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Franchising is one way to expand your business without having to manage each location’s day-to-day logistics. Instead of undergoing the arduous process of opening locations one by one, you position your franchisees for success with marketing assistance, training programs, and more.

Franchisers can enjoy multiple benefits, including scaling their business concept, securing recurring revenue, and building a talented network of franchise operators. 

Think You’re Ready to Franchise? Don’t Forget These 6 Important Details

Even if you feel your small-town business idea can be replicated in another city or state, don’t let the allure of expanding your brand blind you to some of the realities of franchising. 

Initial Franchise Fees Shouldn’t Be Your Primary Income Source

A common mistake among new franchisors is hoping to make a profit on initial franchise fees. However, excessively high initial fees may turn away qualified entrepreneurs who can open your first franchise units and promote your brand. Consider setting your fee at just enough to cover franchisee onboarding costs, such as site selection assistance and training programs. Franchise fees typically range from $20,000 to $50,000.

Unlike the one-time initial franchise fee, monthly royalties and marketing fees offer consistent, recurring revenue. Royalties and marketing fees are typically based on a percentage of the revenue generated.

Keep in mind that it may take up to ten months or more from when a franchisee makes contact with you and when they open their doors for business. Don’t count on collecting revenue-based fees until several months later when the business is actually serving customers.

You’ll Have to Give Up Some Control

If you’ve built your business from the ground up, it’s tempting to get attached. However, franchisees are individual owners that operate their units with some independence and are largely responsible for handling the day-to-day responsibilities. 

However, you will still have some input when it comes to the overall representation of your brand. Franchisers will often provide a 300- to 500-page operating manual that contains guidelines on multiple procedures, including how to deliver customer service, which in-store and outdoor signage must be displayed, and which days and hours the business is open.

Creating training programs will also equip your franchisees with the necessary skills and knowledge for owning and operating a franchise. Also, the right training can help create a uniform customer experience across all locations. If you don’t create and regularly update your training systems, it can be easy to normalize undesirable employee or franchisee behaviors that could tarnish your brand’s reputation.

Multiunit Franchisees Can Help Scale Your Brand Efficiently

Working with multiunit operators allows franchisors to sell additional units while working with fewer franchisees. Recently, we’re seeing a jump in entrepreneurs operating multiple units — 54% of franchised units within the United States in 2019 are multiunit operators, according to FRANdata. Offering multiunit agreements can be efficient since you will only need to train the franchisee once. Also, multiunit operators tend to be better financed and possess strong management skills. 

If you decide to offer multiunits, you and the franchisee will need to sign an area development agreement, which gives the franchisee permission to open a certain number of units in a specific territory within a defined timeline. Keep in mind, however, you will typically need to facilitate a franchise agreement for each individual unit franchise.

If you’re unsure of an individual’s capabilities as a multiunit operator, you can offer to sell additional units at a later date after they’ve demonstrated the characteristics for success. Convincing successful single-unit franchisees to purchase additional units can be easier since the franchisee has already invested in the brand and may be motivated by their first unit’s success. 

You’ll Need to Make Sure Your Brand Concept is Franchisable

You should confirm your brand presence is strong before attempting to replicate it. Consider opening at least three locations on your own first. If each location experiences success, it is a sign that your business concept is profitable and can be replicated. Moreover, you gain firsthand experience on what’s involved in getting new locations up and running.

Conducting market research can also help you determine whether the demand for your brand extends beyond its original location. For inspiration, study local franchise competitors in your area and brainstorm ways you can distinguish your business.

Make sure your business is generating enough working capital to cover the costs of franchising since you don’t want to be reliant on funding to cover everyday expenses. Franchising can be a significant investment — potentially to the tune of hundreds of thousands of dollars and more. You’ll want to ensure your business is financially secure enough to afford hiring salespeople, completing paperwork, training new franchisees, and more. 

Pay Attention to Your Supply Network

Franchisers are often responsible for helping their franchisees secure necessary goods, such as inventory and supplies, and services, like packaging consultants and accounting firms. The quality of your supply network can affect the profitability and success of your franchisees — a product supplier with poor service and late deliveries, for example, may lead to a loss of customers and sales.

When choosing the right supplier, try finding one that has experience working with franchising organizations, as they will more likely understand your needs. Also, be sure to verify the supplier has the necessary training and licenses — business brokers, accountants, and builders may need specific documentation before practicing or operating within a specific territory. Don’t be afraid to shop around and compare quotes from different suppliers to help you determine a fair price.

Don’t Leave Tech Fees Off the Table

Many franchisors have started charging fees to invest in new technologies, such as a new software system or mobile ordering platform, which can help increase efficiency and profitability across all stores. As software and point-of-sale systems evolve, business owners are understanding how technology helps businesses succeed. Domino’s Pizza, for example, has developed its point-of-sale system in-house to help increase efficiency. McDonald's installed decision logic technology on drive-thru menu displays to instantly suggest additional items based on the customer's selections.

Despite the benefits of technology, only 61% of franchisors collect technology fees, according to a 2019 study by FranConnect. Before franchising your business concept, consider how investing in tech solutions can position your franchise for long-term success. Charging a tech fee can help you invest in technology that can increase efficiency, such as automating certain positions in labor-intensive operations. Leaving tech fees off the table can limit the growth of your franchise.

About the Author(s)

 Ting  Pen

Ting Pen is a ValuePenguin Co-Founder. She previously evaluated corporate mergers and acquisitions as a Financial Analyst at Citigroup. Her experience in financial services combined with her entrepreneurial spirit allowed for her to start her own fin-tech company. Her passions lie in problem solving, growth, and travel.

Co-Founder, ValuePenguin.com
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