Do you think your business is unique? Are your friends, family--and, more important, your customers--telling you every day that you should franchise your business? They may be right.
But are you sure you really know what franchising is all about? Is your concept really "franchiseable"? How does one go about franchising? What does it cost? And do you have the skills necessary to become a successful franchisor? In this article, we will answer these questions so that you will have a better understanding of franchising as an expansion strategy. And while it's not the right strategy for everyone, for some companies the explosive potential that franchising affords is unparalleled in the world of business growth.
How Franchising Works
Generally speaking, franchising means opening additional outlets through the sale of franchise rights to independent investors who will use your name and operating system. A franchisee pays a franchisor an initial franchise fee in return for the rights to open and operate a business under the franchise trademark and for training in how to operate the business. In some cases, the fee may also cover additional services such as assistance with site selection. In most systems, after the startup period, franchisees also pay an ongoing periodic royalty fee--4 percent to 10 percent of sales on average--for continued support and training in advertising, marketing, sales, operational guidance, financial and human resources consulting, and other services.
Perhaps most important from your perspective, a franchisee furnishes all of the capital required to start the business and assumes all risk for success or failure.
Franchising has many attractive features, particularly when compared with more traditional methods of expansion such as opening more outlets on your own. Typically referred to as company stores, you own and operate these locations yourself. You provide the entire investment for the startup, and while you keep all the profits the company store generates, you are also responsible for all the losses. This is great if you are passionate about preserving the values you built into your original operation and believe you are the only one who can do that. But if you want to expand more quickly and get ahead of a competitive curve, it may not be the best way to expand. Opening company locations takes capital and time--sometimes a lot of both--plus you retain all the risk if a unit doesn't do well. And how will you manage operations that may be far from your home base?
Let's look at the issue of capital first. If you have only one or two units operating, or your concept is new or unusual, bankers may not be willing to lend you money for aggressive expansion. Lenders need collateral or a history of demonstrated success over time and in different markets to make taking a chance on you sensible. For a young or unproven business, this may be an obstacle that's impossible to overcome.
And what about running company stores? Does your current organization have sufficient depth to handle the hiring, training and supervision of a number of employees who will be handling your money and your reputation--especially if they will be operating at a distance? Plus, opening company stores can be a slow proposition as it takes time to get each unit open and successfully operational; you can't be everywhere at once. And all too often a business owner spends months looking for and training a new unit manager only to see that manager leave or, worse yet, get hired by the competition.
For all of these reasons, more and more entrepreneurs are finding that franchising is the best way to expand a great business quickly with minimal capital and risk. And franchising offers a number of advantages worth considering:
- You expand using someone else's money.
- Franchisees are responsible for all hiring, leases, and unit-opening expenses, reducing your risk.
- Franchises can open quickly, often getting a new concept out ahead of the competition.
- A franchisee assumes the risk of succeeding or failing.
- Franchise owners are highly motivated operators.
So, with all of this going for it, let's take a closer look at what franchising involves:
Is Your Business "Franchisable"?
Before making the decision to franchise, you must first determine whether franchising is a viable strategy for your particular business. Here are some questions to ask yourself:
Is there a wide market for your concept?
Does the market for your particular product or service transcend your current neighborhood or region? You may need professional advice to see the bigger picture objectively. Many entrepreneurs "just know" they have a hot, new concept and they act on their convictions. But unless you have opened several prototypes in a variety of markets to test those convictions, it is important to ask yourself candidly whether or not your concept will work in other locations under other owners.
Do you have a point of differentiation?
What makes your business special? It doesn't have to be something no one has ever seen before, but it must have something about it that is unique and that will attract the public and investors. Maybe it's gourmet hot dogs, or quick made-to-order sushi or fast furniture repair. Whatever it is, it has to offer something that the public sees as unique and desirable.
Can the concept be duplicated?
How difficult or easy will it be to train inexperienced franchisees to run an operation like yours? Have you streamlined processes to make them easy to teach? Or has your success been the result of years of perseverance and relationship-building that is not readily transferable to a new owner? Will your concept flourish in a wide variety of locations?
Is your concept saleable?
Will investors--potential franchisees--see the value of your offering and be willing to commit to it? Will you be able to offer a program with real advantages for the potential franchise owner?
If your answer to these questions is yes, read on.