Have a better mousetrap and scared to death that the world actually
is beating a path to your door? People walking through your operation
with notepads and cameras? Trouble sleeping at night wondering who
will knock off your operation first? Certain that yours is the next
Ray Kroc story, if only you could get the capital? Tired of reading
this magazine and thinking, "I have a better franchise concept
than that company"?
Maybe you, too, should consider franchising.
In general, companies franchise for one of three reasons: time,
people, or money.
The primary barrier to expansion faced by today's businessman is
capital. And franchising allows companies to expand without the
risk of debt or the cost of equity. Since the franchisee provides
the initial investment at the unit level, franchising allows for
expansion with minimal capital. Moreover, since it is the franchisee,
and not the franchisor, who signs leases and commits to various
service contracts, franchising also allows for expansion with virtually
no contingent liability, thus greatly reducing the risk to the franchisor.
Another barrier to expansion facing many of today's businessmen
is finding and retaining good unit managers. All too often, a business
owner spends months looking for and training a new manager only
to see that manager leave - or worse yet, hired away by a competitor.
Franchising allows the business owner to overcome many of these
problems by substituting a motivated franchisee for the unit manager.
Interestingly enough, since the franchisee has both an investment
in the unit and a stake in the profits, unit performance will often
improve. And since a franchisor's income is based on the franchisee's
gross sales, and not profitability, monitoring unit level expenses
becomes significantly less cumbersome.
Finally, opening a unit takes time. Hunt for sites. Negotiate leases.
Arrange for design and build-out. Secure financing. Hire and train
staff. Purchase equipment and inventory. The end result is that
the number of units you can open in any given period of time is
For companies with too little time (or too little staff), franchising
is often the fastest way to grow. That's because it is the franchisee
that performs most of these tasks. The franchisor provides the guidance,
of course, and the franchisee does the legwork. Thus, franchising
not only allows the franchisor financial leverage, but it allows
him to leverage his resources as well.
But is my Business "Franchisable?"
Franchising is a relatively flexible format, and just about any
type of business can be franchised, provided it meets some basic
- It needs to be credible. Does it have experienced management?
A track-record over time? Is the concept proven? Has it achieved
good local press or public acclaim?
- It needs to be unique. Is it adequately differentiated from
competitors? Is it marketable as a business opportunity? Does
it have a sustainable competitive advantage?
- It needs to be teachable. Are the systems in place? Are operating
procedures documented? Could someone learn to operate the business
in three months or less?
- And it needs to provide an adequate return. Not just profitability.
In todays high-octane marketplace, if a business cannot
generate a 20% return on investment after deducting a royalty
(typically between 4% and 8%), it is going to have difficulty
keeping franchisees happy.
If your business meets these criteria, then it may be a good candidate
The Process of Franchising
When a company makes a decision to franchise, it must first develop
a sound plan for expansion. The plan must take into consideration
the numerous issues confronting a new franchisor: speed of growth,
territorial development, support services, staffing, and fee structure,
to name several of the most important. Larger companies need to
address more complex issues such as channel conflict, anti-trust,
and resource allocation issues. And obviously, this entire plan
needs to be subjected to rigorous financial analysis and scrutiny
to fine-tune the strategy for growth.
Once this plan is in place, the franchisor needs the proper legal
documentation. At a minimum, the franchisor will need a franchise
contract, an offering circular (as required under FTC Rule 436),
and, depending on where franchises are being sold, state registrations.
There are literally hundreds of different business issues that must
be addressed in a good franchise agreement, and the decisions made
regarding these issues will ultimately dictate the franchisors
Quality control for a new franchisor involves the development of
highly developed systems. Generally, this translates into the development
of an operations manual. This manual must contain not only the systems
used by the business, but also the checklists, policies, procedures,
and tactics that will allow these systems to be uniformly enforced.
Moreover, these manuals must be careful to avoid the creation of
an agency and must also address issues that could create claims
of negligence if the franchisor is to maintain an effective shield
from consumer liability.
Finally, the new franchisor must develop the ability to market
and sell franchises. That requires knowledge of how to attract the
prospective buyer and the necessary materials (brochures, mini-brochures,
videotapes, etc.) that will help make the sale. Moreover, since
the franchise sales process is highly regulated, the franchisor
needs to be educated in proper sales, disclosure, and compliance
Every new franchisor quickly learns that when they turned to franchising
they entered a completely different business. Regardless of how
the franchisee makes money, the franchisor has two roles in life:
selling franchises and servicing franchisees. And of the two, ensuring
the success of the franchisee is the most important.
Properly structured, franchising can allow small companies to more
effectively compete with much larger competitors. It can also allow
large companies to gain the advantages of highly motivated unit
management while reducing overhead. As such, franchising is an option
that more and more companies should explore.
The key to success in franchising is successful franchisees. Without
successful franchisees, no franchise system will last. But
if you can put the interests of your franchisee first, those same
franchisees might help you become the next McDonalds.
First Published in Successful Franchising Magazine, August 1999.
All rights reserved by author.