If you’re interested in jumpstarting business growth, one approach is to franchise your company. By creating a system through which franchisees pay you startup fees of $25,000 to $50,000 and yearly royalties ranging from 2 to 8 percent of sales, you can get fast access to a potentially sizable new revenue stream. And, just about any type of business can be franchised, from executive coaching to house painting.
The thing is, not every company is franchise material. And, even those that fit the bill need to understand the in’s and out’s of how to turn their firm into a successful franchisor. “You might be great at selling hot dogs,” says Steve Rosen, CEO of FranNet, a Blue Bell, Pennsylvania-based franchising consultancy. “But that’s different from running a franchise company.” What’s more, in today’s climate, there are a number of important factors to consider that you might not have had to tackle in a different economy.
Here are some questions to ask before making the leap:
Can your business model be replicated? The first—and most important—issue is whether your operation can be repeated on a large scale. That means a franchisee in, say, Los Angeles or New York—or anywhere in between—can follow your plan and set up shop. “Everything from the look of a store to the software has to be replicated,” says Rosen. Result: Customers, no matter where they are, know exactly what to expect when they patronize one of your franchisees.
Does your business have staying power? Your franchisees undoubtedly will plan to be in business for at least five to 10 years. So, they need to know your company will last. While that doesn’t require being around for decades, you have to demonstrate a solid track record. What’s more, trendy or leading-edge businesses should think twice before becoming franchisors. “If you’re selling the latest technology, in all likelihood someone will come out with something better the next year,” says Rosen.
Can you provide the right services? To ensure your franchisees’ success—and turn yourself into a desirable business—you have to be able to provide top-notch support. “You need to think about what would cause someone to want to continue paying you fees,” says Rosen.
Generally, that means offering such services as help with marketing and advertising and, perhaps most important, providing in-depth training to franchisees and, when appropriate, general managers and employees. That training should take place before the franchisee starts up and then continue at regular intervals throughout the year, often via the web. You also should think about providing a SWAT team that can help the franchisee set up initially. And make sure you have franchise development staff available who can provide more help when it’s needed.
Will your franchisees be able to finance the venture? In these times of tighter credit, it might be tough for prospective franchisees to get a bank loan. That’s especially important for hotels and other businesses that require a larger upfront investment. Result: Try to find a lender willing to team up with you. Or look into ways to loan them money, yourself.
Are you targeting the right franchisees? Fact is, companies on the verge of franchising often focus on the wrong market at first. “It’s not always obvious who will buy your franchise,” says David Deutsch, CEO of Franchise Development Partners in Atlanta. Take Lou Gentile. About a year-and-a-half ago, he decided to franchise his company, Corporate Securities and Investigations, a Pittsburgh-based investigations business. Because most of his investigators have law enforcement or military backgrounds, he figured prospective franchisees would need the same experience. But, he quickly discovered that his original market tended to lack a sufficient entrepreneurial spirit.
After working with Deutsch, he realized the smarter move was to target businesspeople who would hire former police officers and the like as employees. With that change, he’s already sold two franchises in just two months and several more are pending.
Can you offer a competitive money-making proposition? To attract franchisees, they should be able to generate a 15 to 20 percent return on investment after deducting royalties. What’s more, laid-off managers with few resources—a growing portion of prospective franchisees—need to break even in six to nine months. “Those are the franchises that are moving faster these days,” says Deutsch.