Before taking the leap of handing over operations to several store owners, consider this.
Whenever I meet with an entrepreneur interested in franchising I ask, “Where do you want to be in five years?” Perhaps unsurprisingly, most entrepreneurs have never given any thought to the question before. But to determine which growth strategy is best, I need to understand three things: Their personal goals of ownership, the assets (both human and capital) they can devote to achieving those goals and the time frame within which they hope to accomplish them.
Armed with that knowledge, the strategy you will choose is often just a matter of plugging in the numbers.
Business owners often tell me they want to grow as fast as possible without sacrificing quality. But that’s just an ownership philosophy. In order to use goals as a foundation for your decision-making, they must be concrete, measurable and tied to a specific time frame.
Related: Is it time to franchise your successful business?
Consider the long-term over temporary glory
I encourage my clients to start by asking ‘lifestyle’ questions:
- Do you want to still be working in the business in five years?
- Do you want to sell the business?
- Are you looking to pass this company onto your heirs?
- If you are looking to cash out, how much money is ‘enough’ — not only for the time and effort you will have devoted to developing the business, but for you to move on with the next phase of your life?
- If you want to hold on to your business, how much would you like to be earning at a certain point in the future?
When you ask yourself how much you want for your business when you sell, it is important that you do not ask how much you think it will be worth.
Valuation should not enter this process until later. Instead, ask yourself where you want to be personally. Do you want to retire? If so, do you want to be living on your private island collecting shells? Or would you be happy on a golf course somewhere? Or do you want to open a new business and move on?
Once you have painted the picture in your mind of where you want to be, you should ask yourself how much money it will take for you to achieve that goal.
Money makes the franchise go round
Next, let’s talk capital. Franchising is a low-cost means of expansion, but it isn’t a no-cost means. If you go into a business undercapitalised, you run the risk of taking a nine-foot leap across a ten-foot ditch. In addition to the costs of developing appropriate strategies, manuals, marketing materials and legal documents, you will have costs associated with franchise marketing and franchise sales.
If you don’t have the capital needed to properly support your franchisees, you increase your risk of franchisee failure, difficult franchisee relationships and litigation.
In franchising, there are three ways to capitalise on your initial development efforts:
- You can have the capital (or access to the capital through lenders or investors) when you begin franchising.
- The cash flow from your company-owned operations to fund your entry into franchising can be used.
- Try financing your franchise efforts out of your initial fees and/or product sales — although that's considered a ‘worst practice’ in franchising, because it often encourages franchise sales to unqualified candidates.
One of the most critical things to remember when making the decision to franchise is that you are creating a new business — not simply an extension of your existing business. Regardless of the business you first founded, you need to understand that franchising is the business of selling and servicing franchisees. And your first and most important priority in that business must be to make your franchisees successful.
Related: The keys to expand your franchise footprint with help from your franchisees
There's an old piece of wisdom floating around the franchising world, and it goes like this: You can’t franchise unless you have at least two operating units. As you explore franchising, some people may tell you that. But they’re wrong.
The entrepreneur who spent a year opening his second location would have two operating locations and could now offer franchises with the expectations of a 2,2% close rate.
In contrast, the entrepreneur who spent a year franchising with a lower, 2% close rate would have one corporate location but perhaps 10 franchise locations — allowing her an even higher close rate, more publicity and a faster jump on competitors.
Two (or more) is better than one location
Once an entrepreneur decides to franchise, they sometimes wonder if they can open more company-owned units. The answer: Yes, absolutely. And depending on the company, that may be a valuable strategy.
The vast majority of franchisors use both company-owned and franchise strategies in combination. Some franchisors will choose to own and operate the best locations or markets while franchising secondary and tertiary markets.
Others will choose to develop a company-owned presence in their core marketplace and franchise in more distant markets. And some treat company growth and franchise growth opportunistically and end up with many markets that have both franchise and company-owned locations.
Regardless of the strategy taken to integrate these two growth models, for many companies, the combination of franchising and company-owned growth provides the best of both worlds. From a purely financial standpoint, it's almost impossible to beat.
The excess cash produced by your successful franchise operations can fuel increased franchise growth, but at a certain point, the cash used for franchise lead generation will outstrip your opportunities to spend it wisely on franchise marketing. Reinvesting in corporate locations can improve your cash flow and build your balance sheet.
Before taking the leap…
If a franchise keeps its expenses in check, it can be profitable and recapture its initial investment by selling a single franchise. Its only incremental expense will be the sweat equity it invests in the franchise programme.
If you are still seriously thinking of franchising, think hard about what it means for your business, and for you. It's a big decision.
Related: Are you (really) ready to franchise?
Ask yourself the following seven questions right now:
- Is my business franchisable?
- Do I need to franchise to achieve my personal goals?
- What is happening in my marketplace?
- Will I be committed to the success of my franchisees?
- Do I have adequate resources?
- Do I have the intestinal fortitude to do franchising right — even if it means not selling a franchise to someone I believe will fail or will not meet brand standards?
- Do I have the fire in the belly to make this happen?
The ultimate answer to whether or when you should franchise cannot be found in any magazine, nor can it be provided by a consultant, an accountant or an attorney.
It doesn’t matter if the market is ready, or if the concept is ready. The answer to this big question can be found only within yourself. So it's time to ask: Are you ready?
Present vs future business goals
Next, determine where your business is now:
- How well-defined is the concept?
- How much money is it making, and what is its current value?
- What are its financial and human resources?
- How strong is the management team?
- Is it ready for expansion?
Once you have answers to these two variables, you can measure the distance between your current reality and the goals you have set. That distance, combined with an understanding of your goals, capabilities and time frame, will dictate your strategy.
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