One of the most common questions we get from business owners is whether their business is right for franchising. On its face, franchising can seem like an excellent way to expand utilizing the capital and talents of qualified third parties. And for those that do it right, it is! That said, entering into franchise relationships takes a considerable investment in time, talent, and money, and we initially have many conversations with our clients about whether they are willing to invest accordingly.
Here are some of the questions we go over with our clients when we help them consider whether franchising is the right growth strategy for them:
1. What is your stickiness factor? We believe this is one of the biggest threshold questions that needs to be answered. Take a moment to consider a typical franchise relationship. A franchisee is considering getting into business, but doesn’t necessarily have the know-how to do it on their own. The franchisor teaches the franchisee everything they know about the business up front, and the franchisee thereafter pays a royalty throughout the entire term of their relationship in exchange for operating as part of the franchise system. As years go by, it is a common feeling for franchisees to feel that they are paying a royalty for things they already know, since it has been taught to them from the start. The best franchise systems have a common proprietary element that operators cannot get somewhere else and continues to tie the network together past the initial “honeymoon” period – whether it be a literal secret sauce (or proprietary recipe), a technology platform that allows the business to operate and is not available elsewhere, a product or series of products that have been developed for the system, or some other proprietary element. Consider whether, outside of the brand name, your business has this stickiness factor and if not, whether you can develop one before launching!
2. Do you have a proven model? Brands often develop as they learn over time. Many business owners launch their first location with a set of ideas and assumptions, that they later learn may or may not have been correct. Most entrepreneurs that we work with tell us that if they knew when they started what they know now, they would have _______ (fill in the blank: leased a bigger space, leased a smaller space, added a different service element, simplified their menu, worked with different vendors, offered a different pricing model).
This experience is exactly what franchisees are paying for when they enter the system. That said, a good franchisor will actually build-out and test what they consider to be the actual franchise “model” location. The model is, in a vacuum, the ideal set of circumstances that a business under the brand should have to operate – size, location, services, pricing, etc. Although companies aren’t required to have a model location actually established to begin franchising, it certainly helps franchisors provide relevant information to their franchisees, and also have a showcase location to show and train franchisees and prospective franchisees.
3. Industry Trends and Competition. Piggybacking off of the idea of having a proven model, good franchisors also have a brand that is differentiated in its market and poised for growth. When considering whether to buy a franchise, franchisees will ask the franchisor why they should buy into their brand. Whether it’s a new type of offering in the industry, or whether the franchisor has a new approach to go to market, franchisors should consider what makes them different and worth buying into. And, since a big part of a franchisor’s success is the long-term success of a franchisee, the franchisor should also feel confident that their concept has the staying power to be successful in the marketplace, despite industry trends and changes in the competitive landscape, through the long-term franchise relationship.
4. Are You Willing to Get Into the People Business? Franchising is about relationships. Although a contract ultimately governs the legal obligations of the parties, the majority of the relationship between a franchisor and franchisee is established by trust, communication, processes, and problem resolution. Without these elements, franchisors are rarely successful in getting buy-in from their franchisees, and ultimately, selling new franchises.
Before franchising, the company is `first a business owner and expert in the industry in which they operate. Their customers are the people who buy their product or service. Many franchisors are required to shift their way of thinking to focus on their new customers – their franchisees – and concentrate time and effort on managing franchise relationships.
5. Are You Up For Investing Into Your System? As we hopefully have hammered home in the above, launching and growing a franchise system does take an investment of capital, know-how, and talent. In order to properly establish appropriate systems, technology, and support structures, most start-up franchisors are required to hire team members and bring on new technology and systems that come at a cost. At a minimum, we recommend that franchisors, either internally or externally through vendors, have a plan for the following functionalities: executive leadership (overseeing and adapting the brand), franchise sales and development, marketing and advertising support, compliance, and business coaching and support. Some of these roles may be played by the same individuals at first, but we do recommend that the franchisor establish a plan to cover these needs with individuals with the appropriate skill sets.
6. How Is Your Endurance? Franchise agreements are typically longer-term agreements, as franchisees want to ensure they have time to obtain a return on their initial investment in establishing their business. Common agreement terms are between 5 to 10 years, with rights to renew the agreement for ongoing additional 5 to 10 year periods. Once a franchisor signs one of these agreements, they are contractually obligated for the long haul. Although there are always exit strategies that franchisors can pursue, absent divesting, a franchisor will be tied to the system and the brand for the long-term. We often counsel our clients to consider this and where they are at in their career, goals, and personal lives – and ensure that they have the stamina and energy to lead the system and perform their obligations as may be required.