The thought comes to mind to many small business owners about whether they should consider franchising their existing business. Let’s face it, if you had the capital, you probably wouldn’t think of going the franchise route, unless you can’t find the time or the right people to help you grow. Capital; the quintessential factor in all of business. The appeal is obvious. You can expand your business without the capital, people, or time. In addition, since your new-found franchisees have put up all the cash, they are extremely motivated to make money for you both. With that said, what do you need to really think about before you go down this road?
Let’s look at some basic questions that you have to answer before franchising.
- Is your Business Model Working: What might seem obvious on the surface, your business model must be solid and must demonstrate that it works. Audited financials will help here. This naturally segues into the salability of the concept. Will others find it as attractive as you to invest their hard earned money?
- Unique or Niche Business: If you have something that no one has thought of (highly unlikely) or more realistically have found a niche in some area, this will help you sell your concept to others. This is something that can give you and your franchisee a competitive advantage over others, thus making the business more salable.
- Can it be Cloned or Taught Relatively Easily: In order for someone to buy in, they are going to have to understand the ins-and-outs of what you do. The easier it is to teach the easier it will be to sell. The business model you are selling shouldn’t be designed around a certain location, having a star salesperson, or having to work monster hours. Replicate and relocate your business. That is the key.
- Value and Return on Equity: It will take more than an adequate return to turn your franchise into the big time. The franchisee is ponying up an initial fee, which quite often is substantial. Probably more insidious, is the percentage of sales fee that is charged to the franchisee. What at first doesn’t seem like much, an average fee of 8 percent of sales is a lot. If you make $10,000 in revenue, the franchisor takes his $800 right off the top. That’s tough stuff for a new business to swallow. Thus, you must give your buyer distinct upside potential to get them to buy in.
The process of being a franchisor is also far from being free. It can cost you a staggering amount in legal fees, paperwork, and accounting to meet what are very stringent guidelines set forth by the Federal Trade Commission. You can be no means go this alone. It is beyond the scope of this article, but an alternative to franchising is licensing your brand or product. You have probably seen this many times on the show “Shark Tank,” where the investors often bring up the option of licensing to their potential partners. Simply put, licensing deals involve a company selling the right to use its brand, product, or intellectual property under certain conditions. The license is non-exclusive, so the licensor can sell it multiple times, and the licensor does not get involved in managing the licensees’ companies. This does sound pretty compelling. I think a part 2 to this article will be in the works.