If you’ve built a successful business, the time may come for you to franchise it. Although franchises are excellent opportunities for a business to reap substantial rewards, many of them end up failing. It is imperative that the company’s owners know the risks as they thoughtfully make the decision to franchise. Below are some questions you should ask:
The History and Foundation of Your Business
Objectively evaluating your company’s track record is essential to determining if there is enough potential for a successful franchise. Here are some questions in this category:
What are the potential franchise earnings? Before anyone will purchase a franchise, they want to understand how much money they might earn versus company royalties and franchise fees. This type of data will later need to be formally disclosed to potential franchisees in a financial performance representation. Start thinking about it now.
How long has the company been in business? Although success is a green flag, it cannot be considered in isolation. Many new companies enjoy initial success that may last a while, but later fizzles out under the pressure of economic and other challenges. Generally, your business should be in operation (and successful) for at least one to three years before franchising.
Are your internal operations sound? Smart franchisors understand the need for internal organization, which includes adoption of an operations manual. This manual will serve as a model for future potential franchises, governing their daily operations. Be sure to establish a strong internal system of running your company if you haven’t already.
Understanding Your Industry
No business operates in a vacuum, and you need to be realistic about industry challenges. These are some issues to look at:
Is your brand unique? If you are one of a dozen local burger restaurants, you should give considerable thought to how much your brand truly stands out. Competition is huge in any industry, with some being especially cutthroat. Know your brand, further develop it if needed (e.g. by registering trademarks), and understand the role it plays in differentiating your company.
Do your team members have the right experience? As a franchisor, you will be dependent upon leaders within your company to help with franchise sales, training, daily operations, and other matters. Your team members should have the requisite level of industry experience to ensure they can successfully execute their responsibilities.
Meeting industry benchmarks. Success within your business is great, but how does it compare with other businesses in the same industry? As a basic prerequisite to franchising, your company should be at or near the top among competitors. It should also exhibit consistently strong numbers (e.g. gross revenues), not just sporadic years of success.
Well-Positioned for Growth
Becoming a franchisor will take you from the role of business owner to franchise operator. You and your company must be ready to handle the potential growth that a franchise may bring by looking at:
Short- and long-term plans. Consider adopting separate one-, two-, three-, and five year growth strategies. The first two years will be spent on shoring up the foundations of your company mentioned above (e.g. earnings and sound operations). Years three to five are when your company will accelerate its growth so it’s ready to branch out. Having plans in place can manage expectations and encourage your company during challenges.
Know your limits. It is highly unlikely that in the first year of franchising you will be opening hundreds of locations in far-flung places. Franchising is a meticulous process that can often be frustratingly slow. But patience, combined with realistic expectations and planning, are key markers of success.
Handle advice well and wait if necessary. Meeting with a business consultant at some point is a good idea to gauge the franchise readiness of your business. However, the advice you receive may not be what you want to hear. A skilled consultant will objectively and dispassionately review your company’s financials and operations and give you a sober evaluation. If it becomes clear that the business isn’t ready, don’t get discouraged. Keep growing and wait.
When You’re Ready, We Can Address the Legal Issues
If you’re prepared to franchise your business, there are plenty of legal matters to handle. An attorney can guide you in this crucial process so you can be ready for franchising. Give Seder Law’s Business & Corporate Law Team a call today.