Once you’ve established a thriving small business, based on a desirable product or service, it’s only logical to think of expansion to capitalize on your success. The first step usually includes the addition of a second establishment in a comparable area with a similar target market of consumers. Continued success may lead to the consideration of expanding on a much larger scale – franchising your product or service. This strategy has proven to be one of the fastest ways to scale your operation and multiply the success you’ve already achieved. But before you consider pursuing this aggressive growth strategy, there are several issues to consider and address.
So, is your business franchise worthy? As a franchising consultant with over two decades of experience confronting this question, I can advise that it takes a cautious and measured approach to determine the right answer. A great deal of my career has been spent evaluating all sorts of business models, products, and services, determining whether they meet the threshold and requirements for franchising. For the successful business owner, this can be an emotional time. Impatience is common, as it’s only natural for entrepreneurial-minded individuals to strike while the iron is hot. Many worry that the opportunity to franchise their business model is limited to a narrow window of opportunity.
But the truth is unavoidable – there are some difficult questions to confront when evaluating the opportunity to franchise your product or service. You must have a thorough understanding of the franchising industry, how it operates, and what guidelines to follow in this carefully regulated industry. It requires an examination of your personal goals, as well as your business goals, to determine whether your interests are truly aligned. There are several stages of evaluation in this process and it’s highly advisable to seek professional guidance during this exercise – especially in the legal and accounting fields. Thankfully, there are an abundance of attorneys and CPAs who specialize in franchising.
To provide some context on the evaluation process, as well as to demystify it, I’ve developed a checklist to help business owners determine their company’s potential and suitability for franchising. I call it the “Necessary Nine,” a sequential series of probing questions that owners should address prior to engaging in any franchise-related growth strategies. Even those who’ve already expanded their operations to multiple locations should know that franchising is a whole new ballgame. So, if you’re wondering whether your established company, brand, concept, product, or service is franchise-worthy, be prepared to confront and answer the following queries.
1. Does the company, brand, or concept have sustainable competitive differentiation (SCD)?
For any company to achieve success – even moderate success – it requires a clear-cut value proposition. But it also requires key differentiators, designed to set you apart from the competition. The three main sustainable competitive advantages include differentiation, cost effectiveness, and focus advantage. If you believe you’ve built a better mousetrap, then what are the specific features that make your brand, product, or service better than the competition? Beyond that, are these features sustainable over time?
2. Are there replicable processes in place?
How easily can your company, brand, or concept replicate the product or service you offer consumers? If it’s a product, does the expense of replication outweigh your potential profit margin or narrow your competitive advantage? And if it’s a service you provide, can you easily train others to perform and offer the same level of value to your target market?
3. Has the business been operating for two or more years?
In a few select cases, this requirement isn’t a hard and fast rule, but it’s still a highly recommendable benchmark. While anyone is capable of hitting a grand slam in their first at-bat, consistent business performance matters in the long run. Without a minimum of a couple of years in business, how can you truly know if your particular product or service can weather a down economy, and possibly even a recession? A minimum of two years of sustained profitability is a positive sign and an accomplishment that should give you the confidence to proceed with a franchising strategy.
4. If relevant, what has the revenue been over the past three-to-five years?
It goes without saying that your revenue is a critical factor in considering expansion through franchising. And if your franchising effort requires an influx of borrowed capital – and it almost always does – you’ll need to demonstrate steady and sustainable financial performance to satisfy banks, venture capitalists, or alternative lenders.
5. Is your revenue north of $200K per location?
Do you have a minimum of $200K in revenue per location? Because that’s a fairly good indicator that your product or service is meeting the needs – as well as the demand – of your target market. You have to have some form of an earnings target, and I’ve found that $200K in revenue per location presents a minimum benchmark for proceeding.
6. Are you willing to provide the level of assistance required to oversee franchisees?
For entrepreneurs, franchising offers one of the most advantageous ways to launch a business of their own. But the reason most franchisees are able to succeed as business owners has everything to do with the comprehensive training and ongoing support they receive from the brand. It’s a commitment that should never be taken lightly. Franchisees in your system will be wholly dependent on the level of training and support you provide them. If you fail to provide the requisite level of guidance and support to your network, your franchisees may fail. And if they fail, you fail.
7. Are you willing to give up control?
Franchising your company, brand, or concept will require you to cede a modicum of control to others – including some who will have played no part in the origination of your business. As a franchisor, your operations will be bound by regulatory oversight from the FTC. And some of the operational guidelines you’ll have to abide by may not offer you the total level of control you’ve become accustomed to having.
8. Are you at the forefront – or the storefront – of the business?
If you’re a business owner who’s always been intimately involved in the day-to-day operations, your role could dramatically change once you franchise your concept. From that point on, you’ll be working on the business, not in it. For some, that’s simply a bridge too far to consider. Are you one of them?
10. Is there adequate capital and buy-in, from all founders, to start an entirely new business?
If your company, brand, or concept involves more than one decision-maker, you’ll need a unanimous decision to attempt a franchising effort. And you’ll also need the capital necessary to expand, which sometimes doesn’t come easily – especially in times of constrained lending. All ships must sail in the same direction and even then, your biggest obstacle remaining could still be the funding you need to franchise your operation. Since we’re well aware that banks aren’t in the business of losing money, there’s simply no guarantee you’ll acquire the necessary funds to pursue a franchising operation. But you will have options, some of which you might not be aware of at this point.
This “Necessary Nine” checklist of questions is designed to spur the uncomfortable conversations you’ll need to have before you can consider a future in franchising. These inquiries were developed over time, during my successful career as a franchise consultant and they cover the critical issues you’ll need to address before you make a final decision. I hope you’ll take them seriously.
And whatever you ultimately decide to do, I wish only the best of luck to you in your endeavors.
Blake Martin owns FranNet of The Heartland, a franchise brokerage, sales, and consulting firm that provides coaching and consultation for entrepreneurs and small business owners. He’s a Certified Franchise Executive (CFE) and a graduate of the University of Michigan’s Psychology Program. During his two decades in the franchising industry, Blake has provided practical advice in building franchise systems from the ground up, while helping hundreds of entrepreneurial clients become small business owners. He can be reached at bmartin@frannet.com.