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Why Should You Franchise Your Business?

Franchising is a mutually beneficial strategy — entrepreneurs choose to franchise businesses to raise capital and grow market share, while prospective franchisees choose to invest in a franchise because it provides a path to business ownership that’s significantly de-risked.

Franchising works by having a company sell its concept to other entrepreneurs who agree to follow the business model in exchange for paying fees and royalties to the franchisor. This is a great strategy for successfully growing a business, but it isn’t right for everyone. When considering whether or not to franchise a business, it is essential that owners define their goals, ensure the business is replicable and develop the infrastructure necessary to successfully maintain consistency across locations.

Now, as the world emerges from the COVID-19 crisis, there may be a large number of qualified candidates looking for new franchising opportunities. 1851 Franchise spoke with franchise industry expert and iFranchise Group CEO Mark Siebert to learn more about how a company can franchise its business and take advantage of this demand.

1851 Franchise: How can a business know when it's ready to franchise?

Mark Siebert: It's all about what your goals are. There are two basic questions that every business needs to ask. The first: Is my business franchisable? A franchisable business needs to be able to provide value for the franchise, franchisee and franchisor — everyone needs to get a good return. There needs to be a value proposition that is sellable for the franchisee — a strong track record, a social media following — and you need to make sure you are getting inquiries from people who want to buy franchises. Are you doing something unique and differentiated? Are you credible as a franchisor? Those factors will tell you whether you can sell franchises. 

The second question is: Can you duplicate the success of what you already have? There needs to be an established business that is up and operating before you can franchise. Then, you should look at that one established location and ask whether an owner would be interested in replicating that business. If the business can only succeed if you are working 22 hours a day, no one will want to sign on. Or is the business working because it is in a special, one-of-a kind location that won’t translate to other markets? If it is a swimsuit shop in Florida, or a regional cuisine restaurant that focuses on a specific product, for example, it probably won’t have much impact outside of those markets. You also need to make sure you have the resources in place to successfully replicate the business, including operations manuals, training programs, etc. 

The other thing is ROI — in order to be franchisable, the business has to provide a return on investment just like a stock or bond would. If you invest in a franchise, you expect a return over and above a salary you would normally earn with a corporate job. If you are going to buy a franchise and work there, the alternative would be joining a corporate job and investing in a stock or something similar. But with a franchise, you are entitled to a return on your time and investment. It doesn’t need to be after year one or two, but by year three you should be getting a return that is a compensation for your level of risk. Historically, the stock market offers a 10% return in the long term, and a franchise should be able to provide at least 15% or more.

Additionally, throughout all of this, business owners should also ask themselves whether they should franchise their concept. What are the goals and objectives that you have with your business? Are you going to sell it in five years or are you going to pass it on to your kids? How big do you want to make the business, and how much risk are they willing to take to get there?

1851 Franchise: What are some of the primary benefits to franchising over just growing through corporate locations?

Siebert: Time, people and capital. With franchising, you are leveraging the time of your franchisees — they are the ones looking for locations, signing leases, hiring contractors and training staff. When it comes to people, nothing will ever be as powerful as someone investing their own dollars in a business. Especially these days with ongoing labor shortages, finding a good manager can be difficult, but a franchisee by nature is going to be a long-term investor and will take pride in ownership, which won’t be the case with 99% of managers. Businesses often see improved AUVs when hiring a franchisee over a manager. You put a franchisee in a location previously run by a manager, and their revenue jumps up by 30%. In terms of capital, franchisees are investing their own capital in the business, which reduces financial risk for the franchisor. 

1851 Franchise: How can you maintain consistency across locations?

Siebert: Quality control in a franchise organization is sort of like a stool with four legs. The first leg is franchisee selection — you need to be careful about who you take on. You need to do a deep dive to make sure you have someone who is right for the brand and is hard-working. 

The second leg of the stool is the tools that you develop for franchisees — operations manuals, training programs, online learning systems and otherwise. 

The third leg is a commitment to support. When a franchisor is getting started, they need to be able to provide the support necessary to maintain standards, which means they need someone whose job is to go out and visit those locations, go through a checklist, and so forth. That team needs to be adequately trained in the business and to understand how it works. 

The final leg is making sure you have great legal documents and are willing to enforce those documents. When businesses sell their first franchise, they often want to be friends with the owner. But you are not friends from a business perspective. You have to be willing to draw a line in the sand and tell them that they have to live up to those standards or they are out of the system. You have to have that fortitude to enforce those systems. Like any good business, if everything is being done right and you have a good infrastructure in place, then you won’t need to look at those documents until it is time to renew.