Are you thinking about franchising to expand your business? If you are ready for more success, opening up multiple locations is an option for scaling up. It boosts the reach of your brand, market share, and profits.
But franchising isn’t easy. When I franchised my business as a home-based service concept, I learned what it takes to be a successful franchisor. Though I researched and prepared extensively, the realities of managing a franchise system were full of surprises.
Based on my experiences, here are 7 ways to know if your small business is ready to expand with franchising.
1. Solid financials and metrics
You’ve been successful in selling your products or services. As a franchisor, get ready to sell the potential of your business as an investment. Take a look at your financial statements and metrics from the point of view of an outsider. What are your profit margins? Do you have seasonal fluctuations? Do they jump up and down from year to year?
Also, how much money are you drawing out as personal income? Showing that your business has been consistently profitable and can generate a decent salary makes your company an appealing opportunity for franchisees.
2. There is market potential
Is there wide demand for what your company does? Consider the potential for franchising the success of your business across your region, the country, and around the world. If you offer a niche service that depends on certain market conditions, that limits your ability to expand. Or if you are in a sector which is trending down or in decline, then there is no market potential for franchisees.
3. You have a trademarked brand
Franchising is all about recognition, which requires the duplication of a name and logo. If your branding has been trademarked, then you have a protected asset you can licence in a franchise agreement. If you haven’t, then it’s time to research. Beware of any similarities between your name and logo with large, established companies. Solid businesses have been ruined by costly legal fights with litigious corporations who issued cease and desist orders to protect their brand.
4. Your business runs without you
Does your team handle all the day to day operations? If you are still involved in hiring and training staff, managing suppliers, or taking care of customers, then your business is not ready to franchise. There are a couple of reasons for this. First, if you haven’t yet taught staff how to run all the ins and outs of your business, how will you teach franchisees?
And also, franchising is a big commitment, requiring a range of skills. There is marketing, lead gen, evaluation, training, and support. If you are still responsible for every day activities, there is no room or scope for managing franchisees.
5. You have a manual
Every business has systems, policies, and procedures. But only a business which has fully documented them into a manual is ready to expand with franchising. New franchisees must have access to a manual. It’s their guide on what to do in any given situation. Every single task, activity, and behaviour must be set out in detail. This isn’t just for them to know what to do; it’s also your way to ensure that your brand and concept is being run exactly like you want.
The whole concept of franchising is about duplication and consistency. We walk into any chain store or restaurant because we know what to expect. This is controlled by the manual, which franchisees agree to follow as part of the legal agreement of joining your system.
If you are thinking about franchising, start documenting every aspect of running your business. Don’t assume that someone will handle things the way you would. Remember that as a new system, franchisees don’t know your brand, your business, and how things are done.
6. You have lots of cash. And can get more.
What they say about home renovations is true for franchising. It will cost more, and take more time than you think it will. Depending on your business sector, franchise fee, and royalty structure, it may not be until you have 6-8 franchisees up and running before generating the income to support the cost of running a franchise system.
In the meantime, you’ll need cash, and be able to access lots more to cover the costs of legal fees, marketing, training, and support.
Review your financials with your accountant to measure how much operating cash flow you have available to invest into franchising. And talk to your bank about a loan or line of credit.
7. You are comfortable being hands off
Do you have a hard time delegating? If you have a struggle with letting go of control, then you are not ready for franchising. As franchisor, you set the direction of the brand, and make strategic decisions. But your franchisees invested in your concept so they could run a business, and they expect you to be hands off.
Which means if they want to hire their brother in law whom you immediately dislike, too bad. As long as the manual is being followed, you don’t have a say in hiring decisions.
To conclude, franchising is a well-established method for business expansion. After all, there are almost 800,000 franchises operating in the United States alone. However, it takes more than business success for an entrepreneur to become a franchisor. Strong financials, documentation, capital, a skilled management team, and the right mindset are necessary.
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