Many businesses view franchising as a low-cost way to expand their operations, while franchisees see an opportunity to work for themselves without the same level of vulnerability that’s associated with starting a new venture from scratch. While both answers are correct, the truth is that the franchise business model seems deceptively simple from the outside. Here’s a closer look at the ins and outs of franchising, and how to tell if it’s the right choice for a company.
So a Business is Ready to Franchise ... Or is it?
Those who have built a successful operation on their own but feel hesitant about taking on the high debt that’s typically associated with expanding have probably looked into franchising as an alternative. Franchising a business allows individuals to purchase a new location from a business owner up front. The franchisee then assumes the risks of success or failure, and the business owner receives passive income in the shape of royalties on his/her product or service.
Sounds great, right? Certainly, franchising a business can be beneficial to both parties – when approached correctly. There are a few elements a business needs to have in place to successfully franchise:
- Is there a market? Has the business owner proven over several years that a high demand for his/her product/service exists? Is the local demand the same regionally, nationally and, potentially, internationally? Is the business “built to last,” or is it a craze?
- Can franchisees make money? It makes sense that the original business concept needs to be solidly and consistently profitable before thoughts of expansion can be entertained. However, potential franchisors also need to look at that expanded market to ensure the same metrics and conditions that promote profitability in their existing enterprise can be easily translated to a new location under different management.
- Is the business model replication-friendly? Does an easy-to-follow operations manual exist? Can a franchisee with no background in the industry easily learn the “how-tos” and “the whys”? Does it translate to their employee training? Can store fixtures and supplies be readily and easily purchased in any region?
- Can training be standardized and simplified? It only takes a quick look at some well-known franchise restaurants (Jimmy John’s, for example) to realize that a system has to already be in place for a franchise to turn a profit, and that system has to be streamlined enough to translate into use by franchisees.
Once a business owner has a universally marketable product backed by a proven and simplified training and delivery system, they’re in good shape to franchise.
Choose Franchisees Wisely
The viability of a franchise depends heavily on the franchisees themselves. Franchisors should take the time to interview potential candidates thoroughly. It’s important that they have likeminded beliefs about the business; a long view of success is far more beneficial than a short-term attitude of wringing every possible penny out of daily operations.
It’s not enough just to bring a product to market – franchisees have to invest the time and effort to do so correctly. Without this attitude, their employees suffer and so will a budding franchise.
In choosing candidates, franchisors should keep their eyes peeled for potential red flags:
- Someone who’s reluctant to follow the recipe. (Of course, this also begs the question of why they wanted to buy a franchise in the first place).
- Someone who loves telling the franchisor everything he/she is doing wrong.
- Someone who doesn't buy into the franchiser's business philosophy.
If a prospective franchisee isn’t on board with the business and what it stands for, they aren’t a fit.
A trustworthy franchisee will want to look under a company’s hood, so franchisors should assemble a comprehensive franchise disclosure document (FDD) that spells everything out in black and white. Sometimes, this can be accomplished through a franchise development company, which can then also help find and qualify franchisee leads. Above all, it’s important to do what’s best for the business.
Jim Brock is founder and president of Simple Computer Repair in Henderson.