Five Requirements for a Successful Franchise Model
Lately, it seems as if everyone is franchising their business. In fact, according to Franchise Consultants, Inc., a new franchised business opens every eight minutes of every business day. You can get your cat groomed, your poop scooped, or your dog walked; a hotdog, pizza, salad, tacos, yogurt, ice cream, or fondue; your hair cut, nails trimmed, back rubbed, body tanned, or waist whittled; your radiator lubed, tires rotated, car painted, battery changed; kids tutored, teenagers prepped for college, grandma babysat; carpets cleaned, basement finished, lawn trimmed, windows wiped, pipes drained and you can even do your taxes -- all from a franchised business.
While it is impossible to determine if a business would make a good franchise without doing a significant amount of analysis, here are five criteria I suggest to help determine if your business is franchisable.
A Compelling ROI: This is the key factor -- without a proven and strong economic model, there is no point in going any further. Business owners will be looking at a minimum 15 percent ROI (Return on Investment), so if your business has an initial investment of $200,000, a franchisee would be looking for a minimum of $30,000 in profits by the end of the second or third year. Also, keep in mind that a franchisee has to pay royalties, so that $30,000 is harder to come by for a franchisee than it is for a non-franchised business.
A Successful Base Model: A compelling ROI in a single unit of business is not enough to warrant franchising. It is often difficult to replicate the success of a single unit, where the owner is passionate and very hands-on with the business. Therefore, it is important to test your concept in at least three locations, preferably more. If you can show that your business is successful in varying markets where demographics, real estate, employees, customers, etc., are different, then you have a much greater chance of offering a potentially successful franchise.
A Strong Operational System: All successful businesses have systems in place to ensure the consistency of their offering and the management of their operations. The key to a successful franchise, however, is to have proven systems in writing that can be taught to franchisees. A franchisor needs to communicate to its franchisees all of the operational tools and systems needed to run a successful business. These include systems and forms for recruiting, training, marketing, operations, finances, purchasing, and virtually every other aspect of running the business.
Access to Capital: While franchising is much less capital-intensive than other means of growing a business, it does require adequate capital to launch and manage the franchise program. There are significant legal fees to create the required disclosure documents, and you will want to create compelling collateral materials to entice a potential franchisee to your system. You will also need a budget for marketing the opportunity, and you will need a support staff to help your franchisees run their businesses. Chances are you will also want to create a website and perhaps some other computer systems to manage the growing business. Franchising is definitely not a good option for a company that is financially strapped.
A Commitment to Long-Term Relationships: Franchising is really all about relationships, and most franchise agreements are 10 years in length, so you should be sure you are committed to long-term relationships -- both good and bad. Tension is inherent in the franchisor/franchisee relationship, so a strong resolve, good leadership, effective management, and two-way communications are critical in order to be a successful franchisor.
Franchising is definitely not for everyone or every business, but if your business meets all the criteria above, you could want to consider becoming a franchisor. I highly recommend getting a franchise expert to help you further analyze your business and its franchisability.