Franchising as a business expansion model has many advantages and can be a great choice for the right business. However, not all businesses are well-suited to be franchised (sometimes called "franchisable"). Moreover, a business needs to be at the right stage to start franchising.
This article addresses some characteristics that make a business more or less capable of being franchised as well as some to ask when determining whether the time is right to franchise your business.
Some of the main reasons businesses consider franchising include: easier access to expansion capital, access to more talented and more motive operators, faster growth, and access to local knowledge/connections. For a more detailed discussion of the advantages and disadvantages of franchising, see our article on the topic.
If the advantages of franchising area appealing to your business, your next step is to evaluate whether your business is franchisable and whether the time is right to franchise. Below are five characteristics of a franchisable business, five characteristics of a business that isn't as franchisable, and five questions to ask yourself when deciding if the time is right to franchise your business.
Characteristics of a franchisable business
What makes your business attractive to prospective franchisees? What element sets it apart from a business anyone could set-up on their own? Inquiries about selling franchises can be a good indicator that your business has enough uniqueness, but it is important that you have identified and understand what it is that makes your business unique.
Being able to replicate all of the essential elements of your existing outlets is crucial to successfully franchising. Elements such as the personality of the owner or manager, a unique location or an operator with particular management skills can all be difficult or impossible to replicate.
Standardization permits customers to enter any franchised location and recognize it as offering the same level of quality and uniformity that they have come to expect from the brand. For franchisees to be able to achieve this customer experience, your business must be subject to a high degree of standardization in most or all areas.
How much will it cost to replicate your business? Can your ideal franchisee candidates afford this amount? If the type of operator you hope to attract will have difficulty securing the necessary funds, you will have a difficult time selling franchises.
Will an outlet be profitable when the cost associated with being a franchise are added? A successful franchise system must allow each outlet to generate enough profit to pay royalties and still leave a reasonable profit to the franchisee.
Characteristics that make franchising more difficult
1. High Competition.
Highly competitive industries can make it more difficult to sell franchises, and for franchisees to thrive. Franchised business generally enjoy a higher success rate in comparison to completely independent businesses, but for a franchise system to succeed in a highly competitive business it needs to score highly on most or all of the characteristics described above.
2. Trendy Concepts.
Franchise systems take time to develop and franchisees that invest in businesses are generally looking to operate an enduring business or a business they can build up and sell. This means that franchises based on the things like the latest fitness craze, health trend or culinary fad might not stand the test of time.
3. High Cost to Entry.
A franchise offering that is very costly to get into can be difficult to sell. Consider all the costs necessary to establish a new outlet – physical space, equipment, vehicles, permits/registrations, software etc. It is, however, possible to mitigate start-up costs by setting up financing programs with preferred lenders, making it easier for prospective franchisees to secure the necessary initial capital.
4. Time to Positive Cash Flow.
By buying a franchise, franchisees expect to make money. Although its understandable that any new business will take time to become established and grow, franchisees that take a long time to become cash flow positive can lose confidence in the model, which may lead to a host of other problems.
5. Enforceability of Standards.
If a franchise system's standards are difficult to enforce, a system is at risk of losing the degree of standardization necessary to achieve that predictable customer experience. Even if the business is capable of being standardized, it is important that franchisors be able to enforce these standards with all operators so that certain operators aren't tarnishing the reputation of the brand.
Questions to consider when deciding whether the time is right to franchise.
1. Do you have the necessary capital to cover the expense of franchising your business?
In Canada, you should budget at least $25,000 to $50,000 for this expense.
2. Is your intellectual property protected?
Before selling others the right to operate using your brand and other important intangibles of your business, it is important to ensure that you have sufficient rights and protections (such as trademark registrations and license agreements) in place.
3. Have you identified the precise location requirements for franchised outlets?
It is important to investigate the availability and affordability of locations meeting these requirements in your target markets.
4. Have you developed an operations and marketing manual?
Since you can't be there to guide your franchisee through every aspect of the business, it is important to have a comprehensive operations manual setting out what a franchisee needs to do to replicate the business.
5. Can you teach others to duplicate your business?
In addition to an operations manual, what formal training will your franchisees need, and it is feasible for you to provide this training?
6. Do you have the personnel necessary to implement the system?
Franchising is a business in and of itself. As such, the personnel you require to set up and manage a network of franchises is different than what you require to operate your own outlets of the business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.