​When Does it Make Sense to Franchise Your Business?

Christopher Conner  |

Via pearchina

Many business owners have at one point or another considered the concept of franchise expansion as a way to build the business and expand into new markets through franchisee’s investment. Franchising is an exceptionally powerful expansion vehicle and has in many cases created national or global brands in very short time periods. Although effective, the model isn’t necessarily for every business or everyone and the timing for a business needs to be right for a brand to efficiently transition to the franchise model.

My first recommendation is to let the market drive your timing decision. You can have all of the analysis, consultants and expensive data to review, but if people aren’t interested in the model and asking about the possibility of investing in the business as a franchise, it really means nothing. Now, you aren’t really allowed to market a franchise before you have the disclosures and registrations in place, but that doesn’t mean you can’t get a litmus test of how much market there is for you to grow your future franchise and expand your brand through the franchise channel. Generally, it starts with what might seem like benign questions from customers, friends, vendors and people you already know. People saying things like, “Can you help me open a business like yours in Kansas City?” Or, “Can I invest in your business and be part of what you are doing here, I really like the brand” are indications that the franchise model should be in the realm of consideration.

These may seem like off the cuff questions that don’t mean a great deal, but they are in a very real sense potential franchise inquiries. Nothing is a better gauge as to whether you are ready to franchise then when the potential franchisees are already knocking on the door. After all, if you don’t franchise the business, these interested parties will either go elsewhere or just become your competition. You may have been in business for a short time period, but if the market is asking you to expand, you need to be considering the franchise channel.

The second indicator for when to consider franchising would be when you reach that crossroad in your business’ expansion. You know you would like to grow the company, but can’t decide what would be the next move. It may be that you still have only one location, but your sales have increased to a point where you have “capped” the single unit capacity and are now trying to decide what is the next step for the brand. Or possibly you have opened a second or third company location and now are trying to decide what market to expand into and how to put the capital together for another company location. Maybe an investor has approached you and you’re considering giving up a portion of the business you’ve built for the expansion capital needed to expand. Any of these could be valid reasons to trigger a serious look into the franchise model.

A third reason to start considering franchising as an expansion vehicle would be the consumer market you are in is growing much more quickly than you could possibly serve. There are some markets where the growth and opportunity is just more than any one person or company can handle. We saw it in the frozen yogurt market and although overbuilt today, many yogurt innovators were able to capitalize on the rebirth of the frozen yogurt market through franchise expansion. When it became clear that there was a large and exponentially growing market opportunity, the franchise model was leveraged by a dozen different brands who in total sold many hundreds of locations. Although in this case, there was unwarranted over-growth, there were plenty of examples of amazingly successful brands who were able to expand quickly and leverage a highly opportunistic consumer market. Today, we are seeing this same type of growing in the studio fitness market with brands like Orange Theory, Soul Cycle, Bar Barre and others who are capitalizing on the boutique fitness market currently experiencing amazing growth on the consumer side of the business.

Another aspect to consider when timing the potential for franchising is whether your business has the systems and infrastructure needed to scale and duplicate the business. You need technology infused in the operating structure, scheduling software, business development modeling, staffing models and anything else that relates to the management of your day to day business to repeat your successes through franchising. One area to focus on for most entrepreneurs considering when franchising makes sense is to have a good handle on marketing and sales. Most entrepreneurs are great sales people and they themselves are the rainmaker for the business.

In order to duplicate the model, a franchisee needs to have a good business development system in place in that the franchisee needs to go out and sell when they open the business. Make sure you have a methodology and process in place to efficiently replicate sales, a good way to verify this is to hire a sales person if you don’t already have one and prove the marketing model within the business with a successful sales representative. Having great systems in place can be a broad description of pretty specific things, so a good way to understand whether you have systems in place, try leaving the business and not responding to emails or phone calls for 2 weeks… take a real vacation and see what happens in the day to day business. How bad was it? If the operation made out without you, the business is heading down the right path and you might have a model that is not wholly dependent on you as an owner-operator. By this point, we’ve all heard of the E-Myth concept, you can’t build a business if you are stuck in it. As Michael Gerber has told us all, you need to get out of your business so you can work ON it.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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