How To Franchise
Most companies that decide to start franchising their business do so for one of three reasons; lack of money, people or time. The primary reason is lack of capital. Franchising allows companies to expand without the risk of debt or the cost of equity. Since franchisees provide the initial investment, franchising allows for expansion with minimal capital investment on the part of the franchisor. Plus, since it’s the franchisee, and not the franchisor, who signs the lease and commits to various service contracts, franchising allows for expansion with virtually no contingent liability, thus greatly reducing a franchisor’s risk.
The second barrier that hinders expansion is finding and retaining good managers. Very often, a business owner spends months looking for and training a new manager only to see that manager leave-or worse yet, get hired away by a competitor. Franchising helps to overcome many of these problems because it substitutes a motivated franchisee for a manager. Since the franchisee has both an investment in the unit and a stake in the profits, unit performance will often improve. And since a franchisor’s income is based on the franchisee’s gross sales-and not profitability, monitoring unit-level expenses becomes significantly less cumbersome.
Simply opening another location in comparison to franchising takes a lot of time and effort as you have to look for sites and negotiate leases, secure financing, arrange for design, and hire and train staff, plus purchase equipment and inventory. The end result is that the number of locations that you can open in any given period of time is limited by the amount of time it takes to do it properly. For companies with too little time, franchising is often the fastest way to grow. That’s because it’s the franchisee that performs most of these tasks. The franchisor provides the guidance, of course, but the franchisee does the physical work. So franchising not only allows the franchisor financial leverage, but it allows him to leverage his resources as well.
Maybe you have been considering franchising your business but don’t even know if that is a viable option. If your business meets some basic characteristics then it can be franchised. Does your company have experienced management with a track record that is proven over time? Is your business adequately different from its competitors and is it marketable as a business opportunity? Could someone learn to operate your business in three months or less? Are the systems in place and are operating procedures documented? Does your business provide an adequate return? If your business meets these criteria, then it may be a good candidate for franchising.
Every new franchisor quickly learns that once they start franchising they’ve entered a completely different business. Regardless of how you make money as a franchisor, you’ll have two roles: selling franchises and servicing franchisees. And of the two, ensuring the success of your franchisees is the most important. The key to success in franchising is successful franchisees. Without successful franchisees, no franchise system will last.