When you’re driving down the street, passing by everything from Taco Bell to Roto-Rooter, it’s obvious that franchises are everywhere and clearly profitable. Both aspiring entrepreneurs and established business owners looking to grow their operations can find success with the franchising business model. But how can you tell if it’s a worthwhile option for you? Before you devote time and resources into changing your business model or buying into an established company, here are the fundamental issues that you should be considering.
What does it mean to franchise your business?
A franchise isn’t just a business model — it’s a relationship. When you franchise your business, you license your name, logos and operations methods to another individual or group, known as a franchisee. The franchisee pays a flat fee to the franchisor (you) to join your company and get everything they’ll need to set up a branch of the business. In turn, the franchisor offers everything from help finding a location to branded marketing materials. The franchisee will take a percentage of their sales revenue, and also pay recurring (monthly or weekly) franchise or royalty fees to the franchisor.
Why franchise your business?
Entrepreneurs with established businesses may choose to enter the franchise system to increase their market share or geographic reach at a relatively fast pace. Other benefits of franchising a business include:
- Additional revenue: Royalty payments provide franchisors with an additional source of revenue.
- Cost-effective growth: The franchisor’s brand will expand into new markets, while the franchisee handles the running costs.
- Motivated managers: The franchisee has a financial stake in the success of the business, and therefore may be more driven than a salaried manager.
Is franchising your business the right move?
Even if your business is doing well, franchising isn’t something that you can just jump into. It can be a complex and time-consuming process.
Determine if franchising is a path that you are ready to pursue by considering these factors: whether you should open multiple storefronts instead of franchising; if the timing is right; if you can maintain consistent branding: and if you will be able to provide your franchisees with the ongoing support they need.
Here’s how each of these factors comes into play.
1. Opening multiple storefronts vs. franchising
When you’re ready to grow your business, franchising obviously isn’t the only option. Many entrepreneurs find that opening multiple locations — in which they maintain ownership — makes the most sense for them.
Company-owned expansion, as opposed to franchising, may be the best option for business owners who:
- Can afford to fund and operate multiple locations on their own
- Prefer to manage all aspects of the business
- Want to keep all profit generated by the business
- Want to grow at a slower pace to ensure that they can better manage the company’s expansion
- Need the flexibility to make changes to their business practices at any time
Franchising may be a better fit for business owners who want to:
- Have less involvement in the day-to-day operations of the new locations
- Experience faster growth
- Expand into new regions, states or countries
- Make a smaller capital investment for the new locations — as franchisees will take care of costs associated with finding a location, staffing and administrative issues
All this being said, even when your ultimate goal is franchising, opening a second location is a good way to test out your business model and can be a helpful preliminary step on the road to franchising.
What to consider:
Before you make your final decision, it will help to:
- Think about your management style. How much control are you willing to share?
- Determine how fast you’d like to grow and which markets you would like to expand to. The more locations you want to open, the more it makes sense to franchise.
- Review your financial situation and decide which option will realistically work for you.
Businesses that are doing well financially are good candidates for franchising. But there are other important indicators that signal it’s the right time to take the leap. Here are a few:
- People are approaching you and asking about becoming franchisees: If your company has made a name for itself, you may find that entrepreneurs are just as interested in the value of your brand as your customers are in your products or services. When people inquire about franchise opportunities, it’s a good indication that you’ll be able to find prospects interested in buying into your franchise in the future.
- You’re making a profit: When your business isn’t just performing well financially, but is seeing consistent increases in profit and customer growth, it makes sense to think about franchising. Profitability and the prospect of continued success will make your company more desirable to a larger pool of franchisees when the time comes.
- People in other regions or states are interested in your offerings: Are consumers outside of your geographic area clamoring for your products or services? Then you may be onto something. As a franchisor, your business model needs to work in other regions. And while interest outside of your immediate market, isn’t a guarantee of success, it is important that there is some demand for your business in other markets if you hope to succeed.
What to consider:
Although being mentally prepared and motivated to enter into the franchising system is another crucial indicator of readiness, simply wanting to franchise your business isn’t reason enough to change your business model.
Instead, focus on the three indicators above, which may suggest that a franchise business model will be viable and sustainable.
3. Consistent branding
Your brand — which includes your logo, company colors, the language you use and graphic design elements — creates a set of expectations for customers. For example, when you see a Hertz sign outside of a building, you instantly know what service is being offered and expect a certain level of quality based on past experiences, or based simply on the fact that Hertz is a well-known brand.
When your company is established and successful, seeing your logo on a storefront or uniform lets prospective customers know that they can trust the quality of the products or services being offered. The franchising model is built upon that trust, so it is especially important that franchisors make sure that their branding is consistent across all of their franchises. This may mean that you will have to provide:
- Branded uniforms: If employees are required to wear uniforms, those uniforms should all feature the same logo and colors and be printed on the same style apparel.
- Promotional products: Any T-shirts, pens, water bottles or other branded merchandise your company sells or uses for promotional purposes should be made available to franchisees.
- Printed marketing materials: Direct mail postcards, business cards, brochures, catalogs and other print materials should have a standardized design, color scheme and logo.
- Brand files: Company fonts and logo files (JPEG, PDF, PNG, etc.) will need to be distributed to franchisees, so that they can create signage, emails, websites, advertisements any necessary promotional items.
What to consider:
To ensure that every franchisee meets your brand standards, you will have to take time to create brand guidelines and create a process for them to either order the brand appropriate items or create them on their own. You will also need to find a company capable of meeting your specific design and branding needs.
4. Ongoing support
When it comes to a franchise agreement, you can’t just set it and forget it. While you won’t have to manage the day-to-day operations of your franchisees’ businesses, you will still need to have an ongoing relationship with them. As a franchisor, you will be responsible for:
- Assisting in location selection: You will give the franchisee information about the type of location they should be looking for.
- Sharing your expertise and offering support: You must be willing and available to advise franchisees on technical, operational, accounting, administrative and human resource issues.
- Training and ensuring franchisees understand your operating system: You should give franchisees detailed explanations of all rules and standard practices.
- Marketing and advertising guidance: You should provide brand-compliant marketing materials and guidelines for creating their own materials, as well as instructions on how to approach local advertising.
What to consider:
Before you decide to franchise your business, ask yourself if you have the time to offer ongoing support to your franchisees. Are you prepared to make changes to the way you manage your own business to accommodate these new responsibilities?
Is buying into a franchise the right move for you?
A successful business — especially one that has been thriving for a number of years — has a proven business model. Rather than start a company from scratch, some entrepreneurs choose to buy into a franchise, allowing them grow under a well-known brand and use that winning business model to eliminate much of the guesswork that comes with launching a new company.
As an aspiring business owner, buying into a franchise may seem like the easiest route to take. After all, you will be working with an established and popular brand. But running a franchise is not a guarantee of success and, like running any business, has its challenges.
Determine if becoming a franchisee is right for you by considering the costs involved, your franchisor’s management style, your entrepreneurial passions and the operational restrictions that are usually a part of this business model. Keep reading to see how these factors might impact you.
You will have to pay an initial fee to buy into the franchise as well as ongoing royalty fees. But these aren’t the only costs associated with opening a franchise. You may have to pay legal, accounting, marketing and inventory fees. You’ll also have to think about build-out costs, purchasing supplies and the amount of capital you will need before the business becomes profitable.
What to consider:
Before opening a franchise, ask yourself if you will be able to manage the ongoing costs. Find out what the costs will be from your franchisor and do an assessment of your own financial situation to determine if this investment is worthwhile.
2. Franchisor’s background
The prospect of buying into a successful franchise is exciting. But you can’t let a brand’s clout blind you to the realities of working with a particular franchisor. As part of your research, you will need to find out as much information about the franchisor as you can — from what it’s like working for them on a personal level to franchise sales figures.
What to consider:
- Franchisee opinions: Contact your prospective franchisor’s current franchisees, and see what they have to say about their experiences with the brand and franchisor. Would they recommend working with them? What obstacles have they run into? How long did it take to become profitable?
- The kind of support offered: You don’t have to face the challenges that come with being a franchise owner on your own. But different franchisors offer varying degrees of support. Find out what your prospective franchisor offers franchisees and decide if you’re comfortable with that.
- Track record: Finding out information like how long a company has been in business and the average success rate of franchisees will help you decide whether or not this is an opportunity that you should pursue.
3. Following your passion
It takes a lot of time, money and mental energy to run a business — franchise or otherwise. Passion is what will get you through the difficult times and make the investment you’re making in the business worthwhile. You don’t have to be a chicken aficionado to open a KFC franchise, but you should be passionate about being a business owner. Maybe you are a talented manager and team builder and find joy in that. If you aren’t pursuing something that you’re passionate about, then it likely isn’t the right path to take.
What to consider:
- Where do you excel? A franchisee should be a hard worker, energetic, an excellent communicator, results-driven, adaptable and able to understand a business’s finances. Do a self-assessment of your strengths to see if you’re a good fit for this type of work.
- What gets you excited? Whether it’s the industry you’re working in, the company you’re working for or the day-to-day operations of a business owner — something about the work you will be doing should make you excited.
4. Business restrictions
You may have some room to innovate as a franchisee, but you will have to stick to the brand’s guidelines and rules. If you want the freedom to experiment freely with your approach to marketing, business operations and customer experience, it might be better to start your own company.
What to consider:
Review the company’s guidelines and processes. Would you feel constrained by these rules? Or do you think you’d thrive within the franchise’s structure? Ask other franchisees how they’ve managed the protocol passed down by your prospective franchisor.
Is a franchise right for you?
Franchising brings many complexities. As a franchisor, for example, you will have to develop a whole new wing of your company solely devoted to acquiring and supporting franchisees. As a franchisee, you will have to stay committed to a system that likely won’t bring in immediate results. But if you take the time to prepare yourself for the journey, you will find that franchising can be rewarding and an excellent way to grow your business.
Sources: Forbes, Franchising.com, American Express