Are you dreaming of franchising your business? Here’s how to tell if all systems are go and when it’s time to franchise a business.
By Rieva Lesonsky
Is your small business profitable and growing? Do you constantly get out-of-town customers wondering when you’re going to open a location in their neighborhoods? Are you secretly kind of bored running just one, smoothly operating location and want to feel the excitement of your startup days again?
If your answer to these questions is an unqualified “Yes,” maybe you’re ready to franchise your business.
The key word is “maybe.” To see if you’re really in a position to franchise, ask yourself these key questions:
Do I have the standardized systems needed to franchise my business (or can I create them)?
To franchise a business, you need operational systems and processes that can be standardized to provide a consistent product or service at all of the franchise locations. Standardization is also required to train new franchisees and their employees. For example, if you own an ice cream shop, do you have a written system detailing all the steps of serving customers, such as
- How and when wash the ice cream scoop
- Whether to put on gloves first
- How much ice cream, hot fudge sauce, toppings and other ingredients to use (such as “one full scoop” or “one-fourth cup”)
These little details are what can make or break a franchise’s success and profitability. If different franchisees serve ice cream differently, you could run across these problems:
- Your ice cream cones and sundaes won’t be consistent, which will negatively affect your brand reputation. One location might serve heaping scoops of ice cream, while another might skimp.
- Any locations that aren’t consistent about measuring and weighing ingredients will see less profits.
- Unless there’s a standard process for serving, customers may wait longer, which hurts the customer experience.
Before you even think about franchising, you should have an employee handbook and an operations manual and use them consistently.
Does my business rely on my personal presence?
This is a challenge for a lot of service businesses, especially those that began as one-person companies. For example, if you’re a talented graphic designer or hairdresser, clients might only want to work with you—not your employees, who they perceive as less skilled. It’s impossible to franchise with only one of you.
If you have this problem, you can pave the way for franchising by training employees to provide the same services you do (create an operations manual to teach them). Next, begin easing your customers into working with your employees instead of with you. Some ways to do this are by charging more for your personal services and less for services provided by employees (as hair salon owners often do) or by having employees handle all of your new customers to employees while you keep serving your “regulars.”
Am I ready to follow all the rules and regulations to franchise a business?
Franchising is laden with red tape and regulated by both state and federal laws to protect franchisees. The FTC’s Franchise Rule requires franchisors to give prospective franchisees a Franchise Disclosure Document (FDD) before buying a franchise. This legal document often runs to hundreds of pages. It provides detailed information about 23 aspects of the franchise offering, including:
- Initial and ongoing costs
- Any litigation in which the franchisor has been involved
- Background of the franchisor and its key employees
- List of current and former franchisees and locations
- Three years’ worth of financial statements
- Your obligations as a franchisor (such as providing training or advertising support)
- How franchise renewal, termination, transfer and dispute resolution will be handled
Gathering all of this information and preparing the FDD document is time-consuming. It also requires legal assistance, which can quickly add up. If you don’t have the patience (or the finances) to meet the legal requirements of selling franchises, it’s not time to franchise yet.
Is there a market for my business idea outside my location?
Businesses that work in one city or state don’t always translate to other parts of the U.S. where consumers aren’t familiar with the concept. For example, Hawaiian shave ice would probably be a hard sell in Montana, and bagel shops took years to move out of New York and catch on in the Midwest. Before you try to franchise, do your homework to learn:
- Is what I’m selling familiar in other areas of the country, or will I have to educate consumers on my concept?
- Is there a good supply of my target customer base elsewhere in the country?
- Is there a good supply of potential franchisees in the areas I’m considering? A concept that requires white-collar management experience might find more franchisees in a metropolitan area than a rural one.
Is my business financially successful?
Having one profitable location is just the beginning. In general, it’s best to have at least three successful locations up and running profitably before you take steps to franchise a business. The process of opening and running multiple locations will give you a good idea of what’s involved in opening franchises and helping them succeed.
Deep pockets are also needed to:
- Complete all the necessary legal documents
- Market your concept to possible franchisees
- Hire salespeople to sell the franchises
- Provide training and ongoing support for your franchisees
This can cost hundreds of thousands of dollars or more. If you can’t finance this internally, looking for a business loan to do so will give you a good idea of whether or not your franchise dreams are realistic.
Do I enjoy management?
If the hands-on aspects of your business is what keeps you going, you might be in for a shock when you franchise. You’ll no longer manage the day-to-day operations of one location. Instead, you’ll be more like a corporate manager, handling tasks such as:
- Looking for new regions for franchise expansion
- Creating marketing plans for your franchise
- Meeting with prospective franchisees
- Training new franchisees
- Providing ongoing support for new franchisees
If the idea of taking on a management-oriented role fills you with dread, be ready to promote or hire a manager who can take charge of your franchising operations.
Does franchising still sound exciting? You can get more information from the International Franchise Association and the FTC website. More interested in buying a franchise? Find out if owning a franchise is right for you and learn the 7 steps to take before buying a franchise.
Businessman showing franchise system stock photo from Natali_ Mis/Shutterstock