Should You Franchise Your Business

Franchised businesses account for roughly ten percent of the nation's businesses, and about half of the nation's total retail sales. Many investors are interested in joining with an established brand and a proven business model, rather than trying to build a new business from the ground up. It makes sense for a successful business to explore the possibility of franchising as a means of expanding into new territories.

But before jumping into a large pool of franchise opportunities, a business and its owners must consider whether an effort to franchise will be successful, both in the short-term and longer-term, and whether it is in their own interests or the best interest of their business.

Profitability is at the center of every successful franchise relationship. Franchisees will want to make a significant return on their investment, and it is the job of the franchisor to make that happen on a continuing basis.

Is Your Business Ready for Expansion

Before any form of business expansion, a business needs to consider whether its expansion will be profitable and successful. For businesses that hope to franchise, they need to not only convince themselves that their business is ready for expansion, but must convince prospective franchisees who are also considering other options.

Factors that suggest that a business is ready to expand include,

  • Differentiation from Competitors: Is the product or service offered by the business sufficiently unique? The more generic the business or the more competitors it faces that offer similar products and services, the more difficult it becomes to profitably expand.

  • Established Track Record: Does the business have a track record of success, and is that record sufficiently long that it will reassure potential investors?

  • Established Systems: Has the business established systems that provide for smooth, consistent operations? Can those systems be taught to others?

  • Profitability: Are the profit margins of the business sufficiently high that they justify expansion or would attract investors?

A business that is highly reliant upon the direct involvement of its owners, that has an appeal that is predominantly regional or local in nature, or is very similar to other businesses that operate across the region or nation, may find itself with limited opportunity for expansion and will generally not be a good candidate for franchising.

Reasons Why You Should Franchise

Franchising can transform a business from a local enterprise to a national or international brand that operates in partnership with dozens, hundreds or even thousands of franchisees. Factors that support the decision to franchise include:

  • Raising Capital: When you expand your own business to additional locations, you must raise the necessary capital for the expansion. When you expand through franchising, your investment is much smaller. The franchisee must provide the capital for the new location, and it is the franchisee who becomes bound to leases and other contracts to support that new location.

  • Employment Issues: When your business operates from multiple locations, you must find and hire appropriate management staff to oversee the operations of those locations, as well as the employees who work at each location. When you franchise, the franchisee becomes responsible for the general management of the franchise locations, and for staffing and supervising those locations.

  • Market Research: Although a business should work hand-in-hand with franchisees to help select business locations that are likely to succeed, much of the work in identifying new locations can be shifted onto the franchisee, subject to review and approval.

  • Name Recognition: Once a business successfully franchises, it benefits from growth in its name recognition and from national or regional advertising campaigns.

  • Increased Buying Power: A company that has franchised may be able to arrange bulk purchases of products or supplies at a discount from the cost charged to smaller business operations. It may be possible to use that buying power to provide products and supplies to franchisees at a cost below what they would pay through independent operations, make a profit on those sales, or both.

  • Reduced Liability: A company is potentially responsible for accidents and injuries at its own locations, but receives considerable protection from liability for injuries that occur on the premises or through the operations of a franchisee.

Reasons Why You Should Not Franchise

Although the successful franchise of a business can be very lucrative, franchising is not appropriate for every business or for every business owner. Factors that weigh against franchising include:

  • Up-Front Costs: The costs of preparing to franchise a business are substantial. The preparation of legal documents, marketing materials, and business plans, procedures and manuals for franchisees can easily involve a six figure up-front investment. A new franchisor must have sufficient capital and cash flow to support its own operations, while also supporting the franchise operation as it grows to scale, and as it generates franchise fees over time.

  • Business Transition: As a franchised business expands into new locations, the core business model shifts from the original business model to the management and marketing of franchise operations.

  • Maintaining Standards: If a franchisee falters or fails, how will its substandard operation or failure affect your brand, business, and continued effort to franchise?

  • Profitability: Is your business sufficiently profitable that it will be of interest to a franchisee who must still make an adequate return on investment after paying franchise fees?

  • Credibility - Upon review of your business model, will a franchisee see it as one that is well-established, and that can be successfully and profitably expanded to a new location?

  • Complexity: The more complicated your business, the less likely it is that you will be able to reduce it to a franchisable model that can be taught to franchisees and implemented consistently across all locations.

  • Sustainability: Some businesses, even some that have successfully expanded or franchised, turn out to be dependent upon a short-term business model or fad. To succeed as a franchise operation, a business should have a sustainable business model and be able to adapt to changes in the marketplace.

  • Cost per Location: If it is unusually expensive to open a new location of your business, whether as compared to other businesses within your sector or as compared to other franchise opportunities, absent a belief that the returns will match the outsized investment you may struggle to find franchisees willing to make the investment.

Preparing to Franchise

Franchising a business involves a considerable financial investment, and a considerable amount of time and effort in planning and strategizing for success.

  • Legal Issues: A company that is preparing to franchise must file a Franchise Disclosure Statement with the Federal Trade Commission (FTC), a document that provides information about the business, describes the business team's management experience, provides audited financial statements for the business, and includes an operating manual for franchisees. The company will also need to develop contracts for its franchisees. The company will also need to consider other legal issues including the extent to which it may regulate franchisees without creating agency issues, potential trademark issues and, in some cases, possible antitrust law issues. The company must also consider state laws for each state into which it will offer franchises.

  • Territorial Issues: The company must determine the states or regions in size of territories that will be offered to franchisees, and how many locations may be opened within a territory.

  • Rate of Growth: The company must consider how quickly it intends to expand through new franchise locations, and weigh growth against such factors as costs, management, and quality control.

  • Franchisee Qualifications: What experience and net worth must a franchisee possess in order to qualify for a franchise? Will franchisees be owner-operators, or will they be allowed to be absentee owners or open multiple franchise locations?

  • Support of Franchisees: What training and support will be offered to franchisees? Will you create a franchisee training center to train new franchisees and provide continuing training and support?

  • Quality Control: How will the company maintain quality and consistency between franchise locations, and what steps may the company take if a franchisee is not meeting standards? In this Internet era, the importance of a uniform, consistent customer experience between locations is higher than ever.

  • Marketing Strategy: How will the company market its franchises?

  • Hiring Staff: A company that is becoming a franchisor will normally have to hire qualified staff to market the franchise, to train and support franchisees, and to monitor the operations of franchisees.

  • Product Sourcing: Will the franchisee be required to purchase products or supplies from the company and, if so, what products or supplies will fall under that requirement?

  • Real Estate Issues: Will the company negotiate leases control the real estate, and act as a landlord for its franchisees, will it assist franchisees in their negotiation of leases with landlords, or will the obligation of negotiating lease terms with independent landlord fall principally upon the franchisee? Who will manage the process of creating building plans, obtaining permits, sourcing equipment, and finding contractors to build out franchise locations?

  • Franchise Management: What financial information will be required from franchisees to monitor their economic health?

Copyright © 2016 Aaron Larson, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was last reviewed or amended on May 7, 2018.