Which expansion path should I take: to franchise or not to franchise?

Should I franchise my business or not? How do I know?  This is one of the most frequently asked questions we get. And the one of most important questions you will need to answer.

A big part of our business is helping entrepreneurs expand into franchising their business.. The call often sounds like this: “I’m still trying to decide if I should franchise my business or expand via more corporate stores. What do you think?

Let me start by saying what I love about franchising. It is the most diversified cash flow stream you could possibly build.  When you are able to build your business  to the magical point where your royalties exceed all of your other costs…and it’s growing…and your costs aren’t growing anywhere near your royalties coming in…oh that is beautiful. But it takes time and a lot of sweat, effort, learning and investment into your business to get to this point.

Franchising is a totally different business than the  one you are running right now. And that means a lot of learning has to happen. And it’s a long road to build the powerful model that I described above. So with that, let’s get into it. Should I franchise, or not?

What are the benefits of franchise your business?

Let’s start with why you would want to franchise. There are so many reasons to do it:

1. Higher scale at a lower cost.

Some people want to start and run a small business; some people want to build an empire and be an Internationally recognized brand.  For those who want to build and empire, franchising is the way to go. Why? Because you can grow a lot faster with a lot less capital. How? Well, once you prove your model, and build all of the systems to execute on that model, then it becomes about finding the right franchisee to execute on your model. The right franchisee will have the capital and the attributes it takes to be successful in your business. So you grow but get to grow by the franchisee’s capital, not your own capital. If you want to build a 100 unit chain across the country, it would take you tens of millions of $$  and years and years and years to do so on your own. With franchising? It might take you less than a million $$’s and you might be able to achieve that number in 5 years. Franchising is the ultimate leverage. That is the power of franchising.

2. You can build a powerful brand and realize your vision as an entrepreneur

With higher scale comes higher recognition. Brand power can be achieved, and when brand power is achieved, it can accelerate success. Why? Because people want to go to a recognized brand. And so the more your brand is known, often the more business you will get.

3. Consistent diversified cash flow

When you have a lot of franchisees spread out across the Country in different markets (and different countries), your business is protected from fluctuations of local economies. Then add in the fact that every business pays you a monthly (or semi monthly) royalty whether their business goes up or down, and you have a really great business model. Then, if you can help your franchisees grow their business? That royalty just continues to go up and up. Add more locations every year? Yup, the royalty just keeps growing. And coming every month.

As you scale, for say, every $.25 investment you put into the franchise business? You should get $1 out. Now that’s a good investment and a great business.

4. Increase your chances for a successful exit

Private equity companies love franchising. Why? A proven business and business model that turns out a consistent, diversified cash flow stream, and can be replicated in multiple new markets quickly. That’s why. Franchising is the ultimate scalability model, and there are a lot of companies who want to buy that. How do I know? Because I had a highly successful exit.

5. You get to help the everyday person build their dream of business ownership

I meet a lot of franchise founders who are truly driven and passionate about helping others achieve success through their business model. There is something powerful in seeing someone achieve their dream of business ownership and their success in life because of what you have built. I would say that the best franchisors have this passion deep within themselves.

Now, the question is, Are YOU ready for it? (and I mean you, not your business)

Ya, a very very simple question. But it all has to start here. Franchising is a brand spanking new business. You have never built or run a franchise business before. You may be a very experienced business operator, but franchising? It’s different. Just because you are an expert restauranteur does not translate into being an excellent franchisor.

Do you have it in you to take the time to learn franchising? To Invest in building support systems and infrastructure to train and support franchisees who, in turn, will help you grow your brand? To pull yourself out of your own store operation  (that makes you all of your money) and focus on running an entirely new business and organization that goes far beyond the original business that got you here?

Franchising is not a hands-off business growth model, It is a brand new business that is intense even at the best of times.

Are you ready to commit the capital it requires to build a successful franchise system?

Launching a franchise is launching a brand new business, and new businesses require capital to grow. Shortcuts are not the answer. All too often we see entrepreneurs launching franchise systems on a shoestring, thinking it is the ‘cheap’ way to grow. But capital is required. You will need capital for:

• Building out your systems to franchise including your operations manuals, training program and onboarding process
• Building your FDD and franchise agreements? Registering your FDD in Registration states?
• Trademarks
• The franchise infrastructure to grow and operate your business
• The cost to do lead generation in order to sell franchises
• The ongoing cost to operate your new business. Most franchisors under estimate how long it will take before they begin to make money. It is imperative that you understand the point at which you achieve the Royalty Break even rate in your s=system. It is usually a lot higher than a new franchisor anticipates

Will franchise expansion fit your personality?

Let’s be honest. Franchising doesn’t suit every entrepreneur. And it really comes down to one reason: you will be giving up some control over your business, Your franchisees run their own independent business. They are free to make their own decisions (within the confines of the franchise agreement). And those decisions won’t always be in line with what you want. If you are a person who requires total control, you will have a tough time with franchising.

Also, it is a business of relationships. You are interdependent upon one another – they are only successful when you are successful, and visa versa. Because they run their own independent business, you will be at odds with each other. The decision you make as a franchisor won’t always be in the best interest of the individual franchisee. Conflict is built into the relationship. It is part and parcel of franchising. For the franchisor who isn’t inspired to build powerful relationships, even when there is conflict, franchising can be a difficult journey. I have see this first hand, when franchisors are operated by individuals who need control. They end up alienating franchisees, sometimes to the point where franchisees either sue or leave the system. Why? Because franchisees became franchisees to run their own independent business; not to be under total control of an over control obsessed franchisor.

Finally, Is your business  ready for it?

Ok, this is a massive topic, and you can read more HERE. There are a few key aspects that your business MUST HAVE in order to become a successful franchise system: Your business has to make a really good profit. Franchisees don’t want to buy a job. They want to build their own financial freedom. That is one of the main drivers for buying a franchise and getting into business for themselves. You may have a ‘great’ business that people in your community admire, but does it make really good money? And part of the answer looks at one of my favorite metrics in all of franchising: the Payback Period 

Your business has to be unique. Or as I like to say, It has to have some ‘special sauce.’ You MUST be unique. You must stand out in your industry. You must be doing something special. It could be your product or service; it could be your brand; it could be how you market. Whatever it is, it better give your future franchisees a huge advantage over their local competition. All too often see entrepreneurs who have been competing in their local market for 20 years, and while they have built a highly successful business, it is successful because of a) longevity in the market and b) the charismatic force of the founder. It works in their own local market, but once they expand, there is no differentiator!

I will also add, brand plays a huge role in selling franchises. Strong, unique and distinctive  brands attract franchisees

Your business has to be scalable

Most businesses can be scaled, however some are easier than others. How difficult will it be to scale your concept?

Scalability franchise expansion questions to consider include:

• Does it require a highly specified position or expertise to run the franchise?
• How complex is the service you are offering? How much training will it really take to teach a franchisee properly?
• Is your secret sauce repeatable for people other than yourself? (We have seen franchisors stumble because their success was almost entirely based on the power and the energy of the founder)
• Does the business take too long to make money?
• Are you willing to spend the time and, as your system grows, build a team to support your franchisees and improve your business systems?

Franchising is an amazing industry. It is the ultimate scale vehicle for entrepreneurs who want to scale their impact across the country and truly build something special. Too many entrepreneurs dive headfirst into franchising without really understanding if they are ready for it or not. We end up talking many entrepreneurs out of franchising instead of taking their business Why? Because we want to see more franchisors succeed, and part of this is making sure they are ready to franchise.