Should You Convert Your Business to a Franchise?
Consider these issues if you're thinking about turning your independent business into a franchise.
A number of franchise systems have grown by converting independent businesses in the same industry into franchise units. Perhaps the clearest example of this is in the real estate industry--franchises such as Century 21 grew rapidly in this very manner. Yet this system doesn't just work well in real estate; in fact, many franchises use some degree of conversion franchising to grow. Travel agency and home service franchises--including plumbing, air conditioning and handyman services--have all successfully offered existing entrepreneurs the opportunity to convert to a franchise.
But why would you want to trade in your independence to belong to a franchise? What do you get in return? And how can you decide if the leap from independent to franchisee is right for you? Whether you're an existing entrepreneur considering converting into a franchise--or a franchisor bringing existing entrepreneurs into your system--you should carefully consider the pros and cons before deciding on this course of action. From each perspective, here are some of the most significant factors to take into account.
You are an experienced and successful operator of an independent business who is considering converting your business into a franchise. The factors you should consider include:
Pros. The advantages of such a conversion can be many. You can achieve significant marketing advantages by being associated with a brand that has regional or national top of mind awareness, and there is usually a common marketing fund used to drive brand recognition and customer growth. In addition, you can probably achieve significant purchasing power savings by being associated with a large system that has much better bargaining power than an independent operator. Finally, you can take advantage of an operating system tested and proven by many other operators to produce the highest possible level of success from the business.
Cons. The disadvantages to the operator converting to a franchise usually relate to two factors: fees and operational flexibility. A franchise system is probably going to require a converting franchisee to pay both initial and ongoing fees. These fees represent expenses that you do not have as an independent operator, and you need to be confident that the increased projected revenue, cost savings or profitability associated with being a franchise will more than offset the fee costs, or this conversion may not be in your best interests. In addition to fees, a franchise system typically has many rules in terms of how the franchise business must be run. Since you can conduct your business in any manner you choose in an independent business, you need to make sure you're comfortable giving up this total freedom to abide by the operating rules of the franchisor.
You are an experienced and successful franchisor with a solid brand and operating system and are considering using a strategy of converting existing independent operators into new franchisees for your system. The factors you should consider include:
Pros. The advantages of this strategy are the potential for very rapid growth in unit counts and royalty fee income. Existing independent business already have real estate, staff and customers and most (if not all) of any other requirements for becoming an operating unit in your chain. When they decide to convert, you immediately have another operating unit and ongoing income stream. You also have franchisees who know how to operate in your industry and have proven their competency via their independent businesses.
Cons. The disadvantage of a conversion strategy is the very same industry experience we mentioned as an advantage. Franchisees who have prior experience in your industry usually also have many preconceived notions and opinions about the industry and about how the business should be operated. These opinions may or may not match up well with your system. Whereas new franchisees entering your system without this experience tend to do what you tell them without argument, converting franchisees tend to require much more effort when their opinions and preconceived notions don't match what you're telling them to do. To put it bluntly, conversion franchisees are often a big pain in the neck during the operational conversion process.
The secret to successful conversion franchising, for both parties, is extensive communication prior to the conversion decision. Independent operators need to make sure they understand exactly what the benefits and costs will be and also what is required of them in terms of changes. The franchisor needs to ensure potential franchisees are embracing the idea of conversion for all the reasons that are important to the franchise company, without reservation.
A wonderful strategy for both parties in this process is for the franchisor to conduct a business review of the existing operation, then provide the prospective converting franchisee with an overview of all key changes required in a conversion. This overview could also list the benefits the franchisor feels the operator would gain from converting.
Such a review usually eliminates any confusion about what is required of independent business owners during the conversion process. They might very well decide not to proceed with conversion based on this information, but that decision is certainly better for both parties than the alternative: having a major conflict after the conversion documents are signed.
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