Many owners of successful businesses have asked themselves if their operations could be converted into a franchise model and duplicate that success. You see so many successful franchise networks every day and wonder how hard is it to set up and how quickly can you start accumulating wealth?
In this 3 part blog series on franchising, I will explore why or why not franchising might be the right route, is your business a good candidate for franchising and what are some alternatives, and finally, how professional advice is critical is making the right decision. These blogs are based on a Welch LLP webinar I participated in with Ned Levitt, Partner, Dickinson Wright LLP.
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What are the positive points of converting your business to a franchise model? First, I should say that the statements to follow relate to the “potential” benefits of franchise systems. Franchise models can represent a quicker growth curve, less up front capital requirements, and a better return on capital. As the franchise system grows, the franchisor will gain greater leverage securing preferred locations, increased group buying power, and a diversification of risk among a larger group. Through careful screening and selection, you can develop a group of franchise owners with more commitment than you would typically find in team of store managers.
Alternatively, from the franchisee’s perspective, a franchise that is based on a successful model represents less risk than starting an independent business. It is the fastest and safest way to become a business owner. They become part of your larger marketing program, larger buying pool, the beneficiary of corporate R&D, and participate in your proven and profitable systems. What are some pitfalls of franchising your business? Due diligence is the main take away here.
You must understand the capital requirements at the buy-in stage and throughout the operating stage. You need to know the franchise is a proven system and strong enough to get the best locations.
You must have your operating systems codified and your brand legally secured. You must be prepared for the level of commitment required to get the franchisor structure in place and the effort required to bring on new franchisees. During the initial growth phase, there is significant risk on the franchisor to have a complete package available whether you have one or five franchisees signed up. A general rule of thumb is that you will not begin to effectively share the risk and have a reasonable recovery of your overheads as a franchisor until you have at least 10 franchisees. The pressure is on you to create growth early.
One significant pitfall is lack of understanding about what makes a good franchise and whether your business meets the criteria. In the next 2 blog entries, I will look at whether your business is franchise ready and what behind the scenes help you are going to need.
Kathy Steffan, CPA, CA