Why Franchising May Not be the Right Business Model for Your Concept
Franchising your business is desirable for many reasons. Among them is expanding your market and increasing profits, experiencing rapid growth for your brand, building your brand name quickly and more.
But, not every business concept is the right fit for franchising. There are many enterprises that have tried and failed because one or more key elements of franchising was missing or the business owner attempted to grow quickly by cutting corners.
Franchising may not be the right business model for your concept if:
Your Concept is Not Replicable
Franchising is all about consistency throughout the entire franchise system. The service and/or product the consumer purchases in Chicago should be the same in San Francisco and at every single location in your brand. In order to achieve that consistency, your concept must be replicable.
Logos, store interiors, customer service, employee attire, franchisee support and training, as well as your product or service must be the same. Utilizing a replicable model is also more cost-effective than building each new location from the ground up. If your business isn’t replicable, you will struggle to build brand recognition and consistent customer satisfaction.
Your Business is not Successful in Multiple Markets
Franchising is an efficient way to grow your brand across a region, country or the world. But, if your business is not turning a profit in more than one location, it is not ready to franchise. There could be several reasons for this – one may be that your concept is not replicable. Another may be that you don’t know your customer demographics. Knowing who your ideal customer is and their behaviors will help you meet their demands and grow your concept across markets. You can then identify ideal markets to expand your brand.
You Lack Differentiators
Emerging franchises must be unique in order to compete against both established and other emerging franchises in your segment. Differentiation is one of the key barriers to entry, which helps keep competition in check and provides potential for you to dominate your industry or segment. But, if there’s nothing that sets you apart from the competition, your business will go unnoticed by both consumers and potential franchisees. Your concept will struggle to grow.
Demand for Your Product or Service is Low
Lack of differentiation for your concept can lead to little or no demand for your product or service. Underperforming marketing can also lead to lackluster demand. As an emerging franchisor, you need to tell the story of your brand, the success of your corporate-owned locations, your plans for growth and more. Public relations and content marketing are effective avenues for spreading the word to pique the interest and generate demand from consumers, as well as entrepreneurs looking for franchise opportunities.
You will not see an Adequate Return from Franchising
Launching your business as a franchise concept is a huge investment that requires planning, effort, commitment and, of course, capital. The goal is, at some point, to be able to sustain the business on royalties from your franchisees. But, you have to develop your franchise system the right way and not cut any corners before you’ll see a return on investment (ROI). In addition to everything mentioned above, you will need to make several other investments, including but not limited to:
- Franchise development strategy ($7,000-$20,000)
- Dedicated franchise development team (Up to $200,000)
- Experienced franchise attorney or franchise consultant to help draw your FDD, franchise agreement and other documents ($25,000-$35,000)
- Training materials for franchisees ($20,000-$30,000)
If you don’t invest the time, energy and commitment to franchise your start-up, the money you spend could be a loss. If your business is not profitable enough to sustain those investments, you may end up losing money by franchising.
Your Franchisees will not see an Adequate ROI
Happy and satisfied franchisees are essential to franchise expansion. Disgruntled franchisees will stall growth. When franchisee candidates conduct their due diligence, they will speak with your existing franchise partners. What they tell your candidates about being part of your franchise system will either help or stunt growth. A surefire way to make franchisees happy (and ensure you award more franchises) is to see that they achieve their ROI. Typically, a franchisee should expect to earn one-third of their investment back every year for three years. If your franchise system doesn’t allow for franchisees to see a timely ROI, you should consider trimming unnecessary expenses, increasing profits or risk low growth potential.
You are Unable or Unwilling to Provide Support
The nature of franchising includes the franchisor providing support to franchisees who are building brand awareness and recognition. The basic support typically includes:
- Training – grand opening and ongoing
- Site selection
- Operating manuals
Franchising is a relationship between franchisor and franchisee. In addition to the rights to a brand and product, franchisees are buying into the franchisor’s support and systems when they pay their royalties. They will expect training and support along the way in return. If you are unable or do not want to help franchisees be successful operating under your brand name, you should not franchise your concept, much less expect your company to grow.
You are Undercapitalized
You have to spend money before you make money. In franchising, you will need at least twice the start-up amount originally planned in order to be fully prepared to spend money where needed – putting systems in place, creating manuals and legal documents, assembling a franchise development team, and more. Unfortunately, the franchising efforts of many emerging franchisors come to a halt because their capital dries up after only a year. Typically, would-be franchisors seek the capital they need from lenders, such as:
- Commercial banks
- The Small Business Administration
- Angel investors
- Investment bankers
- Venture capital firms
- Private equity firms
This requires you to pitch your concept and share your growth plans with potential lenders and investors. If these sources are not willing to lend or invest, your business probably isn’t right for franchising.
For help determining if your business model is right for franchising, or how to make it compatible with franchising, turn to a franchise advisor – Winmark Franchise Partners. With 30 years of franchising experience and more than 800 franchise owners representing almost 1,250 locations for five brands, Winmark Franchise Partners can help you help grow your brand through sound strategy and expert franchising advice. Contact us here or at (844) 452-4600.