franchise
Should I Franchise My Business?
By Mark C. Siebert, Chief Executive Officer
H
ave a better mousetrap and scared
to death that the world actually is
BUT IS MY BUSINESS
beating a path to your door?
People walking through your operation
“FRANCHISABLE?”
with notepads and cameras? Trouble
sleeping at night wondering who will
Franchising is a relatively flexible format, and just about any
knock off your operation first? Cer-
type of business can be franchised, provided it meets some
tain that yours is the next Ray Kroc
basic characteristics:
story, if only you could get the capital?
Tired of reading about companies and
square6It needs to be credible. Does it have experienced man-
thinking, “I have a better franchise
agement? A track-record over time? Is the concept
concept than that company.”?
Maybe you, too, should consider
proven? Has it achieved good local press or public
franchising.
acclaim?
WHY FRANCHISE?
In general, companies franchise for franchising 101
square6It needs to be unique. Is it adequately differentiated
from competitors? Is it marketable as a business opportu-
one of three reasons: time, people, or
nity? Does it have a sustainable competitive advantage?
money.
The primary barrier to expansion
square6It needs to be teachable. Are the systems in place?
faced by today’s businessperson is cap- Are operating procedures documented? Could someone
ital. And franchising allows compa-
learn to operate the business in three months or less?
nies to expand without the risk of debt
or the cost of equity. Since the fran-
And it needs to provide an adequate return. Not just prof-
chisee provides the initial investment
itability. If a business cannot generate a 15% - 20%
at the unit level, franchising allows for
return on investment after deducting a royalty (typically
expansion with minimal capital.
Moreover, since it is the franchisee,
between 4% and 8%), it is going to have difficulty keeping
and not the franchisor, who signs leas-
franchisees happy.
es and commits to various service con-
tracts, franchising also allows for
square6If your business meets these criteria, then it may be a
expansion with virtually no contingent
good candidate for franchising.
liability, thus greatly reducing the risk
to the franchisor.
Another barrier to expansion facing owner to overcome many of these ity, monitoring unit level expenses
many of today’s businesses is finding problems by substituting a motivated becomes significantly less cumber-
and retaining good unit managers. All franchisee for the unit manager. Inter- some.
too often, a business owner spends estingly enough, since the franchisee Finally, opening a unit takes time.
months looking for and training a new has both an investment in the unit and Hunt for sites. Negotiate leases.
manager only to see that manager leave a stake in the profits, unit performance Arrange for design and build-out.
— or worse yet, hired away by a com- will often improve. And since a fran- Secure financing. Hire and train staff.
petitor. chisor’s income is based on the fran- Purchase equipment and inventory.
Franchising allows the business chisee’s gross sales, and not profitabil- The end result is that the number of
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