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?
Content Continues Below
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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