The Industry Word

[#1]

Do you own a small business that you would like to expand? Is it a proven model? Can it be easily duplicated? 

Franchising your current business could be an option for you, if you feel you are ready to take the next step in your growth cycle. Great wealth has been created by a multitude of business owners who have used franchising as their growth vehicle. If you are starting to think big as it relates to your business, fasten your seat belt! This could be a wild ride.......

One huge advantage with franchising, is that you can use OPM {Other People's Money}, to fund your expansion. In other words, if you choose instead to add more business units by adding "company stores", it can get very expensive. Obtaining large loans or getting investors can be challenging and expensive. By using OPM, they put in their capital to fund your expansion. Of course you will still have to make a sizable investment for infrastructure, marketing, technology, and support, but your franchisees open the units, and run them. One other thing...You will charge them an entry fee {Franchise fee} to allow them to use your systems etc, and you will get a percentage of their monthly sales {Royalties}, too!

I present numerous seminars on franchising every year, and I enjoy educating and enlightening folks about the business model of franchising.  During Q & A time, a lot of misconceptions are uncovered.

Here's one;

"Joel, isn't it true that the "franchise fee" is just another way for the franchisor to get rich?"

My answer to this very common question is that the franchise fee is the "cost of entry" into a specific franchisors business model. It is really a license fee. And no, it doesn't really add up to lot of profit for the franchisor. Young franchisors really need cash flow, and the franchise fee supplies it. More established franchisors sink most of it right back into the business for things like technology upgrades, hiring more support staff, and other things that all growing businesses need to do. It keeps the machine running.

It's the royalties* that create the profit. Imagine that you are the franchisor. You have 500 franchises all over the country, with each of them paying you a % of their gross sales. Every month. Let's say you have set the royalty at 6% of gross sales. On average your franchisees are doing $20,000 in sales, monthly. That would mean that every month you'd be getting a $1200 check from each of them. Not too bad, huh?

So, while you visualize what you would do with those monthly checks, let's see if you really have a business that can be turned into a franchise.

Here is a short checklist that may help you decide;

1.  Do you have a time tested, proven business model?

2.  Have you duplicated your concept at least once?

3.  Do you have the basis for a detailed start-up operations manual?

4.  Do you have the desire and energy to expand your concept in a big way?

5.  Is  your concept unique? Does it fill an unmet need?

6.  Are the profit margins large enough to attract franchisees?

7.  Is  there a formal training program in place, or can you design one?

8.  Do you have strong relationships with lenders? Can you get investment capital?

9.   Is there technology in place to help with efficiency?

10. Are you prepared for the legalities involved with state franchise laws and regulations?

The ten items on that checklist should give you food for thought.

If you decide to franchise your business, good luck, and be prepared to work harder than you ever have. The rewards, however, could be huge.

Franchise rules and regulations from Business.Gov

 

{The Franchise King, Joel Libava, is president of Franchise Selection Specialists Inc. Joel helps those interested in exploring franchise ownership all over the country find great opportunities that are a great match for them. He is frequently called on by the media for his no-spin insights on the world of franchising. You can follow Joel on his award winning blog-The Franchise King Blog.}

* This hyperlink goes to a non-government website

[#2]

Joel,

Great post and check list. Do you have figures for the "cost of entry"?

[#3]

Hi Joel,

What do you recommend if a business has a good solid product or service, and wants to expand it, but isn't a good candidate for franchising? 

Licensing? 

Distributors? 

Dealers?

Are there better alternatives? 

- Anita 

[#4]

Lyceum,

The cost of entry of course varies. Some folks just use a franchise attorney-and stop there. Inexpensive, but = FAIL

Doing it correctly, with all the things that need to be done besides legal will cost $100k plus. {That's before even launching the franchise}

The Franchise King

Joel Libava

[#5]

Anita,

Terrific question..The franchise model is not the best thing for every business that wants to grow. Most attorney's that specialize in franchising know how to set up the alternative ways of growing a business-whether that be setting up a distributorship for a product, or a dealer network.

Licensing is another fairly popular option, but sometimes the lines are blurred between licensing and franchising, so the lawyer who sets up a licensing arrangement had better be good.

The Franchise King

Joel Libava

[#6]

Joel,

Thanks for the information. What are the different ways to finance a start-up of a franchise business?

[#7]

Lyceum,

With a great business plan, some of the bigger commercial lenders may help. VC is another possible way.

The Franchise King

Joel Libava

[#8]

Joel,

Thanks for listing different alternatives.

[#9]

Joel, thanks for the great information.

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Message Edited by NicoleD on 08-27-2009 10:07 AM

[#10]

Everyone have a dream that they want to uplift there business and make their business upgrade higher and higher. Your tips will really help them.

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Message Edited by NicoleD on 11-04-2009 10:22 AM

[#11]

Thank you very much!

The Franchise King

Joel Libava