How to know if your business is ready for franchising

The following article was written by Abigail Ingram, executive director of the Polsky Exchange.

Many business owners express interest in franchising their businesses, and it is easy to understand the appeal: a franchise appears to be a clone of your business that you get paid for and do not have to run. But as you might expect, the process is not as simple as it may seem and not every business is ready, or even able, to become a franchise.

There are a number of ways you can assess your business’ franchise readiness to see if it is the appropriate route to take.

Baseline for franchise readiness

Any business considering franchising needs to have the following four baseline accomplishments in order to replicate via franchise:

  • Business is growing with demand that outstrips the business’ ability to supply. There needs to be an obvious market that a franchise of the business would serve.
  • Determine if the business is franchisable. Evaluate its financial performance (1-5 years depending on the industry) over time. Cash flow is good. If the business is not profitable, franchisees will not buy. Since most franchises are less profitable than the original business due to startup costs – like the franchise fee, supplies, and location – profitability is essential. Franchisees need to know the return on investment (ROI) to expect on their initial costs and an estimated amount of net profit to expect monthly and annually.
  • Strong brand recognition. Brand equity needs to be built before franchising to attract buyers and their customers. A no-name brand is harder to sell to a franchisee, and it will be harder for the franchisee to sell to customers if there is no brand recognition. Understanding the industry is critical when deciding to franchise.
  • Optimized operations. Franchisors need to be prepared to teach a franchisee how to replicate their business model exactly and make a compelling argument that the business has identified and perfected the best model of all similar operators.

Cost to franchise

Prior to franchising, the business has to be well capitalized. The cost can be astrononmical. Franchising is a cost before it is a revenue stream and the business will need to have budget for a few necessary items.

IP protections and cybersecurity. The business will need to protect, through registration, its brand (trademark), materials (copyright), any unique software (copyright), and inventions (patent). For intellectual property that the business cannot register, or does not want to register, the business will have to treat it as a “trade secret.” This means showing reasonable measures to keep secrets secret, including strong cybersecurity measures that prevent any loss or unintentional sharing of information along with staff training in cybersecurity.

Consultants or staff time to capture optimized operations. The how-to manuals, operation plans, business plan, etc., have to be developed to be user-friendly for franchisees.

Franchise lawyer. Attorneys should review the corporate structure and draft and negotiate contracts for franchisees, as well as audit and protect the business’ intellectual property.

Other hired help. You may wish to engage a franchise broker to find buyers. If you have a target list of potential franchisees already, the business will retain the 40-50% of the franchise fee that would otherwise go to the broker. Brokers may also ask for a percentage of the ongoing royalty rate that would otherwise go to the franchisor.

A note on franchise brokers: some may have certifications, like the certified franchise consultant certification (CFC) through the International Franchise Professional Group (IFPG). These professionals will ask questions like: What are your sales? How much do YOU, the owner, make? What is your cash flow and how much can a franchisee make? What ROI can they expect? As the owner, expect to have answers to those questions ready.

How the CEO’s job will change

Most CEOs are unofficial chief sales officers, i.e. the primary rainmakers for their businesses, and also often manage employees and set strategy for the business. For CEOs still mired in operations, a middle management workforce may have to be developed before franchising. Once the first franchise is sold, the CEO is now responsible for supporting the new location’s leadership and helping them navigate the business model toward success.

Most franchisees do their due diligence and decide to purchase a franchise on the basis of speaking to other franchisees. For the first few franchises, the CEO needs to ensure that they are working well within the model that the business promised. Only their success and happiness will lead to more franchises, and the CEO’s customers are no longer the customers served by the businesses – but the franchisees.

If the CEO does not want to deal with franchisees, a hire will have to be made to manage the needs, questions, and problems of franchisees. This role most frequently falls to the CEO instead of another employee because the CEO has the most immediate answers for the franchisees.

What has to go right

In brief, a franchise-ready business will have the above baseline requirements exceeded, will see clear market demand for replicating the business, and will know people who want to run a copy of the business. Business owners need the right people to purchase the franchise to ensure success and to avoid damage to the brand. Franchise owners will become the primary customers whom the business owner now needs to serve.

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