Looking to start a small business that’s profitable and grows? If the company takes off there may come a time when there’s a potential of franchising a business. People may be wondering when the business will spread to other areas, and if that’s the case it may be time to ask some questions to see if the brand is ready to become a franchise. To start a business that can eventually spread its wings and fly, check out our free webinar training. Keep reading to learn about which questions to ask before deciding on whether it’s time to franchise a business.
1. Is my business financially successful?
Of course, one of the first things you should ask yourself, according to Forbes, is if your business is financially successful enough to become a franchise. There’s a lot that goes into franchises, and you want to make sure you’re in a good place financially.
Having one profitable location is just the beginning. In general, it’s best to have at least three successful locations up and running profitably before you take steps to franchise a business. The process of opening and running multiple locations will give you a good idea of what’s involved in opening franchises and helping them succeed.
Deep pockets are also needed to:
Complete all the necessary legal documents
Market your concept to possible franchisees
Hire salespeople to sell the franchises
Provide training and ongoing support for your franchisees
This can cost hundreds of thousands of dollars or more. If you can’t finance this internally, looking for a business loan to do so will give you a good idea of whether or not your franchise dreams are realistic.
2. What financial options to I have and how much money can I make?
To add to being financially ready, another thing you should ask yourself is what financial options do you have. Entrepreneur also states that you should consider how much more money you could make if you decide to franchise your business. These are important questions to ask before you make these decisions.
The most common forms of standard financing are bank loans and/or commercial leases. Any bank loan to start a new business will probably either have to be secured by your personal collateral (such as the equity in your home) or through an SBA guarantee program, and the banks may require both forms of security. Most new franchisees find that securing an open line of credit against their home equity is the easiest and least expensive form of bank financing available to them. Leases can also be a favorable option, since they are typically fast to procure and secured by the assets that are being leased (though they sometimes require a personal guarantee as well).
How much money can I make in this franchise? This is the $64 question. You will normally find the answer is related to the amount of time the business has been open. The first year will probably be a loss, but by the third year the business should be making good money. Ask a lot of existing franchisees about their experience at these levels, and make sure you know what your probable income will be by the time you complete that critical third year.
3. Does my business rely on my presence?
Forbes says you should ask yourself if your company relies on your presence. If the answer is yes then you may need to either hire employees and instill your brand message within them or have them work on other areas of your business. Do this and you can focus on your clients without losing sight of your brand.
This is a challenge for a lot of service businesses, especially those that began as one-person companies. For example, if you’re a talented graphic designer or hairdresser, clients might only want to work with you—not your employees, whom they perceive as less skilled. It’s impossible to franchise with only one of you.
If you have this problem, you can pave the way for franchising by training employees to provide the same services you do (create an operations manual to teach them). Next, begin easing your customers into working with your employees instead of with you. Some ways to do this are by charging more for your personal services and less for services provided by employees (as hair salon owners often do) or by having employees handle all of your new customers while you keep serving your “regulars.”
4. Would I be good at pitching my business as a franchise?
If you do decide to move forward with franchising your business, Small Business Trends says you should think about which steps you’ll need to take after you make your decision. One of the things you’ll do is pitch your business as a franchise. You’ll need to know how to effectively do that in order to land the right type of customer.
You must have a process to sell your franchise to people you do not know. Ninety-five percent of your customers who tell you they are interested in becoming a franchisee will never write you a check. And even if all of them do, it is not enough to create a viable business. You need to sell to people you do not know. All successful sales are the natural outcome of a successful process. If you want a great example of an automated process, you can visit Process Peak.
Keep in mind, your initial franchisees will be early adopter personalities, risk takers. They will become franchisees because they like ground-floor opportunities and are easier to sell based on a concept and an opportunity. However, when you update your FDD, you are required to list your current franchisees (with contact info). Those people will become a critical part of your sales process weather you like it or not. The key to your long term-success is how happy you make those early franchisees, and if you are cutting corners to save money or because you are not committed to the idea of franchising your business, their negative comments to prospective franchisees will really hurt future sales.
5. Should I hire someone to help me?
We briefly touched on this earlier, but sometimes it’s in your best interest to hire some help. Inc. says to prevent getting over your head it’s probably a good idea to hire people who can help you run your business and franchise it.
This all sounds fairly complicated. Once you've established that your business can be scaled to multiple locations, and you have the appropriate funds, who should you consult to start the process? Again, this question is somewhat dependent on your knowledge base, and how much work you are willing to put in.
There are franchise developers (similar to consultants) who will offer a one-stop shop to begin the process. When hiring a franchise developer, make sure to perform due diligence to ensure you are contracting a reputable company. Here are a few factors to further consider when hiring a developer.
You can, of course, research and hire experienced professionals on your own. The two most important aspects of starting the process are the legal representation and an accountant. If you already have a lawyer, you can ask for a recommendation for a franchise-specific attorney. You likely have an accountant for your business already; depending on the size of the firm, they might be able to refer you to someone in-house.
Small Business Trends elaborates more on this topic by discussing how important it is to let go of some of the ropes and instead, train new employees to help you and ultimately take over some areas of your job.
Keep in mind you are embarking on an entirely new business endeavor in which you have no practical experience: franchising. You are no longer running your business and training others how to do the same; you are the CEO of what you hope will become a successful national franchise company.
I’ve seen many companies fail and wind up entangled in the legal system because they never make the full commitment to their franchise company. Hiring a franchise development company to create marketing and sales documents and prepare your Federal Disclosure Document is enough to help you sell a couple of franchisees. But if you want to become a meaningful and successful company, you have to support your earliest partners and make sure they are successful.
Here are a few quotes from All Business to inspire you as you consider whether you should franchise your business:
If you have yet to open additional locations, you’ll want to start by trying another location, ideally in a different city altogether where you can truly put your idea to the test. What works in your city may not work in every city because of cultural nuances, a city’s history, or even the climate and seasonal factors. Just be sure that you’re not missing a factor that could be contributing to your success. –David Ciccarelli, Voices.com
It’s a good sign if you have people or businesses interested in franchising your business. Now, you need to set minimum standards for what skills and experiences are required to run a business like yours and if those interested meet the standards. The criteria might include experience in your industry, a ready base of potential customers, and a certain amount of capital available to start up. –Nanxi Liu, Enplug
Scaling is a big decision and it takes people who share in your passion for the business to keep it successful. Not only are you letting go of some control, but you are also bringing new faces to the team. Make sure your team is sound in all aspects and you have succession plans in place as promotions and shifts in responsibility occur. –Drew Gurley, Redbird Advisors
If you do decide to take the leap and franchise your business you can expect potential business executives to ask you some questions about your company. They’ll want to know why they should take a risk on your company. Small Business Trends reveals a few questions you might get asked:
What are some of reasons you have turned down prospective franchisees?
(Here, you are trying to find out how serious they are about finding the best franchise owners.)
Do you have any ongoing litigation with any franchisees? Can you tell me about it? If not, if you’ve had any litigation in the past, can you share what it was about, and how it ended up?
(Lots of franchise and non franchise companies experience the many pleasures of lawsuits. Listen carefully to their answers. Who sued who? What really happened?)
Are there any major technology/equipment upgrades planned for the current system?
(Upgrades could be equipment upgrades that the individual franchisee has to pay for, or major technology upgrades that the franchise company pays for.)
Questions like those are not commonplace. That’s the point. The more you can learn before you invest, the better you’ll feel when you write a $35,000 check for the up-front franchise fee to the franchisor.
The entire business world is becoming more transparent. Allow me to rephrase that; The entire business world is learning that transparency is really the way to do business. Not many industries will be able to escape this fact in the near future.
Join us during our next free webinar training to find out how you can jumpstart your own small business online. Who knows — maybe one day your business will grow and you can franchise it! Don’t stop dreaming and believing in your dreams to become a successful entrepreneur because you’re capable of doing great things.
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