Do you have a popular product or service that’s selling faster than you had expected? Find it difficult to sleep at night because you are worried a new competitor will soon pop up and start replicating your operation? Confident that you could become the next media sensation and success story if you just could get the money to scale your business? Sick and tired of learning about growing companies and convinced that your business concept is better?
If you answer “yes” to any of these questions, then you may want to consider franchising. And when you do, you will be joining many other companies who have taken the same expansion route, as approximately 10.5 % of all businesses in the US are franchises.
Why Should You Franchise?
Most companies choose to franchise because they don’t have one or more of the ingredients needed to expand their business: time, people, and money.
Lack of expansion capital is the main reason many entrepreneurs are unable to scale up their businesses. Securing financing for your business is hard, whether you are taking the traditional funding route or looking for angel investors. Franchising can be an excellent option as it enables companies to grow their operations without taking on debt or having to invest equity.
Considering that prospective franchisees cover the start-up costs for a new unit, franchising gives companies the opportunity to expand with little capital investment on their part. And since it’s the franchise owner (not the franchisor) who will sign the lease and service agreements, franchising enables companies to open more locations without any contingent liability, lowering the risk for the franchisor.
Another barrier to business expansion is looking for new talents and retaining employees who have done exceptionally well, especially unit managers. Many times, a business owner would invest time in finding and training a new unit manager, who would end up leaving or, worse, getting snatched by a competitor. Getting people who will assume these critical roles can seem like walking through a revolving door.
Through franchising, entrepreneurs can work around many of these problems by replacing a unit manager with a hardworking, motivated franchisee. And the good news is that the franchise company is also likely to perform better at the unit level since the franchisee will invest equity in the business and share in the profits. Also, since the franchisor’s income depends on the franchisee’s sales – and not profitability, it is easier for them to monitor expenses at the unit level. As a franchisor, you will not be involved in daily expense management, so you will have more time to focus on and improve your business strategy.
Lastly, it takes a lot of time to set up a new business location. The list of the things you need to do can be quite lengthy. You have to look for sites. Negotiate and secure leases. Build out and design the space. Seek funding. Recruit and train employees. Buy inventory and equipment. All these tasks require a lot of time, and you have to do them all. Therefore, the number of units you can set up within a particular period depends on the amount of time required to open a unit.
For business owners who have too little time (or very few employees), franchising is usually the fastest and simplest way to expand their business. The reason is that it’s the franchisee who will carry out the majority of these expansion tasks. Surely, the franchisor will provide assistance and guidance, and the franchise owner will do the hard work. Therefore, franchising also allows franchisors to leverage both their financial resources and human resources.
Is Your Business Suitable For Franchising?
Franchising is a flexible business model. Nearly all types of businesses can be franchised as long as it meets some of the criteria provided below:
- It needs to have credibility. Do you have an experienced management team at your company? A verifiable record of past performance over time? Is your business concept proven to work? Has your company established good local press, public approval, or a solid presence on social media?
- It has to be unique. Does your business differ in many ways from its competitors? Can it be marketed as a new business opportunity? Does your company have a sustainable edge over the competition? Are your unique selling points compelling?
- It should be teachable. Do you have systems in place? Are your operating procedures well-documented? Is it possible for someone to learn how to operate your business within 3 months or less?
- It needs to offer a reasonable return. We don’t mean it just has to be profitable. If your business cannot give a return of about 15-20 % on investment after deducting a royalty fee and paying a manager (or paying your salary if you are an owner/operator), it will be difficult for franchisees to be happy operating the business. Also, these returns should be achievable latest within two to three years of beginning operation.
If your business fulfills these requirements, then it may be suitable for franchising.
Once you have decided to franchise your company, the first step you need to take is to create a solid plan for business expansion. This plan should consider all the various issues that new franchise owners face, including speed of growth, support services, territorial development, and staffing and fee structure.
If you have a bigger company, you will have to handle more complicated issues, like resource allocation, channel conflict, and antitrust issues. And, of course, you need to subject your whole plant to careful scrutiny and comprehensive financial analysis to adjust your growth strategy.
Once you have developed your plan, you will have to do proper legal documentation. At least, you are going to need a franchise disclosure document (required by the FTC), franchise agreements, and probably, state registrations based on where you intend to open the franchises. Your franchise agreement should address a lot of business issues, and the choices you make concerning these issues will impact your success as a franchisor.
Another important task you need to do is to create and document clear operating systems to enable your prospective franchise owners to duplicate your business model. For new franchisors, quality control involves the development and documentation of proven systems. This often means developing an operations manual that will include the business systems as well as the procedures, policies, checklists, and strategies that will allow the franchisor to enforce the systems.
Additionally, operations manuals need to be carefully made in order not to create an agency or joint employment relationships with franchisees. They also have to address issues that could lead to negligence claims if you want to protect yourself from liability.
Last but not least, as a new franchisor, you have to develop the ability to pitch and sell your franchises to interested buyers. To do that, you need to know how to attract potential franchisees and have the essential materials (e.g., videos, e-brochures, websites, etc.) that will promote sales. Because of the many regulations regarding franchise sales, you will have to learn about proper sales, compliance, and disclosure techniques to avoid having any problems with organizations or entities that regulate franchising.
When business owners venture into franchising, they quickly learn that it is a different ball game from the business they were previously doing. Duplicating your business is not the same as operating your present business. No matter how you generate your income as a franchisor, you are going to have two main roles: awarding franchises and servicing franchisees. And the most crucial of these two roles is ensuring that your franchise owners are successful.
When well-structured, franchising can give small companies the opportunity to effectively compete against bigger brands. It also allows bigger companies to reap the benefits of having motivated management at the unit level while lowering operating costs. That explains why franchising is an increasingly popular option for companies looking to expand their business.
The secret to successful franchising is ensuring that your franchisees succeed. If your franchise owners are unhappy and unsuccessful, your franchise system is not going to last. However, if you put your franchisee’s interests above your own, those franchisees may help you grow into the next big franchise company.
