Small Business Center
While a single restaurant location offers a static return on investment, franchising offers compounding returns. “If, say, you’re from Colorado, and a franchisee takes you and proves you in Phoenix or California or Miami, that doubles the value of your company to a buyer, explained Dan Rowe, CEO of Fransmart, which helps emerging franchise concepts grow within the U.S.
When people think about franchises, they often think of big chains, like McDonald’s and Chipotle. But franchising — in which other people open and run a business’ locations using its name in exchange for fees and a share of the profit — range in size and span industries from fast food to nail salons to pet care. Franchising enables growth while minimizing the financial burdens of opening additional locations. “It often takes less money to launch a franchise than it does to build a restaurant,” Rowe said.
But successful franchise owners can’t be hands-off. Franchising is an entirely different business from running a restaurant; it means being available whenever your franchisees have questions, providing them with the infrastructure and technology support they need to grow and attending site selections. “You have partners that put their life savings into your business, and you're going to hear about things that are problems,” Rowe said. “A lot of people don’t want that. They’re used to running their own place and being dictators, and they don’t want to hear it.”
Running one store, as compared to running a franchise “is not comparing apples to apples,” he said. “It’s like comparing apples to cars.”
Franchising is a long-term commitment, so before you jump in, think through the scenarios and issues that might arise. “If you have two or three franchisees and you suddenly realize you don’t want to be in the business, you’re in some real quicksand,” Rowe said. “If that person signed a 20-year agreement, you’ve obligated yourself for 20 years to be that person’s partner and provide them services.”
Rowe offered tips and questions to ask yourself before starting down the franchising road.
1. Are you profitable?
“I can’t tell you how many people call and tell me they want to franchise but they’re not successful in their own stores,” Rowe said. “They say: ‘I have the next Five Guys’ or ‘I’ve got the next Chipotle.’” But if you’re not busy at your original location, you're not going to be a successful franchise. Customers vote with their wallets. Many states — such as Maryland, California and Illinois — won't allow you to franchise if they believe you lack the financial capacity to sustain it.
2. Is your offering unique?
“Whether or not you have competition today, you’re going to eventually,” Rowe said. Before starting down the franchising route, think hard about whether you have a concept so unique and successful that franchisees are going to want to keep on opening up new stores. For instance, Rowe said, “trying to grow a coffee concept or a burger brand today is a losing cause because every center in the country already has a burger place and a coffee place in it.”
3. Are you ready to be in a completely different job?
Many people don’t realize that when they start franchising, they’re starting a completely separate business. “Franchising is not about the burger,” Rowe said. “Franchising is all about how you support your franchisees.” It’s about training them, going out into the field to approve real estate. And it requires upfront investing in things like technology and marketing. “Your franchisees expect all that stuff to be there and be in one place,” he said.
1. Think about your goals.
Highly successful franchises focus on future profitability. Rowe emphasized: “No franchisor gets rich with single-unit franchisees. You’ve got to have multiple-unit franchisees.” The essence of franchise success lies in the expansion of stores by franchisees. Before you start filing paperwork, think about questions like what are you trying to build 10 years down the road, how big do want the chain to be, how will you attract multi-unit franchisees that want to keep building, wow will your franchise stay relevant in a changing market and do you envision your franchise business being passed down through generations or eventually sold. Franchising is a long-term game. “So many franchisors only think about the upfront franchise fee. They’re trying to do whatever they can to just get that fee in the door, but they don’t realize the true value is in the potential for recurring revenues and royalties.”
2. Develop a comprehensive business prospectus.
This is the first impression potential franchisees have of your business and should inspire confidence in the investment opportunity. The prospectus should outline the business model, growth potential, support structure and financial expectations, helping potential franchisees make informed decisions. Break down the initial investment costs, ongoing fees and expected ROI, as well as your financial projections, including revenue potential and operating costs. “One good piece of advice is: Never, ever, ever lie,” Rowe said. “So many times in franchising, you see these people that bought a franchise and hear them say: ‘The owner told me they were doing a certain amount of profit or sales and it turns out it wasn’t true.’ If the owner gets sued, there’s no defense.”
3. Document and streamline your business processes.
The objective of effective franchising is to establish a replicable and consistent operational framework. This ensures that anyone who enters a franchise location, whether in the same city or across the country, encounters a uniform experience. To make sure all franchisee owners follow your procedures and maintain your brand’s quality, document everything like business operations, customer service guide, employee training, inventory management and marketing strategies. “Think of it as a business in a box,” Rowe said. “You want to steer everyone to one system. That makes everything really predictable, really effortless, and allows for no mistakes.”
4. Have a people plan.
The success of your franchise hinges on the individuals driving its growth. Invest in seasoned professionals with proven experiences in scaling franchises. “Most emerging brands that I get called from have one or two stores and are trying to figure this out as they go,” Rowe said. “So why would you hire people who are also figuring it out as they go?” He advised owners not to look automatically to an employee who has been at the location for a long time to be the trainer or development manager. “People who have had bumps and bruises and realize how do it better the second time are more likely to succeed.”
5. Screen potential franchisees.
As tempting as it might be, don’t accept the first person interested in writing a licensing check, Rowe said. Set clear criteria for potential franchisees, including financial capacity, relevant experience and alignment with your brand values. Understand their background, experience and motivation, and perform background and credit checks to assess their financial stability and legal history. And make sure franchisees understand that this is a partnership that involves mutual decisionmaking. “I just talked with a franchisor that had a franchisee fail because of bad real estate,” Rowe recalled. “I asked him: ‘What happened? Did you approve the site?’ And he said the franchisee had signed up for 10 units, paid them $250,000. They never looked at the location. They just figured he knew what he was doing,” Rowe said. Now the franchisor can’t resell in that market, Rowe said, because “people think that the brand doesn’t work.”
6. Be prepared to invest heavily in marketing.
“Every time a franchisee goes into a brand-new market, you can't just do pro-rata marketing,” Rowe said. “You have to do almost triple marketing.” That’s because new audiences aren’t familiar with your brand or concept yet. To be successful in a new location, drive customer engagement and cultivate brand loyalty via a multipronged approach employing advertising campaigns, social media, local events and more. It helps to think of real estate as a form of marketing, too. “Spend more money to get prime, high-profile trophy locations because the best form of marketing is real estate, where everyone's driving by and sees you,” Rowe said.
7. Invest in good legal representation.
Franchising, he said, “is a very litigious business.” Thus, ensuring compliance with all franchise legal guidelines is crucial. It’s not sufficient, Rowe pointed out, to possess a franchise disclosure document, which is a legal requirement in many jurisdictions that provides potential franchisees with essential information to make informed decisions. Instead, engage a proficient franchise attorney who understands franchise litigation and the underlying reasons people get sued. A franchise attorney acts as your legal partner, Rowe said, ensuring that every aspect of your franchise venture adheres to legal requirements. This safeguarding benefits both your interests and those of your franchisees. These legal experts offer invaluable insights, curtail legal risks and ensure that your franchisees operate within the boundaries of the law. Despite the potential expenses associated with lawyers, the repercussions of lawsuits are far more detrimental. “Fraud or misrepresentation follows you around forever like a DUI,” Rowe said. “In most applications, whether you’re trying to get credit or borrow money, one of the questions is: Have you ever been alleged of fraud? You don’t want to play that game.”
For those willing to put in the work, launching a franchise is a great way to achieve compounding business growth. “When I first launched Five Guys, they had been around for 10 years, and they had four stores,” Rowe said. Now, there are more than 1,700 locations across the United States, Canada, United Kingdom, Europe, Asia and the Middle East, and “it’s almost a $3 billion company,” he noted.
And you can’t embark on such expansive growth alone. Rowe pointed out the limits of growth without franchising: “Even if you had a blank check, there’s only so many hours in a day and you can only build so many company stores so fast.”
By Rebecca Meiser
Contributor, Commerce + Communities Today