Many successful business owners consider franchising to be one of the most effective strategies to grow and develop their business. But not all companies can be franchised, even those that are successfully profitable.
Understanding whether your business has franchise potential requires an honest evaluation of multiple factors that determine franchising success.
Your Business Has Proven Profitability
“The foundation of any franchisable business is consistent profitability over time. Your business should demonstrate at least two to three years of positive financial performance with healthy profit margins,” say the experts at Franchise FastLane, a top-rated franchise development company.
This profitability history shows your business model is feasible and has a track record. Potential franchisees want the guarantee that their investment will work. A business model with documented profitability will attract serious franchise candidates, individuals who will risk their capital and business future.
Your profit margins should be considerable enough to sustain the franchise model’s profitability. Keep in mind that franchisees owe ongoing royalties, typically between 4-8% of gross sales. Your business model must sustain enough profit margins to allow franchisees to receive a fair return on investment.
You’ve Developed Replicable Systems
Successful franchising depends entirely on your ability to systematize every aspect of your operations. If your business success hinges on you and your specific talents and abilities, that’s going to make it incredibly challenging to franchise. You must document processes that anyone can follow with proper training and support.
Ask yourself if you have written fully developed operational manuals and developed training systems and processes. Think about everything. Think about opening the business, closing the business, customer service, inventory, and all the financial processes. The more detailed your systems are and the easier it is to follow, the more success franchisees can achieve.
For example, think about McDonald’s or Subway. Their strength is in the ability to be consistent and do it thousands of times. It means that customers going to any McDonald’s can expect the same experience. That didn’t happen by accident. It means they had to document everything and be absolutely relentless in how they kept all the abdications of the brand.
Your Brand Has Market Appeal
When people are going to run their own business, they want to do it under a brand that their customers feel is a brand. Your brand needs to be unique and stand out in your market, and it needs to mean something. It is particularly helpful to have its own brand recognition so that franchisees don’t have to build it. They can build on that brand recognition, rather than starting from scratch.
Think about where your company stands in the market. The first question to answer is whether your company is being sought. Do customers come to your business instead of getting services from other competitors? Do they endorse your business to other potential customers? Do you think your company can compete in other regions? These are the questions to assess whether you have built something to address the broader market needs and to compete in other geographies beyond where you are located.
Consider whether your company can build confidence and trust with potential investors who would like to purchase your business. Investors are looking for companies they can trust and would like to partner with businesses that have a proven track record, and more importantly, companies that clearly articulate their competitive advantage. Companies that have a clear competitive advantage will have no problem attracting potential investors.
The Business Model Works Across Locations
Geographic transferability for your model is important. Your business idea should be able to work in multiple locations without the need to make major changes to the business model for each location. Of course, there should be changes to address customer preferences in that area, but the core idea and business model should be able to work across various customers in different regions.
Consider whether your business is dependent on your current location. Do you have a supplier in the area? Are the market conditions favorable? If your business depends heavily on factors that are unique to your location, it may be more challenging to franchise the business idea.
Test this transferability by analyzing similar businesses and assessing their successes in other markets. Look up your business’s competitors in other regions and see how they perform. If your concept works only in a given context, then you are likely going to have to modify your model in lieu of pursuing franchising, or at least preemptively consider restricting development of franchises to markets that are more closely aligned.
You’re Prepared for the Franchising Investment
You have to make a lot of investment, both in money and time. Franchising requires money that you won’t see a return on for a long time. You’ll have to pay for lawyers, disclosures, and manuals for operations, training programs, marketing, and the ongoing support your franchises are going to need. A lot of people grossly underestimate these expenses, which often are, on the lower end of the spectrum, in the $100k range.
There’s a lot of time that you have to invest as well. Running your business is going to be a lot more hands-on, and you’re going to be supporting your franchisees. Your focus is going to shift a lot from supervising the businesses to supervising the franchisees and supporting them. You’re going to be responsible for training them and making sure they have the support they need, and that they’re all on the same page with your brand. Your role is going to be different because now you’re franchising.
Think about whether you’re mentally and physically up for that kind of shift. You’re not going to just sit and make the money at that point. You’re going to be managing all the business owners who have poorly performing businesses at that point, because they’re going to be relying on your franchise and your business. You’re going to have to support them a lot, you’re going to have to make sure they can contact you, you’re going to have to be there to solve their problems, and make sure that they can follow your business operations and that your franchise as a whole is functioning well.
Your Industry Supports Franchising
Some industries find it easier to franchise than others. Businesses that provide a service and food, retail, and fitness tend to franchise more easily than others. Industries that need very specific expertise, have a lot of regulations, or need to put in a lot of money tend to have a more difficult time with the franchise model.
Make sure to conduct thorough research on your industry’s franchise landscape. Do your research on your sector’s franchise. What kind of challenges do they face? Learn to understand your industry’s specific franchise dynamics to help you predict possible challenges you might encounter and help you figure out whether or not franchising is a smart move for your business type.
Some industries have complicated laws, health regulations, and legal restrictions that make franchising more complicated. Make sure you understand the less flexible side of regulations before you commit to franchising. Some businesses face so many regulations that franchising just isn’t practical.
You Can Provide Comprehensive Support
Franchisees do not just buy your brand; they also buy your support and guidance throughout the whole process. You will need to provide quality initial training, guidance throughout the process, marketing help, outsource people in the supply chain, and provide tech support. Support is the backbone of every successful franchisor, and to make sure their franchisees succeed, successful franchisors put a lot of time and money into building support infrastructures.
Since your business is new, ask yourself, can you continue giving this level of support to your franchisees in the future? Will you have, or be able to build, the support of a team to train new franchisees, do routine quality inspections, provide marketing materials, and assist with other operational issues that arise? Without effective support, your franchisees and, in time, your franchise will be negatively impacted. Top franchises develop a community amongst their franchisees, where they can learn from one another and receive additional support from the corporation. For this to happen, you will need to develop franchisee to corporate communication, franchisee to franchisee communication, and franchisee mentorship. Creating this desired culture will take dedication and a real commitment to the success of your franchisees.
Making Your Decision
Deciding on franchise readiness involves some soul searching and sometimes, a very harsh truth. Just because a business is successful doesn’t always mean it should franchise, and that is perfectly fine! Another growth option is available depending on your goals. Growth through licensing, adding more company-owned locations, or through a strategic partnership can often be a better fit.
Once you have weighed out these factors and believe that franchising will be a good fit based on your business and personal goals, you should ideally reach out to franchise consultants and attorneys. These professionals can help you build a franchise system that keeps your best interests in mind and helps your franchisees succeed.
