As franchising has grown to be almost universal in the service and retail industries, more and more small businesses are considering the option of franchising to continue their growth; this decision, however, is not one to be made lightly.
In general, the decision to franchise is based on two factors – the need for more financing than the business can obtain on its own, and the desire to grow quickly, both to keep the business moving forward and to forestall the loss of markets to competing interests.
Today, franchising is not the only model that works. As banks have grown more comfortable with the concept of chain businesses, financing has become more feasible. Starbucks, for example, has grown without the benefit of franchising to be a dominant player on the world stage.
McDonald's, on the other hand, has grown through the sale of single unit franchises (for the most part), while chains like Subway have grown by issuing master franchises, in which the holder, for a share of royalties and franchise fees, sells sub-franchises in a given area. All three strategies have produced chains that are present and recognized on six continents.
Creating a successful franchise requires a great deal of advance work. First, any business that wishes to franchise should have a proven record of success already. This means having at least one company unit that is growing and is profitable; more than one is preferable. The business needs to demonstrate its success to potential franchisees, and it needs to produce enough profit to finance the initial stages of franchise development.
Critical to the success of any franchise is the development of a proven and teachable system. In fact, this is the key item any franchisor has to sell. The system, if designed properly, can take an amateur and in a few months teach him or her how to run the business in a way that duplicates the success of the original outlet. The system also serves as a guarantee to franchisees that their investment will not be compromised by the existence of a few bad operators. Without a teachable system, there is no franchise.
It is also necessary to develop the corporate staff to teach and monitor adherence to the system. All of this is an essential part of franchising, and much of it must be in place before the first franchise is sold.
Critical, too, is expert legal assistance. Franchise contracts are complex documents. An experienced franchise attorney is essential to insuring compliance with local franchise laws (which differ greatly from country to country) and to insuring that the contracts and disclosure documents clearly present the obligations of both franchisor and franchisee.
Finally, franchising requires a tremendous commitment from the owner of the original business. In a single, company-owned unit, the customer is the retail purchaser, the person who walks in the door to buy food or auto products, or to rent a room for the night. Once the business owner become a franchisor, the customer is now the franchisee, and the owner's entire focus has to change.
This is why the decision should not be taken lightly. While franchising is a great avenue to growth and revenue, it is not right for every business and it is not right for every person. Research is the foundation and should never be overlooked or short-changed in the pursuit of growth.
Author: Peter Winkler, lecturer at LIGS University
This article was created as a follow up to our open webinar