5 Must-Answer Questions if You’re Thinking of Franchising Your Small BusinessDo you have the capital, the revenue, the right product — and the wherewithal?
You’ve been growing your small business for years. Now that you have multiple locations, you may be wondering, “Should I franchise?”
Drawing from more than 20 years of franchising experience, Scott Mortier, president of The Franchise Whales, a franchise consulting and development company, shared five questions to ask yourself to help you determine if “yes” is the answer and if now is the right time.
1. Is my product or service transferable to every market in the country?
Your business works well in your neck of the woods, but will it work everywhere? If not, “you need to be willing to change or adapt your business model or product/service to fit a larger audience,” said Mortier.
2. Do I bring in enough revenue?
Your business turns a profit — but will it still once you add franchise fees, royalties and other franchising expenses? “Typically, franchise fees are around $25,000, and the royalty percentage is 6 percent,” said Mortier.
Make sure you know the overhead costs, expenses, profit and liabilities for the product or service you are currently offering. “Prospective franchisees are looking to buy into a franchise because it already has a proven business model,” Mortier said.
They will look to your corporate unit sales to evaluate the strength of that model. “If your corporate units aren’t showing a great enough profit, it will be more challenging to get initial prospects to join your franchise,” Mortier said.
Healthy unit sales depend on your industry or niche. “For example, in the restaurant industry, your profit margin should be between 14 and 20 percent after franchise-related costs. In a business-to-business world, your profitability should be around 25 to 40 percent after franchise-related costs,” Mortier said.
3. Am I willing to make franchising my company my full-time job?
Transitioning from running your business to selling your business model as a franchise is a significant shift. Much of franchising is service, and you have to be ready to work hard at providing that to your franchisees.
“There are many skilled people within the franchise profession. That being said, there are many people who have sold a franchise but have never built a franchise system, generated a franchise lead or built a brand,” Mortier said. “You need to be able to go the extra mile.
4. Am I adequately capitalized?
It’s extremely important to have a realistic idea of the capital you need to franchise your business model and know whether you’ll need to raise money from outside sources. A cash flow analysis can help you plan for the costs of franchising, such as legal fees, new staff and marketing, and factor in the franchising fees you can expect to collect.
“Businesses should budget around $100,000 to $250,000 for legal costs, creating manuals, generating franchise leads, building a training program, hiring necessary personnel and other operations needs,” Mortier said.
“The concepts that struggle when they begin to franchise are those that are undercapitalized, are too focused on specific areas of their concept, such as operations or sales, and have corporate units that aren’t profitable enough.”
5. Am I willing to change my product or service to make it more franchisable?
“If you’re too in love with your product and unwilling to change, your concept is not going to make it in franchising,” Mortier said. “When an industry veteran tells you that your product or service isn’t right for franchising, find out why and, most importantly, listen to their advice. Drinking your own Kool-Aid is never a good thing in the franchise world.”
Getting professional help is important. Hire a lawyer, CPA or franchise consultant to help you make the transition to franchisor, Mortier advised. When choosing a franchise development partner, take the time to thoroughly vet them. “They need to be a cultural fit and, most importantly, you need to be able to work with them. I recommend observing their process first-hand and speaking with other franchises they have supported.”