If you have a successful retail store, restaurant, or local service, you've probably asked yourself: Could this be a franchise?
Franchising your business as a way to grow has clear advantages over simply expanding. You don't need to raise capital to open new locations. You don't have to cope with managing staff at one or more locations where you can't be present most of the time. And you get to share the risk: If a franchise location fails, you're not left explaining to creditors what went wrong.
But not every concept can make a good franchise, according to Shelly Sun, author of Grow Smart, Risk Less: A Low-Capital Path to Multiplying Your Business Through Franchising. Her healthcare agency BrightStar is now a franchise with more than 250 locations, and an Inc. 500 company. To find out if your small business could have the same kind of success, she recommends asking these questions:
1. Is demand for your product or service growing or shrinking overall?
Your business could be doing great, with customers lined up out the door. But if the reason you're so successful is that you run the only typewriter repair shop in a 500-mile radius, you likely don't have a rosy future as a franchisor. "You really have to understand the industry, and how it's trending," Sun says.
It's also important to understand the geographic side of your industry and how that breaks down both in terms of demand and of the labor market. There may be great demand for an all-night convenience store in a wealthy suburb populated by senior citizens, but finding the people to staff it might pose an insurmountable challenge.
Speaking of geography, make sure to trademark your brand, which will make it yours at the national level, she adds. "As a small, local business, you may not have to protect your intellectual property and every iteration of your URL," she says. "As you're thinking about expanding, the sooner you do that the better." She's encountered many hapless entrepreneurs who tried to launch a franchise with their company name only to find someone else had the same name in a different region. "You're going to ask franchisees to put that name on their signs and brochures. You've got to have ownership of it."
2. Who are your competitor franchises and what do they charge franchisees?
"All successful business owners believe they don't have competition because their offerings are the best," Sun says. But if there truly were no competition for a prospective franchise, that would make her nervous, she says. "I don't want to be the first one into something."
Once you've identified your competitors, the real work begins. Find out which geographies your competitors are in. Use a franchise information service to obtain their franchise documents and find out exactly what services they offer and what fees they charge to franchisees.
Just because there are lots of competitors doesn't mean you're dead in the water, Sun adds. It goes back to question number one about understanding your industry. "There are 64 franchises in senior care," she says. "That doesn't worry me at all, given the rate at which the market is growing."
Instead, figure out how you'll differentiate yourself from the competition. "You can offer the best quality, the best service, or the best price," she says. "At most, two out of those three will apply."
3. Will your concept appeal to franchisees?
"You have to understand prospective franchisees and offer something people would feel proud about, and that they can see themselves doing," Sun says. In the case of BrightStar, prospective franchisees may have struggled to find care for an aging parent, and can see how providing that service would make a positive difference in their communities.
"Many people can see themselves running a bed and breakfast," Sun adds. "If it's something people can see themselves doing, it's an easier model. I know there's a 1-800-Autopsy franchise but I don't know how that works because I can't see myself in that business."
4. Will the business model work for everyone involved?
"You have to make sure you've got a solid business model, not just at the franchisor level, but also at the franchisee level," Sun says. "So once you've assessed your competitor franchises, take your own business model and then add in the fees they charge. You have to make sure the ROI is acceptable from the franchisee's point of view. A lot of franchises are only structured to only make sure the franchisor makes money, but you can't build a sustainable franchise that way."
If you get the business model right, it can be a very compelling proposition to prospective franchisees, she adds. "They don't have to figure out the business model, they're being trained in what to do. They didn't have to spend $30,000 developing their marketing materials and website, they're getting all that stuff for free. They have the opportunity to make more money than the franchisor."