If you have a successful business that can operate in many locations regionally, nationally or internationally, you may want to consider using franchising as a growth vehicle.
Restaurants are commonly franchised, but businesses as varied as mold remediation, garage door repair, closet cabinets, medical clinics, medical labs, retail stores, house cleaning, tree fertilization, and car repair are among the 4,000 + franchisors in operation.
Franchising is an arrangement in which a business (the franchisor) expands by licensing out its business model to other businesses (the franchisee). The franchisee pays a fee up front to the franchisor for the right to open the business and for training. They also pay ongoing royalties (often a percentage of revenues, fixed fee, or fee built into the cost of goods supplied by the franchisor.)
Benefits of Franchising
Franchising has certain benefits for businesses seeking to expand. Licensing out your business model to others creates the opportunity for:
- Rapid market penetration
- Access to the capital for growth (from the franchisee)
- Management with “skin in the game”
- A community of like-minded people collaborating excellence to propel the system to new and greater heights
Businesses that benefit from the franchising model tend to be:
- Those that need widespread distribution, or units such as restaurants
- Those businesses that benefit from local ownership
- Those with a concept that can be taught in a relatively short period of time
- Those requiring significant capital to open the business
Drawbacks of Franchising
Franchising has certain drawbacks:
- New business model–While you know how to run your business, you will have to learn a new set of skills in running a system of franchisees.
- Upfront expenses–Franchising is highly regulated and requires the assistance of experienced franchise attorneys and consultants.
- Added regulation–Certain states require registration or filings before you can franchise.
Businesses that do not benefit from the franchising model tend to be:
- Those that require years of training to operate
- Those with authoritarian-type management
- Public companies and/or those with have access to significant capital
- Those distributing products or services through established businesses
Requirements for Franchising
The first requirement is that the franchisee must be able to make a profit and pay you a royalty. If your business model allows for both of those conditions, then consider other requirements:
- You need at least one, preferably several or many, company-owned operations with significant experience in operating the business
- Your business needs to be teachable
- Your business needs unique intellectual property and trademarks
- You need to be a person who can work with other people and not “be their boss”
- You need capital to pay for all of the legal and structural work that needs to be accomplished
Choosing a Franchise Expert
Many new franchisors use franchise business experts to help them put all the business aspects of the franchise system together. In choosing a franchise expert, consider these items in your selection process:
- Price–Some companies are expensive and may include in their package of services things you don’t need. Make sure you only pay for what you need.
- Track record–How many documented successes do they have? Remember, it’s not the number of companies they have worked with but how successful those companies are. Call those companies and see if they are happy with the services they received.
- Specialty–Your business is unique. You need to look carefully at what the expert produces; you don’t want boilerplate intended for another business or type of business that suddenly becomes the basis for your franchise.
- Independent attorney–Always choose your own. Avoid using in-house attorneys or the attorney the expert recommends. You need to choose a franchise attorney who fits you and protects you, not one that protects the expert.
- One-to-one work– The staff of a franchising expert seldom has real expertise. Choose an expert who will work one-on-one with you.
- Clients–How long has the experts’ clients remained with them? A good franchise expert should have clients who have continued to use them for many years. Franchising is complicated and good advice never grows old.
Jack Eberenz is a nationally known franchise expert who has held the titles of CEO, President, COO, CFO, Chairman of the Board and franchisee over the past 30 years.