When Is a Business Ready to Franchise?

Before a business owner can confidently franchise their brand, they must first understand their unit-level economics, development costs and more. 

Now, as the world emerges from the COVID-19 crisis, there will likely be a large number of qualified candidates looking for new franchising opportunities. 1851 Franchise spoke with franchise industry experts to learn more about how a company can know if they are ready to franchise and take advantage of this demand.

A Proven, Scalable and Repeatable Business Model

When deciding whether or not to franchise, step one is evaluating the current state of the business. In other words, are the locations already in operation healthy and lucrative? If so, is the business model specifically designed only for those areas, or can it work anywhere?

In 2009, at the height of the recession, Valerie McCartney found herself developing Broken Yolk Cafe’s first franchise as a favor to the owner, whom she had befriended as a patron of the restaurant for several years. Through her extensive franchise experience, McCartney knew the time was right to franchise Broken Yolk Cafe. The brand offered a quality, profitable business opportunity and was a concept primed for expansion as the economy began to recover. Over the next few years, McCartney facilitated what would eventually turn into a national franchising program of over 30 locations. 

When it comes to how she knew the business was ready to franchise, McCartney first points to one thing: proof of concept. 

“In my opinion, proof of concept comes with at least a year and a half of operation,” she said. “It scares me when people have only been open for six months and they take their eye off the first unit to try and grow. The first six months may be great because of the honeymoon period, but brands need to stay the course and make sure they work out all the bugs before starting to grow. Once the first unit is successful, they can open up a second unit and, if that is successful, then start franchising from there. Basically, the first couple of stores need to make money so you are franchising a concept that someone will actually make money with.” 

Franchise Cost Considerations 

Once the unit-level economics of the business are in place, it is time to look at the bigger financial picture.

“It is important to remember, if franchisors do this right, they are going to be in for at least $100,000 in legal fees, operation manual costs, trademarking, training, registration, FDD creation, marketing and more, before they ever sign their first franchisee,” said McCartney. “Most people who have only opened up one store don’t have that kind of capital lying around to spend. Entrepreneurs should be optimistic, but they also need to be cautious and take calculated risks.” 

For example, franchisors should take the time to figure out how much money they will need to spend to train someone to run the business successfully as an owner, as well as how much money they will spend on a franchise attorney when crafting an FDD. 

As costs like this add up, franchisors need to remember the franchise fee and initial investment are also going to go up for prospects. If there is too much cost involved in running a franchise, the pool of qualified buyers may also shrink. Franchisors also need to ensure that the fee structure is flexible enough to allow for adapting to local market conditions. 

Franchise Support Infrastructure

After business owners decide whether they have the financial means to franchise, there’s still one more thing to consider: support. As franchisees sign on to develop a brand, they’re going to rely on a corporate team to help get their businesses up and running. That means franchisors are responsible for guiding their owners through the grand opening process, especially as they’re first launching their business opportunity. 

If business owners do not feel as though they have the bandwidth or expertise to provide day-in and day-out support of franchise owners, it may not be time to expand yet.

Overall, even if customers are repeatedly asking that the business open in new areas, the true indicators of whether or not a business is ready to franchise are based around the internal health of the company. With an effective business model and a solid infrastructure in place, business owners can be sure now is the right time to franchise their business.