What to consider before franchising your business
Franchising can be an excellent way to grow your successful business, but you have to make sure it’s the right fit for you and your company.
With franchising, you enter into a contract with other entrepreneurs to replicate your business in exchange for paying you fees. While this allows you to grow your business with the help of your franchisees’ investment, it comes with risks and challenges.
To improve your chances of success, there are several financial and operational factors to consider before deciding to go the franchising route, says Sherry McNeil, President and CEO of the Canadian Franchise Association.
“We currently have about 50 different business segments in our membership,” McNeil says. “So, almost any business could be franchised if the owner sets it up to be franchised.”
McNeil, whose association has 700 corporate members representing 40,000 franchise owners, highlighted five important factors you should consider before franchising your business.
1. Do you have the right advisors?
McNeil says it’s important to put together a team of experts to help you look at your franchising options, potential expenses and operational requirements. Team members will typically include a lawyer, accountant, banker and consultant. In each case, they should have specific expertise in franchising.
“We’re often asked the question: Can I use the lawyer who did my house deal?” McNeil says. “The answer is usually No. You want someone who has experience with franchising.”
2. How strong is your company’s financial performance?
As a franchisor, you will be asking other entrepreneurs to invest in your business model, so you will have to show them your company has a track record of generating healthy profits over several years.
“Do you have a history of sustained financial performance?” asks McNeil, noting franchisees will not only have to earn enough money to meet their needs, but also pay you fees and royalties to operate their franchise.
You will also need to consider whether you have sufficient capital to make the upfront investment required to set up a franchising operation. Typical expenses include fees for legal and other professional advice, protecting intellectual property, market research, and marketing and advertising, among other things.
“An accountant with expertise in franchising will be able to give you a range of what similar franchisors have invested,” McNeil says.
3. Do you have a replicable business model?
To expand through franchising, your business must be rigorously standardized with operating procedures and methods that are easy to teach to franchisees and their employees. To do so, your procedures should be codified in manuals, preparation charts and other tools to create consistency across the business.
Consistency is critical to maintaining your company’s brand promise to customers throughout your franchise system, McNeil says.
“If you buy a Big Mac in Newfoundland or Vancouver, it’s the same Big Mac delivered to you in the same packaging with the same smile,” she says. “All the staff is learning to do the same thing in the same way.”
Carefully consider whether your business lends itself to standardization and what you will need to do to make your business replicable before you begin franchising.
4. Is your business scalable?
You must also determine whether your business model can be successful in other geographic locations under different management and staff.
Will it work in markets where customer habits, needs and desires may be different? Is your current success dependent on your unique skills as the owner or that of your key employees? Will you be able to find high-quality franchisees who are passionate about your business?
Answers to these questions will require market research that will help you understand how your concept will work in other markets, learn what potential competitors are doing and find out what makes an ideal location for your franchises.
5. Will franchising fit your personality?
McNeil says entrepreneurs should also consider whether franchising fits their personal preferences and work style. It often requires entrepreneurs to move from running the day-to-day operations of a business to managing and coaching a group of franchisees.
“Not everyone can do that because their love and passion is dealing with customers and their current business.”
She notes there are several different models for franchising your business. These include unit or multiple franchise models where you license a franchisee to open one or several locations. Another option is region or territory developers where you grant the right to open franchises in a larger geographic area such as a city, province or all of Canada.
She says a good place to start for entrepreneurs considering franchising is the Canadian Franchise Association’s Franchise Your Business seminars presented across the country and online through the association’s website at www.cfa.ca.