Should You Franchise Your Business?

Tom Spadea

Date

Jul 19, 2017

There are actually two questions bundled in the above. Question one is whether the business model itself is formatted in such a way that franchising makes economic sense to the franchisor and the franchisee. Question two is whether franchising as a means of growth fits with the business goals, temperament and skills of the owner. Just because the business can be franchised, doesn’t mean that the business should be franchised.

Franchising is a business growth and expansion strategy. If you are a business owner and you want to grow your business you essentially have two options.

Option 1: Grow Your Existing Business

Your first option is to grow your existing business organically by opening new outlets, hiring new managers and expanding your customer base. To fund that growth, you can borrow money, use existing cash flow or raise capital by selling off a portion of your equity. This strategy allows the business owner to maintain direct control of the operation, with clear responsibility over the personnel at each location.

It could, however, be argued that as a business grows beyond a certain size, an owner’s ability to truly control the enterprise is only much stronger on paper, but not in reality. After all, a human being can still only be in one place at one time. It is the classic command and control dilemma. As the business grows the owner tries to control more of it, but the less they are actually able to control. Think of the inefficiency in big businesses or governments with a command and control mindset and structure. What is effective for dozens or maybe even a few hundred people breaks down when it scales into the thousands.

Option 2: Franchise Your Business

Your second growth option is franchising. Franchising, at its core, is a licensing agreement of your intellectual property. Not all license agreements are franchises, but all franchises are licensing agreements. As the owner, you are taking your system, knowledge, history, trademarks and intellectual property and creating a system to teach others your business while allowing you to share financially in their success. If your business is highly dependent on your personality, like a consulting company or a law firm for example, then it is much less viable as a franchise because “you” cannot be duplicated, only what you do can be duplicated. However, if the success of the business is based on a system, even if that system is dependent on trained people, and that system is reflected in a strong brand that is known by loyal local clients, then the business has viability to become a franchise system.

Before You Can Franchise…

Notice the “success of the business” discussion above. It should be noted, although perhaps this is merely stating the obvious, that the predecessor discussion of whether a business should be a franchise is financial success at the unit level. Is the business successful enough that others would want to be the business owner and share in that same success? If the business doesn’t make a profit, is too expensive and difficult to run, or is completely dependent on the personality and unique skills of the owner, then the business owner should set aside franchising until the fundamentals are solid. The business needs to make money and be scalable or it shouldn’t be franchised.

Until you have figured out your core business and understand why it works, what you do well and what you would avoid if you had to do it all over again, you are not yet ready to franchise. Your business doesn’t need to be fully documented and on paper, but it must be a system that works, is consistent and predictable. You need to know why your customers buy from you, what your “unique” market positioning is and how you will teach others to do what you did. Strip away all the formalities of franchising, including the consultants, strategies, franchise attorneys, legal documents, regulations, etc., and you are left with the basic principle that you do something well and unique and you are willing and able to teach and show others how to do it.

The second part of the question is whether you as the business owner SHOULD franchise. This has more to do with your personal goals, ambitions, skills and capital than the fundamentals of your business. If your ultimate goal is to double or triple your take home income out of your current business over the next five to ten years, franchising may not be the most efficient way to accomplish that goal. You can put systems in place and reward good managers in such a way that you can share in a much higher percentage of new profits from a few company-owned outlets than you will with a few franchised outlets. Profits from royalties and fees from a single location will always be less than the profits from a company-owned unit. It may take four or five franchised outlets to match the profitability of one well run company outlet.

You will, however, eventually run out of good managers, partners, relatives and others you can put in place directly, and your ability to manage those direct reports will go down in direct proportion to your growth. If your goal is to only double or triple profitability, a slow and steady organic approach with direct reports and a command and control structure is probably a better strategy. The goal in franchising your business is to grow a much larger system with exponentially larger revenue. Your share of revenue and profits as the franchisor will be a smaller percentage but overall should be a much larger number. There is no right answer: it is a business decision you need to make after comparing the choices and thinking deeply about your business and your goals.

Franchising is a get-rich-slow, exponential growth strategy. Franchising takes a long time to take root and the first few years require patience and investment. The big advantage is you are setting your business up for explosive future growth by planting the seeds of success for the next generation of outlets. If you study exponential growth in business, science and nature, there are a myriad of examples of explosive exponential growth curves. In most, the beginning years and cycles are painfully slow and progress seems non-existent until a threshold is surpassed and critical mass is reached. At that point, the growth explodes seemingly out of nowhere. But it is not out of nowhere — it is following the natural exponential growth curve set in motion from the outset. That is the real payoff for franchising your business. If your goal is 50x or 100x profitability growth over the next five to ten years, franchising is the best way to achieve it.

As a business owner, you have to ask yourself, “Do I possess the patience and vision to build my business over the long haul and to wait for the payoff?” That is why I call it a “get-rich-slow scheme.” The franchisor who tries to rush it will risk destroying the very business they are trying to expand. As a franchise attorney, I have seen many owners launch and fail because they think, or are told by unscrupulous professionals, that franchising is simple and just a matter of plugging in some information into a template FDD and operations manual. It is much more than that, and any successful franchisor will tell you that the journey is long and complex but well worth it in the end. The bottom line is that if your business has a track record of success and you are ready, willing and able to be patient, open-minded and disciplined in teaching others how you achieved success, then you just may be ready to franchise your business.

To learn more about launching a franchise, visit the Spadea Lignana website.

Upcoming Expos

Jan 24-26, 2019 Ft. Lauderdale, FL
Card image cap

Franchise Expo South

Broward County Convention Center
May 30-Jun 1, 2019 New York, NY
Card image cap

International Franchise Expo

The Javits Center
Sep 13-14, 2019 Rosemont, IL
Card image cap

Franchise Expo Midwest

Donald E. Stephens Convention Center