Are You Ready to Franchise?
At the beginning of each new year, I find myself in the quest to update my business plan. Likewise, I encourage all my franchisor (and soon-to-be franchisor) clients to do the same.
For some of you, no doubt, franchising may be in your future. But if you're thinking of making franchising your New Year's resolution, I would suggest you answer the following questions first.
1. Is my business ready to franchise?
This column has frequently addressed this question, but it's still the first question to ask. The core questions that impact your readiness to franchise are:
- Is the business adequately differentiated from its competitors?
- Are systems in place to allow it to be duplicated?
- Can the average franchisee make a good return on their investment even after paying a royalty?
These questions should be answered before you give any serious thought to franchising.
2. Do I need to franchise to achieve my personal goals?
Almost as important as the "Can I?" question is the "Should I?" question. Just because you have a business that can be franchised doesn't mean you should. The decision to franchise, like any strategic decision, should be driven by your personal goals as a business owner.
Ask yourself where you want to be in your life five years from now. Then ask if you can get there without franchising--perhaps through company-owned growth or some other expansion strategy. If there are other routes that'll allow you to achieve your goals, then you must assess the relative cost and risk of each route. Perhaps franchising won't be the best route for you to take.
3. What's happening in my marketplace?
Is there an 800-pound gorilla in your marketplace? Did you get to the market too late? Before franchising, you should get out your crystal ball and see if you can determine if you're well positioned to take advantage of the trends in the marketplace. If future potential in your market doesn't exist, then franchises could be more difficult to sell and your franchisees may be less profitable than they had expected.
4. Am I ready to start a new business?
People getting into franchising for the first time sometimes fail to realize that they are, in fact, starting an entirely new business when they first start franchising--the business of selling franchises and servicing franchisees.
That leads to a number of related questions that you would ask yourself in assessing any new business opportunity. Is there a market for my product (i.e., my franchise)? Do I have the time to devote to this business? Do I have the right skill sets?
5. Do I have adequate resources?
Franchising is often a lower-cost means of expanding a business, but it's not a "no cost" means of expansion. Your costs as a franchisor will fall into four major categories:
- legal costs (which can run $20,000 to $50,000 or more),
- development costs (development of plans, brochures, operations manuals, etc., which can cost between $20,000 and $100,000, depending on the aggressiveness of your goals),
- franchise marketing costs (for which you can budget $5,000 to $7,000 or more per franchise to be sold--you'll need at least six months of working capital here), and
- personnel costs (which will vary widely, depending on the aggressiveness of your goals and the human resources you can leverage).
A moderately aggressive rollout can easily run $200,000 or more. Of course, you can implement a conservative growth strategy with significantly less investment. The low-end cost to "get in the game"--assuming you can leverage off existing human resources initially to sell and service franchisees--will be the costs of legal compliance, the development of an operations manual and some marketing money. Want to sell two or three franchises to people who are inquiring? It'll still probably cost you $40,000. And even with a conservative growth strategy, you need to answer the next question.
6. Do I have the "intestinal fortitude" to spend?
Just having the capital isn't enough. You have to be willing to spend it--ideally without losing much sleep over it.
The franchise sales process takes an average of 12 weeks from the time a prospect comes through the door to the time they sign the franchise agreement. After investing $50,000 to $100,000 to develop your franchise program, you still need to spend.
Assuming you hire a franchise salesperson, you can burn through another $30,000 in the first several months. Add to that two or three months of advertising without a franchise sale, and you may spend another $20,000 or more.
If you haven't sold a franchise and your first instinct is to spend more, you're in the right place. If your first instinct is to run and hide, bear in mind that this scenario may be exactly the one you are bargaining for.
7. Am I a Cowboy?
I firmly believe that entrepreneurs make the world go round. That said, some entrepreneurs change direction faster (and more frequently) than a cowboy draws his six-shooter.
Franchisees need a sense of direction--not several. So if you're the type of entrepreneur who likes to turn on a dime, you might find that your capricious nature may not be appreciated by your franchisees.
8. Am I a Dictator?
Personality can also play a big part in a franchise company's success. A number of highly autocratic leaders--including some of franchising's most renowned pioneers, have been successful. But the times have changed. Today's franchisees are looking for a more collaborative relationship that requires the franchisor to provide strong leadership to its franchisees.
This isn't to say that franchisors should abdicate their responsibility for brand maintenance. But it does mean you should truly listen to what your franchisees have to say and try to provide for open and frequent communication.
9. Are my eyes bigger than my stomach?
Starting a new business takes time. If you don't have the people on staff to do it, and you don't plan on hiring immediately, where are you going to find the time to properly implement a franchise program?
As a new franchisor, you'll have many demands on your time. And if you meet that demand by taking time away from your existing operations, you may find that you're "robbing Peter to pay Paul." And if the core business suffers--the cash flow that was supporting the franchise program dries up--both businesses may end up suffering.
10. Do I have the fire in the belly?
As you can see, there could easily be 100 questions, not just 10. But when it comes to gut-check time, I would recommend just one more. Do you have "the fire in the belly?"
To the neophyte, franchising sounds tremendously exciting. And, if you're successful, there's no business that affords the excitement and the growth which franchising does. But, as with any new business, franchising requires hard work, desire and dedication.
So ultimately, a big part of your success is about desire. Sure, you need more than desire to be successful. But without desire, you likely never get to the starting gate. As they say in the movies, "you gotta wanna."