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Definition: A business that has the potential to be sold as a franchise opportunity, generally having the following characteristics: It is established, offers a unique concept, is teachable and can provide an adequate return to potential franchisees. .
In general, companies decide to begin franchising for one of three reasons: lack of money, people or time.
The primary barrier to expansion that today's entrepreneur faces is lack of capital. And franchising allows companies to expand without the risk of debt or the cost of equity. Since franchisees provide the initial investment at the unit level, franchising allows for expansion with minimal capital investment on the part of the franchisor. In addition, since it's the franchisee, and not the franchisor, who signs the lease and commits to various service contracts, franchising allows for expansion with virtually no contingent liability, thus greatly reducing a franchisor's risk.
The second barrier to expansion is finding and retaining good unit managers. All too often, a business owner spends months looking for and training a new manager only to see that manager leave--or worse yet, get hired away by a competitor.
Franchising allows entrepreneurs to overcome many of these problems by substituting a motivated franchisee for a unit manager. Interestingly enough, since the franchisee has both an investment in the unit and a stake in the profits, unit performance will often improve. And since a franchisor's income is based on the franchisee's gross sales--and not profitability--monitoring unit-level expenses becomes significantly less cumbersome.
Finally, opening another location takes time. Hunt for sites. Negotiate leases. Arrange for design and build-out. Secure financing. Hire and train staff. Purchase equipment and inventory. The end result is that the number of units you can open in any given period of time is limited by the amount of time it takes to do it properly.
For companies with too little time (or too little staff), franchising is often the fastest way to grow. That's because it's the franchisee who performs most of these growth tasks. The franchisor provides the guidance, of course, but the franchisee does the legwork. Thus franchising not only allows the franchisor financial leverage, but it allows him to leverage his resources as well.
No matter how successful your business is, it will not work as a franchise unless it appears to be a good business opportunity. The franchise should be based on a concept with pizzazz, such as a new kind of fast food or a patented technology for repairing automobile finishes. That's because to really be successful, a franchise has to capture the imaginations of would-be business owners. It's much easier to market a franchise with built-in appeal than one that sounds like some humdrum business.
Needless to say, your franchise must produce a superior product or service. Nobody wants to purchase and run a franchise whose success is based on being the lowest-cost producer. That doesn't necessarily mean that all successful franchises cater to the silk-stocking trade, but it does mean that you need some clearly distinguishing, positive characteristics in the marketplace.
If you produce a superior product or service, it also has to be possible for you to control the quality of that product or service. Much of the appeal of a franchise system to consumers lies in the fact that, no matter where they go, if they patronize one of that system's franchises, they will get the same quality of service and product they would get anywhere else. Unless your product or service is one that lends itself to that kind of standardization, you are going to have trouble franchising your concept.
If you have a good product, a good market and plenty of pizzazz, you need to look for some security. Specifically, you should have-or try to develop a strong trademark. Most of the best franchises, such as Subway and ServiceMaster, have spent lots of time and money creating strong trademarks that convey a consistent and appropriate message about the product and the franchise. Of course, to be effective, any trademark you have has to be yours and yours alone--meaning it can't be too similar to ones other businesses are using. It also has to be one that is--or could be--registered for federal trademark protection.
A good franchise concept has to be teachable. That means it has to be something you can explain to other people and that they can be expected to grasp readily. To accomplish that, your franchisable business should be thoroughly systemized and its operations documented so it can be copied by others. In addition, it must be a business that can be run in a non-centralized way.
If your business is run on the basis of knowledge that exists only in your head and requires your personal involvement every step of the way, you'll have trouble franchising it. Successful franchisors create detailed operating manuals that set standards and describe procedures for every facet of the business. They also create training programs for franchise owners, managers and employees.
Repeatibility is an essential component of a franchisable business. That means your business must be one that can be replicated over and over in many places by many people. If it can only work in one location. A business offering tours of the Grand Canyon, for instance, is not repeatable and not franchisable. The same is true if the business can only be run successfully by one person.
Obviously, incorporating all these features into your business is going to take time and energy. In fact, franchising is a very different business from whatever business you're in now. Instead of the customers you are used to dealing with, once you franchise, your customers will be your franchisees. Franchisees invest time and money in your concept, and they can be demanding when it comes to training and support. Make sure you have the time and inclination to support multiple franchisees before you commit to franchising.
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