Franchising Insights: 3 Common Questions from Aspiring Franchisors

In the dynamic world of entrepreneurship, few strategies offer the potential for rapid expansion and market penetration like franchising.

Over the course of this year, I've had the pleasure of delivering several keynotes centered around franchising and the importance of nurturing the franchise relationship. What's been particularly interesting after my speaking engagements is the recurring theme in the conversations that ensue, both in-person and through social channels.

I've noticed a pattern in the questions that consistently arise from business owners. It's clear that many entrepreneurs are eager to harness the potential of this business model.

In this article, I aim to shed light on the questions that I frequently encounter and provide comprehensive answers that can guide you in your franchising journey.

Below are the top three questions that consistently take center stage from aspiring franchisors.

Question 1: When Should I Franchise My Business?

One of the most common questions I receive is about the right timing to transition a business into a franchise model. The decision to franchise should be grounded in careful consideration and preparation.

Here are a few key factors to weigh:

1. Proof of Concept: Before considering franchising, ensure that your business model is well-established, profitable, and replicable. Your success in your current location(s) serves as a strong foundation for expansion. You should have a proven formula to offer to potential franchisees. Investing in corporate units can serve as a way to penetrate new markets before franchising to help build brand awareness.

Aside from anomalies, I recommend having 3-5 corporate locations that have been operating successfully for at least 2 years before you start franchising your concept.

2. Operational Simplicity: Develop documented processes and systems that can be easily replicated across different locations. This consistency is crucial to maintaining your brand's reputation and quality. Invest time and money in developing comprehensive operations manuals and brand standards that are easily transferable with minimal steps to execute. Clear and standardized systems form the backbone of a successful franchise system.

3. Demand & Market Opportunity: Assess the demand for your product or service in potential markets and analyze saturation strategies. A strong demand indicates that there's potential for growth through franchising. Regions with untapped potential could be ideal for your franchise network.

4. Financial Stability: Franchising involves upfront costs, including legal fees, training expenses, marketing and advertising, and investments in additional people. Ensure your business has the financial capacity to support expansion and all the initial investments.

5. Brand Identity: A well-defined brand identity and a unique selling proposition (USP) make your franchise opportunity more appealing to potential franchisees. Establish a strong set of non-negotiables that you and future franchisees can count on. Craft a strong brand identity that sets your business apart from the rest, especially direct competitors. A recognizable brand increases the appeal of your franchise opportunity to potential investors.

"The decision to franchise should be grounded in careful consideration and preparation."

Question 2: How Do I Maintain Quality & Consistency with Franchise Growth?

Maintaining quality and consistency while expanding through franchising is a valid concern. Many business owners describe this as "losing control" as they are used to having direct control over the day-to-day performance. Most of the founders, who I've helped convert their existing business into a franchise, have lacked confidence in their brand's ability to scale. This usually stemmed from not having professional documentation that showcased the ease of use for others to replicate. Completing the franchise disclosure document (FDD) and operations manual instills a strong confidence in founders and helps them see the real growth potential.

To safeguard your brand's reputation, consider these strategies:

1. Robust Training Programs: Implement thorough and relevant training programs for franchisees that cover all aspects of your brand. This ensures that they understand your brand's values, processes, and quality standards. This equips franchisees with the tools and knowledge to maintain your brand's identity.

2. Standard Operating Procedures (SOPs): Develop comprehensive SOPs that cover every aspect of the business, from guest service to product delivery. These documents serve as a guide for franchisees to follow consistently and a playbook to uphold your brand's standards.

3. Ongoing Support: Provide continuous support to franchisees, ranging from regular check-ins to troubleshooting issues to periodic reviews of their operations and financial performance. Determine a cadence for location visits, operational and quality audits, business reviews and regional strategy meetings.

4. Performance Metrics: Establish key performance indicators (KPIs) that measure the success of each franchise unit. Implement regular reviews of these metrics to assess each franchise unit's revenue and profitability trends. Provide additional guidance when needed and offer business planning sessions. This ensures that red flags or deviations are identified early and rectified.

5. Communication Channels: Foster open lines of two-way communication with franchisees, allowing them to share challenges, suggestions, success stories and overall feedback. This creates a sense of community and encourages collaboration. Encourage franchisees to share their insights and challenges frequently. A collaborative approach fosters a sense of ownership and alignment with your brand's mission, vision, and values.

Question 3: What Should My Franchise Fee, Royalty, & Ad Fee Structure Be?

Determining the right fee structure requires careful consideration and research. This decision is based on multiple factors like number of years in business, unit count, average unit volume (AUV), comp sales growth, earnings before interest/taxes/depreciation/amortization (EBITDA), payback period, headcount support plan, competitive analysis, and overall brand pro forma.

Here's how to approach this aspect:

1. Franchise Fee: The initial franchise fee is a one-time non-refundable fee that is paid to the franchisor upfront after a franchisee signs a franchise agreement. Set a franchise fee that could cover the overall marketing and administrative costs to acquire and onboard a qualified franchisee and is in line with other franchises in your industry. This fee should reflect the value of your brand and the support provided to franchisees.

2. Royalty Fee: The royalty fee is a percentage of franchisees' gross or net sales paid to the franchisor regularly. Weekly royalty drafts are common in high volume brands whereas monthly royalty drafts are more common for lower volume brands. Strike a fair balance between profitability for franchisees and sustainability for your franchise system.

3. Advertising Fee: The advertising fee is also a percentage of franchisees' gross or net sales paid to the franchisor. However, these fees must be deposited into a separate fund that is dedicated to national marketing expenses and spent annually. An advertising fee contributes to brand-wide marketing and advertising efforts. Ensure transparency in how these funds are used and periodically review the effectiveness of your advertising strategies. Most franchise brands also require a local advertising spend based on gross or net sales that is managed by the franchisee directly.

4. Discount Consideration: Offering initial fee discounts can attract early franchisees but proceed with caution. A discount could lead to devaluing your brand over time as all discounts will be disclosed in the franchise disclosure document (FDD) in the form of a range. Instead, consider value-added incentives that benefit both parties.

Some new franchisors position themselves initially with a higher fee structure but offer a reduction for pioneer franchisees who join within a certain timeframe, typically during the first year. The range of fees is easier to explain to future prospects as it was time bound and consistent.

Other franchisors start with lower fees and try to work their way up over time based on growth and demand. This path is usually more challenging and harder to justify for emerging franchise brands.

5. Long-Term Viability: When setting fees, focus on long-term sustainability rather than short-term gains. A fair fee structure encourages franchisee success, which in turn benefits your franchise system.

Summary

Franchising can be a powerful avenue for business growth, but it requires careful planning and strategic execution. As you embark on your franchising journey, remember that adaptability, continuous learning, and a strong support network are key to achieving sustainable success.

"As a Franchisor, your main focus is to serve & support Franchisees."

Remember, the heart of successful franchising lies in fostering collaboration, innovation, and a commitment to maintaining the standards that define your brand's excellence. As a franchisor, your main focus is to serve and support franchisees so you and your team should be fully dedicated to delivering on that.