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When Not to Franchise Your Business

Franchising involves risks as well as rewards. Our expert reveals what you should know before franchising your business.

While some of my franchising brethren may think this heresy, I feel compelled to say that franchising is not right for every successful business. In fact, franchising can be a very wrong strategy for certain businesses and certain business owners.

Those of you who've read my columns in the past know that I am a strong advocate of franchising. That being said, when someone decides to franchise a business, perhaps the most important precept to understand is they're starting an entirely new business--the business of selling franchises and servicing franchisees. And, as with any new business venture, there are risks involved.

So how do you assess those risks? And how can you best judge whether franchising is the right strategy to pursue?

The Downside of Franchising
Surprisingly to many, the biggest risk for companies that decide to franchise is not found in the investment that's made in becoming a franchisor. A new franchisor can easily invest $100,000 or more in the development of business plans, legal documents, operations manuals and marketing materials--before the first nickel is spent on franchise advertising. But that risk is largely quantifiable and readily recovered for the franchisor who can sell any franchises at all.

In fact, many people considering franchising for the first time will ask me, "How many franchises do I have to sell to make it worth my investment?" The answer can be as low as "one." What many individuals don't understand is that franchises are, in effect, virtual annuities--providing a stream of royalty revenue that may stretch 20 years or longer. If a franchisor can generate $20,000 to $30,000 a year or more in royalty revenues from a single franchise, even one franchise sale will pay the price of entry--assuming, of course, that no incremental staff is needed to service a single franchisee.

Franchisors looking for early-stage hyper-growth see much more substantial risks. This is because franchisors attempting to grow more quickly need to hire staff to sell and service franchisees. They need to spend money on franchise marketing. And they need focus on the business of franchising--sometimes to the detriment of the core business they've established. When a franchisor gears up for faster growth, suddenly it becomes a balancing act between the resources devoted to franchising and the revenues it generates.

All of these balancing acts are manageable, of course, if you have a good plan, a sound concept and a qualified management team. But the one guarantee that franchising carries is that without a strong and replicable concept, you will certainly fail.

More often than not, franchisor failures are a direct result of failed franchisees. Failed franchisees require more in the way of support. They pay less--or nothing--in the way of royalties. They stall (or stop) franchise sales efforts when they talk to prospective franchisees. They can destroy the franchisor's brand by failing to live up to brand standards. And they can be the source of litigation and bad publicity. In short, not only do failed franchisees threaten the franchise system, but they can also threaten the core business itself.

Thus, the first decision to franchise must start with an honest assessment of the business itself.

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Mark Siebert is the CEO of the iFranchise Group, a franchise consulting firm that has worked with 98 of the nation's top 200 franchisors. He can be reached at 708-957-2300 or at
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