Should I Franchise My
Business?
Clients frequently ask me what I think about
the franchising of their business. I respond with a scary
discussion of the costs of setting up a franchise system. I
can’t help it – the client sees the upside of franchising,
but it’s my job to see the downside including the costs and
risks. This article will be no different. To help you
decide whether you want to invest your time and money in
franchising, I will summarize up-front for you the costs and
risks.
The core concept is this: A franchise
system must succeed on two levels. First, the franchisor
must create a viable business model, and second the
franchisor must sell the model to franchisees. Most
business owners have such difficulty at the first level –
creating and maintaining a viable business – that they can’t
move on to the second level. Once at the second level –
selling the business model to franchisees – a business owner
will find a very competitive franchise market. There are
many franchise owners out there competing for franchisees to
buy into their system.
I counsel business owners to only consider
franchising after they have proven their business model. It
makes sense for the franchisor to first accomplish the first
level – creating a viable business – because few potential
franchisees will want to buy into a franchise system without
a record of sustainable success. Once the business model is
proven, the franchisor can move to the second level and sell
franchises.
As a potential franchisor you should
consider whether your business model can succeed without
your unique qualities (such as special skill-sets, know-how
or just extreme willpower, all of which the ordinary
franchisee might lack). Consider also whether the business
model can succeed in other markets, whether the business
model has a profit margin sufficient to support the
franchisee after payment of franchise fees, and whether the
franchise system can offer ongoing benefits to keep the
established franchisee in the system once the business is
established.
Just as important, you need to seriously
consider whether you have the capital to launch a franchise
system. A franchise system frequently needs at least
$50,000 in start-up costs plus additional capital to satisfy
state regulators. Also think hard whether your existing
business can survive while you are spending your time and
resources on the franchise system.
I don’t want to scare you away, but
franchising gets harder before it gets easier. Initially
you must sell your first franchise, which is the hardest
sale. After that your job gets harder, not easier. Now you
are responsible for your franchisees – they have invested
their life savings in the franchise and they depend on you
to help them succeed. This adds a moral dimension to your
responsibilities.
So how do you make the decision whether or
not to franchise your business? In sum, think first about
your business, and whether the business has proven itself
successful enough for franchising. Think second about
yourself, and whether you can commit the money, time and
energy required for franchising.
If you’ve read this far and still feel
confident in your business system, franchising might be
right for you. Call me and we can talk more about it, or
see my next article, “How to
Start a Franchise System.”
For help with your franchise disclosure document (UFOC), see
my article
"The
Franchise Disclosure Document." Remember that the
decision whether or not to franchise is very complex and
draws on many specialists, from lawyers to accountants to
financial planners to franchise consultants. Please do all
of your homework.
If you want
to read more about franchising, try my main page "Franchise
Attorney." From there you can link to other
pages and articles of interest.
Call
me to schedule a legal consultation:
510-796-9144
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