By Marietta Snetsinger
1. Why should I use franchising to grow my business?
As a smart and successful entrepreneur, you’re probably thinking about how you can continue to capitalize on your success and grow your business. As you consider your options, you may find that the franchise business model could be a contender. Let’s start with the most obvious and popular reasons to consider franchising your business:
- Local connection: What better way to secure the success of a new location/business than to start with a local connection? Expanding into new markets with a franchise partner who has an “invested” interest and the ability to connect with a local audience can go a long way toward expediting growth. Local representation and connection to the brand can help you expand into markets where you just couldn’t build local relationships and connections as quickly utilizing a corporate model.
- Leverage capital investment: Franchising is a great way to grow and scale a business using other people’s money. This type of growth format allows for a business to expand leveraging the capital of others, i.e. franchisees who are more likely to deliver an exceptional customer experience, and share common values with the franchisor.
- Speed of unit expansion: By leveraging the investment of your franchisees, you can expand more quickly and efficiently. In exchange for sharing your “know how” and proven business model, it is possible to have more locations, sooner!
- Opportunity demand: Simply put, you have a concept that has been successful, and others are willing to pay you for this knowledge. There are many ‘intrapreneurs’ who are seeking opportunities to be in business for themselves and they are happy to invest in your franchise for access to this proven format. They become implementors of your concept at a local level as your franchisee.
2. What make your business “franchisable”?
If you are wondering what makes a business “franchisable” and more specifically, if your business would be a great candidate for franchising, here are five ways to evaluate the franchisability of your existing business:
I. Innovative/unique selling proposition (USP)
The concept has established a strong brand, including unique and innovative services. The products and service are delivered with a customer-centric approach. The company is clear about who they serve and what services/products are offered.
- What makes your business unique and different from competitors?
- Are you offering something that doesn’t already exist in your market?
- Is your business focused on the customer’s experience?
II. Unique franchise proposition (UFP)
Creating a concept that has a clear business proposition for franchisees who choose to invest with you is essential. Part of your franchise marketing program will include clearly communicating exactly what sets you apart from other franchise concepts, including proprietary programs which often evolve around acquiring clients and/or staffing your concept. If there is a common challenge within your industry, your concept has a proprietary way of solving the problem.
- What makes your concept stand out among your competitors?
- Will someone pay you to learn your business format?
- How will you manage franchisee expectations?
The business can be duplicated in a different market and steps have been taken to prove this theory by opening a second or multiple locations. The ability to replicate results needs to be established before the business is offered as a franchise investment to others. In addition to being replicated, the business should also have established and clearly defined standard operating procedures.
- Can the concept be reproduced?
- Have you tested ‘scalability’?
- Have you added systems to your existing business?
- Have you duplicated the business already?
IV. Current profitability
The business is currently very profitable! You have kept accurate financial records, have a solid understanding of why and what makes your business profitable, and there is a history of profitability over time, including different economic cycles. The profit margins should exceed that of your general industry. Have the financial statements and overhead costs been properly accounted for and is there a history of profitability over time? Taking that one step further, will it be profitable for both the franchisee and the franchisor?
- Does the business unit make money today?
- Has it been profitable for a minimum of two years?
- Do the margins exceed that of the industry norm?
- Do you have accurate financial records?
3. What makes it a franchise?
As much as franchise systems may differ in products and services offered, the underlying premise of franchising remains the same. Before you begin exploring expansion options, take some time to explore and understand the components of the business model and exactly what it means to establish a franchise system. A little bit of due diligence and understanding early on can go a long way.
The five fundamentals components of a franchise system include:
I. Proprietary operating system: The initial franchise fee covers access to the franchisor’s validated and documented business system. A good turnkey franchisor provides help with set-up, initial training, and ongoing support, all designed to reduce the number of “days to first dollar.” The “system” allows the franchisee to expedite their business launch and focus on sales vs. setting up a system and process.
II. Brand equity and marketing power: Developing brand standards using the franchisor’s proven system (inclusive of the franchisor’s trademarks) is at the core of any franchise system. Adherence to the system is critical, as it helps manage customer expectations and often factors into a customer’s decision to do business with you. Franchisees may also be required to contribute to national advertising fund programs designed to support more general brand awareness initiatives. This does not negate the need to also engage in local unit advertising initiatives, nor does it mean that “if we build it, they will come.” Brand strength is built upon commitment from all stakeholders.
III. Revenue sharing: For access to the ongoing programs and offered by the franchisor, the franchisee agrees to remit a percentage of their sales to the franchisor. Basically, the brand and the systems which are included within the brand are part of the reason why a customer may choose to do business with your company over another similar brand.
IV. Development and distribution of products and services: Timing is everything and on-going market research on the latest products and anticipated needs of the customers often falls to the franchisor. As a franchisor, you must be aware of industry trends, developments, or products.
V. Customer centric: Organizations wherein the franchisor and the franchisor are aligned and focused on delivering client-centric goods and services with an emphasis on loyalty are infinitely more successful. Basically, both the franchisor and the franchisee are focused on acquiring and retaining customers who will use more and more of the products, on a more regular basis … and tell their friends.
Making the decision to franchise your business starts with a fundamental understanding of the business model. No matter which option you choose, if you are prepared and have done your research, you can approach your expansion plan with confidence.
4. Who can help me franchise my business?
It takes a team to create, build, and support a sustainable and profitable franchise system. A strong team of experienced franchise experts will allow you to get to market faster and avoid costly mistakes and delays.
Early on, a good franchise consultant can help you make the decision to franchise your business and should act a quarterback to help you manage the franchise project. They will be invaluable as you move forward with creating and adding systems to your business. They will also be able to help you understand roles and responsibilities between you (the franchisor) and your future franchisees. Figuring out who does what and when early on is fundamental, as this will also have a direct impact on the financial and future fee structure.
Once you have determined what your system will look like (based on the current proven model), a franchise lawyer can help create the supporting legal documents required to create your Franchise Disclosure Document (FDD). It is important to use legal counsel that specializes in the practice of franchise law so that you meet the constantly evolving laws surrounding the franchise model.
In conjunction with your accountant, the franchise consultant will be able to help you establish a fee structure for your franchise concept. Their thorough understanding of your business financials will be helpful as you establish your franchise entity.
It is important to keep your banker in the loop with your expansion plans. This will also be helpful in the future, should you choose to franchise. Your banker will be familiar with you and your concept and that will help future franchisees as they seek financing for your concept.
Branding and marketing strategy for your franchise concept is essential. You may be familiar with how you market locally, but you will need to have a plan and be strategic about how you scale your marketing activity and infrastructure. A marketing professional with franchise marketing experience will prove invaluable as you move forward with your concept.
Marietta Snetsinger is a franchise expert and founder of Ascend Franchise Solutions. With over 25 years of franchise experience, Marietta has coached hundreds of franchisees. She is committed to teaching emerging franchisors how to create profitable and sustainable relationships with their franchisees.