Six Things to Consider Before You Franchise Your Business
by Caron_Beesley, Community Moderator
- Created: September 26, 2011, 7:10 am
- Updated: October 13, 2011, 7:04 am
Written by Caron Beesley
Of all small business growth strategies in the U.S., franchises are probably one of the most successful distribution systems ever devised. If you are on the cusp of growth, franchising your small business may well be worth a look.
But how do you know if franchising your current business is the right option for you? Here are some considerations to bear in mind as you go about deciding whether your business is ready to be franchised.
Is Franchising a Good Technique for Expansion?
One of the huge benefits of franchising your business is that you are using other people’s money (OPM) to build and expand your business—and not having to seek loans or third-party investors.
Of course, this doesn’t mean you don’t need to make any investment in your growth. As franchise expert and SBA blogger, Joel Libava, explains in his SBA blog, “Are you Thinking of Franchising Your Business?”: “…you will still have to make a sizable investment for infrastructure, marketing, technology, and support, but your franchisees open the units and run them.”
Another benefit of franchising is that it allows your business and its franchisees to take advantage of marketing dollars, buying power, and supply chain economics that many businesses would not be able to afford individually.
What Types of Businesses Might Consider Franchising?
There are several determining factors in whether a particular business is primed for franchising. Here are just a few considerations to bear in mind as you mull over your franchising strategy:
- Can your business benefit from strength in numbers and the power of its brand?
- Is your business well equipped to transfer it’s know-how to new business investors? Think about your business model, is it proven and time-tested? Can your operations be duplicated?
- Are you well organized?
- Are your systems well developed?
- Is your trademark registered?
- Can you scale to recruit, train and provide your franchisee’s with the support they need to make your brand a success?
I’ll add a few very important considerations, courtesy of Joel Libava:
- Is your concept unique? Does it fill an unmet need?
- Are the profit margins large enough to attract franchisees?
- Do you have strong relationships with lenders? Can you get investment capital?
- Is there technology in place to help with efficiency?
- Are you prepared for the legalities involved with state franchise lawsand regulations?
What about Lower Risk Franchising Models?
Because of the build-out costs, leasing agreements, and franchise fees, traditional franchises such as restaurants or retail establishments can represent a degree of risk for franchisors and franchisees alike. One very popular alternative is home-based franchises—because they reduce overhead for all involved. Remember, just because it’s a home-based franchise it doesn’t mean your franchisees will do business exclusively out of their home. Many of the most successful home franchise operations (think about some well-known painting franchises or pet walking franchises) run their businesses from home, but conduct business in the field.
Don’t Forget to Research the Business of Franchising
It’s important to remember that regardless of your business type, going into franchising will require you to learn a new business—the business of franchising! SBA.gov has many franchising guides and blog articles to help you understand this industry, the business steps to franchising your business, and the laws that govern it.
Understand the Legal Steps Involved in Starting a Franchise Program
Franchise sales are regulated by the Federal Trade Commission and require that very specific steps be taken before a business is franchised. Fourteen states have additional steps that franchisees need to comply with. You can read more about these regulatory requirements in the “Information for Sellers” section of SBA’s Franchising Strategy guide.
Consult Professionals Who Understand Franchising
Be sure to consult an attorney who knows franchise law as well as a CPA who understands particular accounting rules that apply to franchises and how franchise systems show the revenue they generate and how they are reported. Franchise consultants also provide services that help businesses establish a franchise program.
- Are You Thinking Of Franchising Your Business?
- SBA Approved Franchises: How do they work and how does the loan application process change?
- Why Executive-Type Franchises Are Attractive For Executive Types
About the Author
Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed.
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