When it comes to franchising, if any well-established business has proven systems, it — theoretically — can be franchised. But just because you can do something doesn’t necessarily mean you should. A business must have certain characteristics and qualities to be considered for franchising.
1. A proven business model: Before turning your business into a franchise, you must first have an initial pilot or prototype concept that has a proven record of success. If you just have a concept and haven’t put it to the test, then you have no way to show investors your franchise opportunity is sustainable.
2. Marketability: If your business is marketable, it’ll likely appeal to investors who are looking to invest in a franchise. A franchise is only marketable if it has proven systems, a strong brand and a path to profitability for investors.
3. An ability to replicate success: The third quality to look for is whether your business can be replicated over and over again. Ask yourself: Can the average, business-minded person learn to operate your business in less than three months? Do you have systems already in place that will accommodate rapid expansion? How well have you documented all the operating procedures for your playbook? If only an expert in the field can manage your business and keep it operational, then it most likely isn’t a good candidate for a franchise concept.
4. Strong returns on investment: Next, look at your ROI. In the current market, a business should ideally generate a net operating income of 15% to 20% after deductions like royalties and payroll. When you consider royalties can run anywhere from 4% to 8%, you have to have a pretty considerable ROI to be successful. It’s also important to have an understanding of the time it will take your franchisees to see a return on their investment so you can manage their expectations.
5. Support and Training: Lastly, does your business concept require a lot of support? As the franchisor, you’ll be responsible for providing training. It’s important to know how much support you’ll need to provide each franchise owner to help them achieve success.
If you believe your business is a viable franchise opportunity for investors, there’s a process you’ll need to follow and steps you have to take to make it official. I recommend working with experts in franchise development to help you navigate this process and the legal implications of becoming a franchisor.
1. Design your franchise model. Your first step will be to determine your franchise business model and franchise offering. The key factors to consider are:
The initial documents that you create will impact long-term profitability. Although the difference between a 4% vs. a 5% royalty might seem minimal at the initial stage, with multiple franchises and over time, that single percent can impact your overall profitability.
2. Register as a franchisor. After you’ve finalized your franchise disclosure document and franchise agreement, you’ll need to submit it to the Federal Trade Commission. You may start to sell your franchise immediately in those states that don’t require notice or registration. That being said, 13 states do require registration, so you have to file under the states’ statutes. Be forewarned that sometimes it can take quite a bit of time to receive approval for state registration.
3. Interview and hire the right team. It takes a lot of energy and creativity to run your business while successfully selling your franchise opportunity. Adding competent managers to help with franchisee relations can keep things running optimally. A trainer, for example, can help keep franchisees on track and make them feel supported, while a good salesperson can help answer questions from potential franchisees. If your franchisees are required to buy supplies, having someone track orders and ship them is the best way to stay on top of everything. Remember, the most successful business owners know how to delegate. Work on delegating essential parts of your process to experienced talent.
If you spread yourself too thin to save money or because you believe that you must do everything yourself, it can end up hurting your profitability. If your success starts to dip, not only could you lose money but also your business could end up looking less attractive to possible franchise investors. That’s particularly true of training staff. If your franchisees can’t correctly implement the system, they shouldn’t own your franchise.
4. Sell your franchises. Now is the time to toot your own horn and target entrepreneurs looking for franchise opportunities. Franchisees will be putting their assets up for grabs to buy into your franchise, so you have to know how to sell it and get potential investors excited about the opportunity. Devise a good marketing strategy with a compelling story to lend credibility to your brand and create trust with prospective franchise owners.
If you’re wondering whether your business is franchisable, take the time to do a thorough evaluation. If you conclude that it is, keep these tips in mind to help set the process up for success.
Author: Seth Lederman
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