemized, and teachable, and able to adapt and work well in different markets. You will be cloning the concept in different locations, usually with some buildout and appearance options.
You gain credibility in any number of ways.
Organization size, years in business, look of the prototype unit, publicity such as newspaper articles, press releases or videos, consumer awareness of the brand, strength of management, good public relations, and loyal customers.
An excellent sign that you may be ready to franchise your business is when customers ask if you are a franchise or plan to franchise, or if you have other locations.
There’s more to creating an attractive, easy-to-sell, startup franchise opportunity than just having the must-haves above. But, if you have those covered, you are an excellent candidate for expanding your business using the franchise model.
The benefits to you when growing your business through franchising come down to speed, people, and money
Expanding your business through franchising is much faster than opening company locations. Your franchisees are managing the bulk of the process. They find the site, negotiate the lease, hire the contractor, oversee the buildout, and employ and train the employees.
All the things that you would typically do or hire additional staff to do when expanding with company-owned locations. You will also be building your brand much faster.
Because of how quickly franchised locations can be opened, public awareness of your brand will increase rapidly. And this tends to snowball. The more public awareness you create, the faster you sell franchises, and the quicker your brand builds.
To fuel the brand-building efforts, you can require that franchisees pay into an advertising or brand building fund that you control. The size of the contribution and how the funds are spent is up to you.
Franchisees represent the best, long-term management there is. You won’t need to be involved in day-to-day operations or deal with the turnover associated with employee managed, company-owned locations.
Franchise owners, usually with their life savings invested, are highly motivated to make sure that the business is kept clean, runs well, employees are operating up to system standards, and the company makes a nice profit.
By becoming part of the local community, your franchisees will be promoting your brand locally, which will help you sell more franchises.
After your investment to create the franchise offering, you will be using other people’s money to grow your franchise system. Franchisees use their capital to open the new business, making the cost to you when opening a franchised location a fraction of what you would spend opening company locations.
You’ll take on much less risk as well. Since you won’t be investing your capital, the possibility of losing money is reduced significantly. The franchisee signs the lease and pays for the build-out, and takes on the financing and liability of the store and location.
Your profit comes from the franchise and any area development fees, continuing royalties, and any products you sell directly to or arrange to have sold directly to the franchisees.
Hold on Loosely
“If I franchise, won’t I lose control?” I get this question a lot.
You do lose the absolute control of firing someone on the spot, which comes with its own set of problems, but you’ll gain control in other ways.
There will be a binding contract (the Franchise Agreement) between you and your franchisees and a playbook they must follow (the Operations Manual). These legally enforceable rules, standards, and policies can be as strict as you want them to be, even to the point of micro-managing your franchisees. Although that is not something I suggest you do.
So when is too much control too much control?
It may seem counterintuitive, but ruling with an iron fist can easily result in less control of your franchise system, not more. Not to mention finding new ways to catch your franchisees in the wrong can be counterproductive and demoralizing.
The goal is to find the sweet spot between over-management, which will make your compliance life miserable and can easily backfire, including making it tough for you to sell franchises, and keeping enough protection and control of the franchise system, trademarks, and brand.