Most people who come to us seeking to franchise their business know nothing about franchising and are usually inquiring because a customer asked if they could buy a franchise or because a friend told them they should franchise their business. The first thing I tell each prospect is that franchising is not easy, it is not for everyone and it is not to be undertaken lightly. As a franchisor, your franchisees will be placing great trust in you and it is important that you take the appropriate steps to position yourself and your franchisees for success. The first step is to gain a working knowledge of what it means to franchise your business. If you are new to franchising, I recommend reviewing the material on FranchisorAttorneys.com, reading Franchising For Dummies and talking to other franchisors. This will provide you with a good overview of the business and legal issues involved in franchising.
You should also consider the following five questions in determining whether to franchise your business:
- Can the franchisee make a profit in the franchised business? If you have not been profitable over an extended period of time, you really have no business trying to sell your concept to others. If you are new to franchising, you should have at least two years of profitable unit level operations preferably in varied markets.
- Assuming profitability, is there enough profit for the franchisee to pay you a royalty and marketing contribution and still be profitable? If you have not already, you should perform financial modeling to determine your bottom line as if you had paid a royalty and marketing contribution to a third party. The margins at the unit level must be large enough that the franchisee can afford to pay you a royalty and marketing contribution and still do well.
- Is the business easily replicable? Franchisees must be able to efficiently operate your business concept in their own individual markets. If the success of your business is market or location driven, linked to your personality or another unique characteristic, it will be extremely difficult for franchisees to successfully replicate your business concept in their markets.
- Domino’s has its pizza sauce, Burger King its Whopper, McDonald’s the Golden Arches. Do you have a secret sauce? If you have a proprietary product, computer system or other unique item that franchisees cannot otherwise obtain, you will have satisfied what I would consider the biggest hurdle to successful franchising. Absent such an item, you will be hard pressed to keep franchisees in your system for an extended period of time.
- Are you first to market or unique to the market? If I had a dollar for every potential franchisor who told me they had no competitors but subsequently determined they were wrong, I would be lying on a beach in the Dominican Republic. Research your market to identify others in your space. If there are others, differentiate your concept from these concepts. If you are late to market, without a significant differentiator it will be very difficult to succeed against more experienced brands.
Before going down the franchising road, carefully consider the questions above. An affirmative answer to each of them does not guarantee franchising success but it should put you on the right path. See our post below, “Preparing Your Business for Franchising,” to understand the steps you should be taking to ready your business for franchising and subscribe to this blog for future installments on this topic. For more information, complete our Franchise Feasibility Test to determine whether you can, or should, franchise your business. Contact us to learn more about franchising and for a complimentary initial consultation.