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Do You Want to Grow Your Company Bigger? Then Use Franchising

23 minute read

2. Is my company ready for selling the franchise?

Any company that yields a profit and has the ability to grow can be franchised. However, several peculiarities have to be considered. iFranchise Group CEO Mark Siebert, one of the leading authorities in the field and author of Franchise Your Business, breaks down the ability to franchise into a six part assessment:

Does my company have enough power to grow through franchising?

It is not a great feeling when you are, say, the owner of Godfather’s Pizza, and have just sold the franchise to an interested party, who was supposed to pay 600,000 dollar seed capital for it. But then you read from Forbes Magazine that this franchise is not worth buying because the company’s five year increment rate is all negative, -7.7%.

Why do situations such as this one occur? There are several reasons.

Every business owner is slightly blind towards their own company, meaning that they tend to overestimate the positive and ignore the negative signals. Which is why the change in client demand went unnoticed early enough. The company may have been very successful a year or two ago, but they probably missed the market changes at the right time, and did not do the necessary readjustments. This will come back to haunt you sooner or later.

You also need to take into account that some areas are more dependent on the economic cycle than others, real estate, for example. Since it takes around 2-4 years for the franchisee to gain economic independence, it is not very wise to buy a franchise during a boom in a field that might be in a freefall in a year.

Can my business be cloned?

Keep it simple – this sentence holds the most importance in franchise business. If your business can’t be learned in three months, then the franchise won’t take off. The franchisee needs to understand the business to a tee.

The thing is that franchisees come from very different backgrounds: Some know nothing about the field, for others it is their first shot at business. Of course, requirements can be set for specialized education and experience – and for a dentist it is the only possible way – but this could hold off talented people from many businesses. There is the possibility of using a simpler restaurant menu for franchise. Or order the complicated stages from the main company, etc.

Start franchising by writing down your business process step-by-step. The time spent on this is not wasted, even if you change your mind and don’t sell the franchise. This gives you an outline to what exactly you are doing. Note down all the important things, starting with how a business card should look like, and finishing with employee training.

Is franchise financially sustainable?

If the business is unable to generate 15-20% ROI (after the 4-8% royalty has been paid), it is difficult to talk talented, enterprising people into buying the franchise.

I won’t be starting from scratch myself?

No matter how brilliant the idea, it is risky creating a franchise business from scratch. At least one working prototype should be founded beforehand.

Do I have money for franchising?

Franchising is a cheap means for growing, but it is not free. A company that is gradually growing through franchising should expect 50,000 dollar in costs, and for a more aggressive growth – 100,000 dollars. This includes the costs of hiring additional people. Don’t kid yourself, there are only so many hours in a day: even if you think you can do it all yourself, then somebody has to do your current job.

There is no right or wrong tempo for growing through franchising. The growth just has to be in line with the nature of your company. If you have been taking it slowly until now, then don’t rush.

The worst thing a franchiser could do is count on the franchisee’s quick profit and the resulting royalty. This drops the bar (the only criterion being money) and only brings in weak franchisees.

Alternatives

Is franchising the only way to grow? It might sound good and cheap, but perhaps an organic growth with the help of a loan or involving new partners would be much more suited to the company right now?