Can My Business Become a Franchise?

If you have a successful business and are looking to grow and distribute your product or service to more customers, then franchising may be a viable option.

Franchising is a growth business model that allows you to increase your points of distribution and increase market share by granting licenses to selected franchisees, which duplicate the franchisors business model, use the franchisors trademarks and you share in the profitability. The advantages of the franchise growth model include having committed operators who are motivated to build the business, since they have a vested in the bottom line. Second, the franchisor requires less capital than would be required opening all corporate stores, since much of the financing comes from the resources of franchisees. This allows a small firm to expand to a larger entity without large outlays of funds. Third, franchising and growth allows the sharing of costs such as administration and marketing, thus reducing operating expenses and increasing profitability.

Today we are seeing almost every industry embrace franchising as a growth strategy. Certain types of businesses tend to lend themselves more to franchising than others.

When assessing if your business is franchisable, consider these following criteria and factors.

Profitability

The business needs to be profitable, ideally with a 2 years proven track record. Franchisees want to know that they are capitalizing on someone’s success and experience. The profit margins must be large enough to allow the franchisor to make money, the franchisee to make a return on his investment and the customer to get value for the price they pay. Reasonable expected returns on investment for the franchisee are around 20%.

A Viable Product or Service

Your product must have wide appeal and long-term value. What is it about the product or service that differentiates it from the competition and makes the offering distinctive and in demand? Once you have identified these elements, are they duplicable? There are many successful businesses that, once assessed, have achieved success due to their unique location or are dependent upon one individual, such as a chef or a talented hair designer. These businesses tend not to be franchisable because the unique elements cannot be trained or transferred to others. At the same time, the unique elements cannot be to easy to duplicated or the long-term value to the franchisee shall be minimal. Without distinctive elements that set your concept apart from the competition, franchisees will begin to question the value of the royalties and look at doing the business on their own rather than through a franchise.

Market and Growth Potential

The business must have the ability to expand into other markets. What is the size of the territory required to be successful? For example, if the territory required would be all of Canada, you may be challenged to create a sufficient franchise base to offset the investment of franchising. How does competition affect this? There will always be competition, no matter what type of business you are in. Can you effectively differentiate yourself from competitors so as to create disproportionate market share, taking business away from the competition? What is the growth potential of the business? At what stage of the business cycle is the business industry in? The industry should have strong growth potential to allow you to fully capitalize on the investment made to develop the franchise.

Leadership

A critical part of the success of a franchise is dependent upon the skills, aptitude and abilities of the franchisor. You need to evaluate yourself and determine if you have what it takes. Are you willing to become a mentor, educator and trainer, working with independent, business minded individuals? Ideal franchisors have a flexible, non-dictatorial management style. The relationship is unlike an employee/ employer relationship. As a franchisor, you must often involve franchisees in the decision making process and sell the benefits of your decisions, rather than simply telling people how things are going to be done. You need to have a strong desire to create success for others, accompanied by strong drive and ambition. During the early stages there will be challenges as processes and systems are more clearly defined and refined. You must have the ability to adjust and resolve conflicts that will arise along the way.

Working Capital

Although franchising is less expensive than corporate expansion, it still requires an investment of funds. Putting together and implementing a franchise program involves a lot of details including, operating manuals, legal and professional fees for franchise agreements, development of training programs, overall strategies, trademark registration, accounting systems and the creation of franchise promotional materials, web sites and audio visual materials. Once the material and strategy is developed dollars must be invested in marketing the franchise opportunity through advertising in newspapers, trade publications and participating in trade shows. You will need working capital during the start-up phase as you initially market and award franchise licenses and then provide support to your first franchisees. There is a critical need for carefully managed cash flow during the start-up period so that you can provide the support to new franchisees that they expect. Typically costs to create a franchise program will range from $60,000 to $100,000. Many viable franchises have failed due to the franchisor being undercapitalized during the early stage of the venture.

Before proceeding to franchise your business, seriously assess your business to determine if it and you are best suited to franchising. There are many key factors to consider including profitability, viability of the product or service, market and growth potential, your leadership abilities and access to working capital. Franchising should be evaluated and compared to other expansion alternatives.

Today there are a record number of individuals looking for a business opportunity and seeking a franchise. This number is expected to continue to grow over the next few years as baby boomers reach a stage in their lives where they can take control of their destiny. A well conceived franchising system can provide excellent benefits. For the franchisor, franchising provides a method of strong, controlled growth without the large outlay of capital.