There’s a common misconception in the business world that franchising is only applicable to large companies with lots of employees. This isn’t the case. As a growth strategy, creating a franchise offers a superb avenue for a small business to gain market share by increasing points of service with minimal capital.
When considering expanding into the franchise world, how can you maximize your chances of success?
The answer is to examine the fundamentals of your business, ensuring you’re on solid footing in each of the following categories.
Business owners looking to franchise must first have a successful concept that can be replicated. This concept needs to hold appeal to both consumers and prospective franchisees. Additionally, there should be an expectation that more units will lead to greater economies of scale and profits for all involved.
The Financial Aspect
The central idea behind franchising is taking a business that’s proven to be profitable and attempting to replicate that success in another locale. Enough income must be generated by the franchisee to make a profit, as well as meet their obligations to the franchisor. The franchise needs to be constructed to ensure both sides receive a fair return on the time and effort employed.
You love your business. It’s a success. But will the market support further expansion? Before you can reasonably expect a franchisee to invest in your business it’s vital to carry out market research to show demand is there. Your market research should answer the following three fundamental questions:
- Is the market sector large enough to support another franchise?
- How many other franchises/businesses operate in your market sector?
- Is the market sector growing, static or declining?
You have several options on how to go about generating this market research:
- Use published market data
- Take DIY market research courses
- Conduct field research
- Employ the services of a market research agency
Economies of Scale
Simply put, is your business the type that will benefit from the economies of scale franchising brings about? These advantages can be felt in areas such as the supply chain, advertising and staff training, with the costs split between all the franchise partners.
Before franchising, you must be able to train and support franchisees in replicating your business. Some of your franchisees may be operating in other provinces or markets with unique challenges, how will they overcome them? The onus is on you to provide training and guidance on these issues. This responsibility extends to advertising, management, employee relations, public relations and legal advice.
Getting a franchising program off the ground is extremely expensive. The initial revenue you recoup from franchisees will almost certainly be insufficient to pay for the expenses you’ve incurred as a franchisor. If, as the business owner, you don’t have sufficient capital to support you until you reach critical mass of franchisees, you will need to find investors prepared to support the franchising.