In general, companies decide to begin franchising for one of threereasons: lack of money, people or time.
The primary barrier to expansion that today’s entrepreneur facesis lack of capital. And franchising allows companies to expandwithout the risk of debt or the cost of equity. Since franchiseesprovide the initial investment at the unit level, franchisingallows for expansion with minimal capital investment on the part ofthe franchisor. In addition, since it’s the franchisee, and not thefranchisor, who signs the lease and commits to various servicecontracts, franchising allows for expansion with virtually nocontingent liability, thus greatly reducing a franchisor’srisk.
The second barrier to expansion is finding and retaining goodunit managers. All too often, a business owner spends monthslooking for and training a new manager only to see that managerleave–or worse yet, get hired away by a competitor.
Franchising allows entrepreneurs to overcome many of theseproblems by substituting a motivated franchisee for a unit manager.Interestingly enough, since the franchisee has both an investmentin the unit and a stake in the profits, unit performance will oftenimprove. And since a franchisor’s income is based on thefranchisee’s gross sales–and not profitability–monitoringunit-level expenses becomes significantly less cumbersome.
Finally, opening another location takes time. Hunt for sites.Negotiate leases. Arrange for design and build-out. Securefinancing. Hire and train staff. Purchase equipment and inventory.The end result is that the number of units you can open in anygiven period of time is limited by the amount of time it takes todo it properly.
For companies with too little time (or too little staff),franchising is often the fastest way to grow. That’s because it’sthe franchisee who performs most of these growth tasks. Thefranchisor provides the guidance, of course, but the franchiseedoes the legwork. Thus franchising not only allows the franchisorfinancial leverage, but it allows him to leverage his resources aswell.
No matter how successful your business is, it will not work as afranchise unless it appears to be a good business opportunity. Thefranchise should be based on a concept with pizzazz, such as a newkind of fast food or a patented technology for repairing automobilefinishes. That’s because to really be successful, a franchise hasto capture the imaginations of would-be business owners. It’s mucheasier to market a franchise with built-in appeal than one thatsounds like some humdrum business.
Needless to say, your franchise must produce a superior productor service. Nobody wants to purchase and run a franchise whosesuccess is based on being the lowest-cost producer. That doesn’tnecessarily mean that all successful franchises cater to thesilk-stocking trade, but it does mean that you need some clearlydistinguishing, positive characteristics in the marketplace.
If you produce a superior product or service, it also has to bepossible for you to control the quality of that product or service.Much of the appeal of a franchise system to consumers lies in thefact that, no matter where they go, if they patronize one of thatsystem’s franchises, they will get the same quality of service andproduct they would get anywhere else. Unless your product orservice 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 shouldhave-or try to develop a strong trademark. Most of the bestfranchises, such as Subway and ServiceMaster, have spent lots oftime and money creating strong trademarks that convey a consistentand appropriate message about the product and the franchise. Ofcourse, to be effective, any trademark you have has to be yours andyours alone–meaning it can’t be too similar to ones otherbusinesses are using. It also has to be one that is–or couldbe–registered for federal trademark protection.
A good franchise concept has to be teachable. That means it hasto be something you can explain to other people and that they canbe expected to grasp readily. To accomplish that, your franchisablebusiness should be thoroughly systemized and its operationsdocumented so it can be copied by others. In addition, it must be abusiness that can be run in a non-centralized way.
If your business is run on the basis of knowledge that existsonly in your head and requires your personal involvement every stepof the way, you’ll have trouble franchising it. Successfulfranchisors create detailed operating manuals that set standardsand describe procedures for every facet of the business. They alsocreate training programs for franchise owners, managers andemployees.
Repeatibility is an essential component of a franchisablebusiness. That means your business must be one that can bereplicated over and over in many places by many people. If it canonly work in one location. A business offering tours of the GrandCanyon, for instance, is not repeatable and not franchisable. Thesame is true if the business can only be run successfully by oneperson.
Obviously, incorporating all these features into your businessis going to take time and energy. In fact, franchising is a verydifferent business from whatever business you’re in now. Instead ofthe customers you are used to dealing with, once you franchise,your customers will be your franchisees. Franchisees invest timeand money in your concept, and they can be demanding when it comesto training and support. Make sure you have the time andinclination to support multiple franchisees before you commit tofranchising.
