When Not To Franchise

Franchising involves risks as well as rewards. Here’s what you should know before franchising your business.

When Not To Franchise

While some of my franchising brethren may think this heresy, I feel compelled to say that franchising is not right for every successful business. In fact, franchising can be a very wrong strategy for certain businesses and certain business owners.

I am a strong advocate of franchising. When someone decides to franchise a business, perhaps the most important precept to understand is they’re starting an entirely new business – that of selling franchises and servicing franchisees.

And, as with any new business venture, there are risks involved. So how do you assess those risks? And how can you best judge whether franchising is the right strategy to pursue?

The Downside of Franchising

Surprisingly to many, the biggest risk for companies that decide to franchise is not found in the investment that’s made in becoming a franchisor. A new franchisor can easily invest R400 000 or more in the development of business plans, legal documents, operations manuals and marketing materials – before the first rand is spent on franchise advertising. But that risk is largely quantifiable and readily recovered for the franchisor who can sell any franchises at all.

In fact, many people considering franchising for the first time will ask me, “How many franchises do I have to sell to make it worth my investment?” The answer can be as low as “one.” What many individuals don’t understand is that franchises are, in effect, virtual annuities – providing a stream of royalty revenue that may stretch 20 years or longer.

If a franchisor can generate R80 000 to R300 000 a year or more in royalty revenues from a single franchise, even one franchise sale will pay the price of entry – assuming, of course, that no incremental staff is needed to service a single franchisee.

Franchisors looking for early-stage hyper-growth see many more substantial risks. This is because franchisors attempting to grow more quickly need to hire staff to sell and service franchisees. They need to spend money on franchise marketing.

And they need to focus on the business of franchising – sometimes to the detriment of the core business they’ve established. When a franchisor gears up for faster growth, suddenly it becomes a balancing act between the resources devoted to franchising and the revenues it generates.

All of these balancing acts are manageable if you have a good plan, a sound concept and a qualified management team. But without a strong and replicable concept, you will certainly fail.
More often than not, franchisor failures are a direct result of failed franchisees.

Failed franchisees require more in the way of support. They pay less – or nothing – in royalties. They stall (or stop) franchise sales efforts when they talk to prospective franchisees. They can destroy the franchisor’s brand by failing to live up to brand standards.

And they can be the source of litigation and bad publicity. In short, not only do failed franchisees threaten the franchise system, but they can also threaten the core business. Thus, the first decision to franchise must start with an honest assessment of the business itself.

Is Your Business Ready?

Many business owners think of franchising as some kind of ‘magic pill’ that’ll cure a business through the economies of scale that come from expansion. It’s not.

There are really three core criteria for franchiseability: You must be able to sell franchises, you must be able to duplicate the business, and you must be able to provide your franchisees with an appropriate return on the time and money they invest.

Let’s start with saleability. In scanning the franchise universe, one can readily find franchises that don’t appear to be attractive to potential franchisees. Not every franchise opportunity is glamorous, sexy and fun, but what every business must have is something that sets it apart from its competitors.

To be ‘saleable,’ a business must have credibility in the eyes of its franchise prospects. That can come from strength of management, a track record of success, publicity or any of a number of places.

Beyond saleability, franchisors need to be able to duplicate their success in multiple markets, and some businesses don’t make good candidates. Food concepts that rely on a regional product, or retail concepts located in a one-of-a-kind location are difficult to franchise.

The acid test of franchising is return on investment (ROI). A franchised business must be profitable. More than that, it must allow enough profit after a royalty for the franchisees to earn an adequate return on their investment of time and money.

Profitability is always relative. It must be measured against investment to provide a meaningful number. In this way, the franchise investment can be measured against other investments of comparable risk.
If your business doesn’t meet these criteria, don’t franchise. Period.

Mark Siebert
About the Author
Mark has personally assisted more than 30 Fortune 1000 companies and over 200 startup franchisors. He regularly conducts workshops and seminars on franchising around the world. For more than a decade, Mark also has been actively involved in assisting U.S. franchisors in expanding abroad. In 2001, he co-founded Franchise Investors Inc., an investment firm specializing in franchise companies.

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