How do you know if your business concept is franchise-able?
by Holly Ford
Is your business concept franchise-able?
I have found that most concepts are franchise-able. Creating a franchise-able business concept is a powerful tool in creating independent wealth. But there are definitely some things to be aware of as you move forward. But without certain critical assessments, a detailed plan for development, and a strong, long-term vision, sustainability can suffer.
A solid concept will have Differentiation. This can come in the form of a truly unique concept, exceptional management experience, a strong ROI, or even touting an ‘at-home’ low investment advantage. The concept must be Replicable with detailed systems and procedures in place that have the ability to translate operational expertise to a new owner in less than 3 months.
A powerful concept, most essentially, must have Unit Profitability. The concept should bring a cash on cash ROI (akin to the concept of a dividend return) of 15% by the end of the second year after owners salary. Concepts that sell multi-units or master developers should aim for 20% to offset the incremental overhead associated with multi-unit management.
Finally a successful franchise-able concept should have true growth potential based on the existing market along with forecasts and industry trends.
How should/can a new franchisor determine the right markets for their franchise?
This is heavily determined by the specific concept, although there are basic principles that govern market determination as a whole. The first is to target markets proximal to the initial concept giving ample room for market share for each location.
The purpose of this is two-fold. First it is much easier for the new franchisor to assist directly as any difficulties occur; and second, it initiates geo-concentric branding. This is the concept of directly branding to a small region, while at the same time, the individual stores begin to develop their market share.
What advice can you give to new franchisors and choosing the right franchisees for their brand?
The most important factor is interest. Many invest in concepts because of its ROI or resale value. All good reasons, but without true passion for the concept, the business is often status quo, or relegated behind other interests and thus declines. Excitement for the concept translates into great employees and raving fans – which of course validates well and creates great royalties for you.
Make sure your candidate has the working capital to see the concept to profitability and ensure that you do not erode that capital with any underestimations on build-out or start-up costs. A financially solvent candidate who doesn’t have to look over their shoulder to make sure they can make payroll, can focus forward on building their new business.
Make a persona. Identify key factors that you have seen in your pilot store(s) that will make the most successful franchisee and continue to hone that model over time.
Are there any costs that new franchisors should be aware of and how can they determine if they have the appropriate financial foundation?
There are several costs associated with franchising a concept. Most businesses, like Zarian Firm, assess the concept with a series of steps and litmus tests to create a detailed proposal for the client. Usually this includes a retainer fee along with estimated costs for each phase of franchising the concept. The areas of financial focus generally are:
I Operational Support – This is perhaps the most critical element to get a concept effectively off the ground. Good operational support prevents franchisees from bleeding their working capital, and in return creates good validation to continue growth.
II Training – There is not a lot of heavy costs after the initial corporate training concludes. However some franchisors do pay for the training transportation costs and food in the early phases of franchising as an incentive.
III Legal – Creating the Franchise Disclosure Document with a Franchise Attorney, along with an excellent Sales Authority, will give the franchisor the legal protection it needs, while presenting the concept in a less-offensive manner with the insights of the sales professional. Also consider licensing, if applicable, and trademarks on logos and intellectual property.
IV Sales and Marketing Support – Investing in a strong team that can assist the new franchisees in sales and marketing will ensure that ROI happens in the expected timeframe and royalties stay strong.
V Sales and Development – Absolutely essential in creating a successful concept is hiring a sales team with franchise success or partnering with a strong brokerage like the Franchise Consulting Company.
What makes a successful franchisor? Are there any certain traits or mindsets?
A successful franchisor is one who has stood the test of time. This franchisor will have a concept that, over time, becomes consumer-driven. Franchisees relish in strong branding, high margins, and a great resale value. The franchisor will have low attrition rates and great validation which all translate into easy sales and high royalties.
This franchisor has a long-term vision that is sustainable. They understand the dynamics of the marketplace and have an intuitive grasp of where the marketplace is trending. They then use that data to provide the entire franchise opportunities for growth.
This franchisor is continuously evaluating the ongoing value of the concept. They engage in annual negotiation of discounts for their franchisees, updates in software that support the franchisee’s growth, and they introduce and test new products and services to keep the brand positioned well.
Finally the successful franchisor provides ‘over the top’ support of franchisees. They keep the ratio of operational support-to-franchisee low, and they make sure they have systems and procedures established to detect early warning signs that a franchisor may need extra help
Tips for franchisors on what to expect as they begin their journey as a new franchise?
The most powerful tip I can share is caring for your franchisees. Many brands are phenomenally successful at selling the concept only to find themselves with high attrition rates and extremely difficult validation. Avoid this by keeping your franchisees involved and supported.
A critical time in a franchisor’s life cycle is the 2-4 year mark. Failures begin to manifest during this time period. This period is a time for critically looking at your system. It is an opportunity to clarify and better define your ideal franchise candidate. Make sure you create and actively update performance standards, compliance check lists, and best practices during this critical period of growth.
Always, always watch your competitors. Keep your franchise-able concept differentiated and be willing to make tough choices to stay competitive.
Zarian Firm, Corporation 846 Old Mill Dr. Loveland, OH 45140 P 855-733-1337 C 513-828-9810