The 2 Most Important Steps in Deciding If Franchising Is a Good Fit for You

Just because a particular business can be franchised doesn’t mean it should be franchised. As a business strategy, franchising is a tool designed to help business owners reach more aggressive expansion goals. If your goals exceed your current grasp, you need to find a way to leverage your business to meet those goals — or you need to redefine your goals. And often, when aggressive growth goals are involved, franchising is the best answer.

1. Defining Personal Goals

Whenever I meet with an entrepreneur interested in franchising, I ask, “Where do you want to be in five years?” To determine which growth strategy is best for you, you need to determine three things: your personal goals of ownership, the assets (both human and capital) you can devote to achieving those goals, and the time frame within which you hope to accomplish them. Armed with that knowledge, the strategy you’ll choose is often just a matter of plugging in the numbers.

Start by asking yourself where you want to be in five years. You need to be specific, and you should ideally have a reason. Do you still want to be working in the business? Do you want to sell the business? Or are you looking to pass this company on to your heirs? If you’re looking to cash out, how much money is “enough” — not only for the time and effort you’ll have devoted to developing the business, but for you to move on with the next phase of your life? And if you want to hold on to your business, how much would you like to be earning at a certain point in the future?

The next step is to determine where the business is now. How well defined is the concept? How much money is it currently making, and what’s the current value of the business? What are its financial and human resources? How strong is the management team? Is it ready for expansion?

Once you have these answers, you can measure the distance between your current reality and the goal you’ve set. And that distance, combined with an understanding of your goals, capabilities, and time frame, will dictate your strategy.

2. Evaluating Risk

Before making a decision to move ahead, you’d be well-advised to examine what your competition is doing in the marketplace — essentially you’re measuring risk. Quantifying risk involves an analysis of those factors most likely to be responsible for franchise failure. The big three are market, money, and management temperament. Before finalizing your decision, you should be sure you understand the factors that will influence your success or failure.

Market: When examining the market into which you’re expanding, you should look at the sustainability of demand, differentiation of your concept, and existing and potential competitors. If you’re going to go head-to-head with entrenched competitors in a mature industry, you’ll need to get your franchise concept as close to perfect as possible before entering the franchise marketplace. Furthermore, before you consider franchising, you need a strong track record of successful operation. You must be able to offer potential franchisees advantages at least comparable to, if not better than, those offered by your competitors.

On the other hand, if you have a concept that’s new to the market or has a unique niche, you’ll need to move quickly to capitalize on it. Given the availability of information in the internet age, your points of difference will rapidly find their way online. So if you play it conservative and wait until everything’s just right to franchise, you may find that instead of being first to franchise the concept, you’re third or fourth — or worse! Lots of people with money and business know-how are looking for bright new ideas that someone else has taken the time and effort to test in the marketplace. So while you’re meticulously developing that last new recipe, product, or service that will perfect your business, your competitor may be quickly developing a franchise concept based on yours that will leave you standing in their dust.

In making a decision about market risk, the essential lesson is that there are two kinds of risk. The first, which we call concept risk, reflects the risk associated with franchising before you’ve perfected the concept. The longer the concept runs and the longer your track record, the more you reduce this risk. The more company-owned locations you run, the more you reduce this risk — both by obtaining more information on what works and by improving cash flows that may be needed to support your early franchise efforts.

This risk, however, is offset by the risk we call competitive threat. The longer you wait to expand aggressively (whether through franchising or another means), the longer you leave an opportunity for a competitor to run with your concept. The sooner they get to the franchise market before you, the more likely it is they’ll be perceived as the market leader.

From a purely economic standpoint, when concept risk is greater than competitive threat, you should wait before you franchise. And when the reverse is true, you should franchise before you spend time and resources on growth or model refinement.

Capital: Another component of the risk equation is capital. While franchising is certainly a low-cost means of expansion, it’s not a no-cost means of expansion. So the amount of capital you can devote to your franchise expansion efforts will impact your risk — not only from the standpoint of the total amount you are risking, but in terms of the riskiness of the decision itself.

If you go into a business undercapitalized and don’t have the capital needed to properly support your franchisees, you increase your risk of franchisee failure, challenged franchisee relationships, and litigation. The best strategy is always to get the advice of experts on the costs you may incur and be sure you’re adequately capitalized before jumping into franchising.

Management Temperament: Perhaps just as important as understanding goals and risks is to evaluate your temperament as a potential franchisor. Not everyone is well-suited for franchising. Some business owners find it difficult to deal with franchisees; as independent business owners, they require a different management style than you might use with corporate employees. Franchisees aren’t employees, and if you treat them as such, conflict is sure to follow. Successful franchisors know how to motivate and lead their franchisees, and they enjoy the day-to-day interactions with them. This leadership requires that franchisors establish a high degree of credibility with their franchisees. And not every successful entrepreneur is capable of or willing to devote the energy toward this important task.

One of the most important things to remember is that franchising is the business of selling and servicing franchisees, and your first and most important priority in that business must be to make your franchisees successful.

Franchisees need a good sense of direction — not several. So if you’re the type of entrepreneur who likes to turn frequently on a dime, your capricious nature may not be appreciated by your franchisees. Today’s franchisees are looking for a collaborative relationship that requires the franchisor to provide strong leadership. And to do that, you must truly listen to what your franchisees have to say and provide for open and frequent communication.

Finally, keep in mind that as a new franchisors, you’ll have many demands on your time, and if you meet that demand by taking time away from your existing operations, you may find you’re robbing Peter to pay Paul. If the core business suffers, the cash flow supporting the franchise program may be reduced — causing your new business to suffer as well.

Source: entrepreneur.com