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Should You Franchise Your Business?

Should you franchise your business
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You have a great business idea, and you've started your own successful business. What's the next step? Business owners are asking themselves the question: should I franchise my business? You should put considerable amounts of time and energy into analysing how franchiseable your business is before taking the leap.

However, we've listed several criteria you should definitely consider before becoming a franchisor.

  •  Substantial Return on Investment: You need to make sure your financials are strong before franchising your business even becomes a consideration. You will need a minimum of 15% ROI to consider making your business a franchise. For example, if you made an initial investment of $100k, you would need at least $15,000 in profits a couple of years into the operation. Don't forget to also consider that franchisees often pay a percentage of their profits to the franchisor, so the 15% will be harder for them to achieve.
  • A Tried and Tested Business Model: You will need more than just a significant ROI in your business to consider franchising. It is important to test the concept at several locations before franchising. We would recommend testing at least three different locations with varying markets (and different employees, customers, demographics, etc). That way, you have a greater chance of offering a franchise that can be successful across the board, not just in your case.
  • A Working Operational Model: Successful businesses generally have a working model in place that outlines how to run the business. It is important to have your working operational model written down so it can easily be taught and replicated by franchisees. This includes the way your business conducts marketing, recruiting, and training as well as operations, purchasing inventory and finances.
  • Capital to Invest: Growing a business takes money, and so does franchising your business. While it requires less capital than expanding your business in other ways, you will still need money to launch and maintain your franchise. This includes money to advertise your franchise opportunity, legal fees, necessary software, marketing budget and staff to provide franchisees with support.
  • A Long-Term Plan for Growth: Since franchise agreements generally span about 10 years, you need to be committed to sticking it out with your franchisees for better or for worse. There may be some disagreements in a franchisor and franchisee's relationship, but if you want to franchise your business, you need to make sure you keep the communication lines open whilst providing effective management. Commitment to these relationships is an important aspect to consider when franchising your business.

Franchising as a Means of Business Expansion

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The benefits of franchising as a means of expanding a business are twofold.

  1. It involves low capital investment by the franchisor as the capital used to expand the network comes from franchisees.
  2. By franchising the business, the franchisor places the expansion of his/her business in the hands of people who are motivated to make it work. Having invested what in many cases are their life savings in a franchise, franchisees will strive to make the business successful. Their livelihood depends on it.

By using the franchisees' capital, the franchisor is able to establish a large number of outlets in a short period of time. Rapid expansion can be achieved without incurring the overheads and costs associated with opening company-owned outlets. This brings benefit to both the franchisor and franchisee as it helps build consumer recognition quickly and establish the franchise.

The cost of expansion for the franchisor is usually limited to the cost of franchisee recruitment, training and assistance prior to opening. Franchisees invest their own equity and borrowed funds in premises, equipment, fixtures, furnishings, inventory and the working capital necessary to establish a franchise unit. The only cost to the franchisor is that of the overheads not met by the franchisee's initial franchise fee.

The return on investment is much higher for businesses who expand through franchising. Because there is less capital employed, the franchisor's profits are generated on a much lower capital investment. Although the revenue from franchised units is less than that received from company-owned outlets, a higher percentage of the revenue is profit.

Franchising also allows for the business to expand without spreading managerial resources across too many business units. A business owner may wish to keep his/her own operation small and tightly run. Operating more than a few outlets can drain business resources. A franchise system requires less management than a company owned chain of outlets. Hiring, training, motivating and retaining competent staff are all functions handled by the franchisee, not the franchisor.

Businesses choose franchising as a means of expanding their enterprise because of the ambition and energy of owner operators and sometimes - especially in the case of small, one-person enterprises - because the service provided by the franchise is very demanding and needs the extra attention of an owner manager. The owner manager is usually more motivated and effective than a salaried manager because he or she has a vested interest in the business.

Franchising has added attraction for expanding a business into foreign markets particularly those that are different, as most foreign markets are, to the franchisor's home market. By using indigenous franchisees, the franchisor is tapping into local business knowledge which may prove beyond his or her capability to obtain otherwise. People who know the local scene well deal with legal and cultural differences more easily than an overseas company executive would.

Whatever the advantages of expanding a business through franchising, it is not without its disadvantages. Nor is it easily done. Successful businesses with franchisable concepts have failed to successfully franchise. Companies must meet certain criteria before embarking on the franchise route. Even when they have met those criteria, prospective franchisors must be to ready to invest both money and time in the development of the franchise system. While it has its advantages, it is not a simple means to expansion.

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Your Next Steps

Before franchising your business, you should make sure that you can meet all of the criteria we listed above. But keep in mind that franchising is not the best way to grow every business. You should definitely get a professional opinion before determining whether or not your business is franchiseable. For example, in his March 2021 blog post, franchising expert Richard Pakey laid out his advice for those thinking of franchising their operations.

For further expertise, check out Franchise Direct's directory of Franchise Consultants for experts to contact.

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