Franchising is a clever business model that allows businesses to expand rapidly, because they don’t need to front the capital that they’d usually invest in each new location in order to grow. It’s a naturally symbiotic relationship, where franchisees benefit from the experience, brand, and structure of the franchisor, and the franchisor benefits from the franchisee’s investment.
Of course, franchising isn’t ideal for every industry or every type business. If you’re thinking about becoming a franchisor yourself, there are a couple of important questions you’ll want to answer first. These will help you determine whether this business model is the right choice for you, and what kinds of challenges you’ll face in building your franchise program .
1. Can you afford the initial investment?
Franchising is very cost effective in general, but becoming a franchisor still requires quite a bit of groundwork and investment. You’ll need guidelines and procedures explaining how franchises should operate, legal paperwork, a training program for new partners, possibly a department with dedicated staff to help manage franchisees, and a way to market your new franchise system to possible investors.
If you aren’t adequately prepared to cover these costs, your core business could suffer from dangerous cash flow interruptions. If your business is doing very well you might be able to simply budget for it, otherwise you’ll need to get access to financing. Whatever the case, it’s important to keep control of your budget so that you can prioritise the success of your primary business, because that is the engine that makes all future growth possible.
2. Is your business marketable?
As a business owner, you spend a lot of time marketing and selling your products to your prospective customers. As a franchisor, that product is going to be your business itself. To be successful, you’ll need to attract investors who are willing to not only invest in your business, but to effectively buy into your industry. Your business will need to convey a sense of being an interesting, challenging, and most of all a rewarding place to be in order to engage with your target audience.
Even investors who are impressed by your business may still be resistant to taking the plunge if they feel that running a franchise is going to be too complicated, too risky, or too time consuming for them to manage successfully. In the end, you’ll need to determine for yourself whether and how you can develop a marketing strategy that will attract the investors you need to make your franchising program a success.
3. How much revenue will your franchisees generate?
Once you have an idea of what you’re going to spend on setting up your franchising program, and whether you can market it, it’s time to consider what it’ll take to recoup your investment. Every business is different, so you’ll need to determine how much revenue you can expect your franchises to generate for you annually.
Once you have a figure, you can calculate how many franchises you’ll need to open in order to recover your investment in a set amount of time. Depending on your business, you might be able to make a profit with just one, but industries with narrower profit margins may need to attract many franchise investors just to pay for the franchising infrastructure itself.
4. How accessible is your industry to franchisees?
Getting a franchisee to sign on the dotted line is only the beginning of the journey. Your franchisees are going to represent your brand to the world, and it’s critical that their work lives up to your reputation. To ensure their success, it’s important that your industry is accessible enough that someone without a lot of industry experience will be able to operate it successfully.
The best kinds of franchise opportunities need to be able to bring a return on investment for the franchisee and the parent company without forcing franchisees to spend months or years struggling with a steep learning curve. New franchisees are typically not experienced as entrepreneurs, and usually haven’t spent time working in their franchise’s industry before. If a new franchise can’t get its head above water quickly enough, it might well close down without ever generating any significant amount of revenue. Additionally, its failure would reflect badly on the franchisor, and discourage other potential investors.
If any of these issues are a concern for you, don’t be discouraged. Few businesses are completely ideal for franchising, and seeing a bump in the road doesn’t mean that you have to abandon your dreams of building a successful program. Rather, you can use that information to build your program in a way that explicitly addresses any weaknesses. If financing concerns are holding you back, Fifo Capital can help! Give us a call to chat with a knowledgeable representative about how you can get access to the funds you need for your project. We also operate a very successful franchise system ourselves.
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