I want to dispel one of the great lies of franchising: the low cost of launching a franchise system.
Here at the Franchise GrowthLab, we are on a mission to discover why so many franchisors fail. One of the main reasons is a lack of funding at launch.
Too often I hear consultants advise: “All you need is an operations manual and a Franchise Disclosure document.” Or, “you need about $25k to $75k in capital to launch your franchise system.”
Are you kidding me? Have these franchising consultants ever launched their own franchise system? (Almost never). Have they been in the trenches, struggling to sell their third and fourth location? No way. If they had, they would know that it takes a lot more than $50k to do it.
Sure, you can launch with just $50k. But let’s look at the track record of franchise start-ups. Only 30% grow beyond 10 units in the first 10 years of franchising, and 60% never sell a single franchise in their first two years! In my opinion, if you only have 10 units, you aren’t a very successful franchisor. You would likely be making far more money if you had stayed with your original corporate units instead of embarking on franchising.
If you ask most successful founders who have grown a brand over a 100 units, most would likely suggest launching with $1 million in funding. That’s a big difference from what many franchising consultants will tell you!
However, it is just not reasonable for most emerging franchisors to start with that much franchise capital; and hey, I did it with much less! So how much is the right amount?
Let’s look at the costs that I deem as basic “get in the game” costs to franchise a business:
One. Franchise Capital – Building your brand so you look like 100 units instead of 1 unit:
We talked about this in “The 3 MUST-HAVE Habits New Franchisors Need to Nail from Day #1. ” Many franchisors come to us at the Franchise GrowthLab for our Hartify Method for Franchise Sales and Development. Once we assess their brand and its potential, we often think “this brand looks small.”
Your brand needs to be polished and world class. You might only have one location, but you better look AND act like you have 100! Most founders aren’t brand experts. This requires some investment to beef up your brand so you are highly differentiated in both the consumer marketplace (to help your franchisees acquire customers) and in the franchisor marketplace (to sell franchises).
Cost: $5k to $40k
Tip: it is astonishing how many franchisors launch without a Brand Guide. Don’t make this mistake
Two. Your Operations Manual:
This is a “must-have” system for franchisors. I have seen operation manuals range from 30 to 400 pages and most are full of boilerplate information that at the end of the day is useless to the franchisee actually operating their new business.
If you take the time to write a truly useful document that packages your most important systems in a clear, concise and detailed manner, the true value of the Operations Manual is:
· In the Standard Operating Procedures, checklists, and step-by-step procedures for your most essential, non-negotiable systems;
· How it forms the basis for your subsequent onboarding and training programs;
· How you ensure your franchisees comply with your brand and your franchise agreement.
You can write your own manuals. That’s what I did, but it took me a full year, allocating every Friday morning to writing. If you have the time and the ability to write your own, great. But looking back, it would have been smarter to have used that time to keep driving franchise sales instead. Most franchisors can’t or don’t want to write ops manuals, and tend to outsource this function. The costs and quality vary wildly. Nonetheless, you must have an Operations Manual, so you need to make an investment here. Choose wisely.
Cost: $15k to $25k
Three. Build a training program that actually teaches:
If the Operation Manuals are the warm up, the Franchisee Training Program is game time. The Ops Manual process lays the groundwork for your franchisee training process, so these two shouldn’t be done in silos. Make sure whoever writes your manuals also has a big hand in shaping your training process as well.
I find that very few founders make good trainers. I certainly do not have this skillset. It drives me crazy – I simply don’t have the patience that a strong trainer requires. Nor do I truly understand how to train someone properly. What I do know, is that it is about getting super clear and detailed on your must-have systems, and then building the program to suit.
A good training program can make or break your franchisees, so you don’t want to get this one wrong. Down the road, you will be so happy when your franchisees hit break-even 6 months faster because they were trained on the right things, at the right time, in the right way. Spend some money here if you have it and can.
Cost: $10k to $25k
This is one unavoidable step every franchisor must take. You cannot be a franchisor without a franchise agreement and franchise disclosure, which is required in many states and provinces (and is federally regulated in the USA).
Here, I come across two problems repeatedly:
o A franchisor tries to save money by patching together a bunch of disclosure documents from other organizations and then gets a cheap, often non-franchise lawyer to pull the documents together. Do not do this: I repeat, do not attempt this or it will cost you, I guarantee it;
o The document is so boilerplate and dry that most of the items are ignored and never get operationalized by the franchisee.
At the Franchise Growth Lab, we often become quite involved in the franchise agreement process with our clients. These documents must contain the most important elements of the operations (so we typically begin after we have a good, solid handle on the operation manuals). Then we insert the proper “Must-Have” operational standards into the document, and finally we build a compliance program around these Must-Have operational items so it is clear to everyone what it means, why do it, and how it will impact a franchisee if it doesn’t happen. Imagine if you had had that in place when you started your original company?
The cost range reflects the counsel you select (some are more expensive than others and are usually worth it) how many states you will register in, whether you are working with a consultant like Franchise GrowthLab [ND2] who will lay the groundwork for your counsel to develop into an FDD, and whether you require trademark searches (and in which countries).
Cost: $25k to $50k
Five. A marketing system:
After we hit our first plateau around the 25-unit mark, it became clear that as a franchisor, we had to become a marketing machine. We almost had to become a full-fledged marketing company because the most difficult part about building most businesses, especially service businesses that do not have a physical storefront location, is driving leads. So, you better have a kickass marketing system that drives customer leads to your franchisees.
Your franchisees will ask you how big their business can be? Your answer: “If you spend $3,000 per month on these 2 marketing channels, you will generate approximately 100 leads, 40 % of which you will convert (higher if you are really good at our conversion systems) so you will add 40 new qualified prospects per month.”
Now that is a marketing system.
Have you thoroughly tested all of the marketing and lead generation channels that you expect your franchisees to implement? Do you have data and metrics to coach/manage these channels? Do you know exactly how much franchisees will need to spend at launch and per month post-launch to achieve the desired results? Do you have a digital marketing playbook for your brand?
Given everything I’ve learned over the years, if I were starting a new franchise system today, this is where most of my $1-million start-up budget would go.
COST: $10k to $100k
Six. The Pre-Opening Marketing System: $5k to $20k
To get a bit more granular, all of our clients have heard my next bit of advice “If I could do it ALL over again, I would spend most, if not all of my time perfecting the Pre-Opening systems so that by the time our franchise partners launched, they were so full of customers/clients that on opening day they all say “enough! I can’t take any more!” This is why we spend a lot of our consulting time on both our Hartify Method for New Franchise Launch and our Hartify Method for Coaching, Operations & Support. If you get this right, your life as a franchisor will be smooth sailing.
Seven. Legal: $15k to $50k
This is one of the steps that every franchisor has to take. You obviously cannot be a franchisor without a franchise agreement and franchise disclosure, which is required in many states and provinces (and is federally regulated in the USA).
I see two problems over and over:
o A franchisor tries to save money by patching together a bunch of disclosure documents from other organization and then gets a cheap, often non-franchise lawyer to put the documents together, or
o The document is so boilerplate that most of the items never get operationalized.
We often become quite involved in the Franchise agreement process with our clients. These documents must contain the most important elements of the operations (so we typically begin after we have a good, solid handle on the operation manuals). Now we can insert the proper “Must Have” operational standards into the document, and then we can build an entire compliance program around these Must Have operational items so it is clear to everyone what it means, why we do it, and how it will impact a franchisee if it doesn’t happen. Imagine if you had that in place when you started your company?
The cost range reflects the counsel you select (some are more expensive than others AND WORTH IT) how many states you will register in, if you are working with a consultant like Hartify Franchise Consulting who will lay the groundwork for your counsel to develop into an FDD, and whether you require trademark searches (and in which countries).
Ok. That is a handful already. We are already between $65k to $325k to franchise your business the right way. We have five more components to go, but some of them are doozies. I think I’m going to stop here and continue the rest of the list in part 2. Stay tuned!