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In a previous article, I wrote about why so many franchisors do not grow past 10 franchise locations. In my current position leading my company and in my roles as past chair and a board member of the Canadian Franchise Association, I see hundreds of fledgling franchisors trying to convert their businesses into bona fide franchise systems. I also get many entrepreneurs asking, “Is my business franchisable?”
So I feel I have a pretty good inside view on why franchise startup numbers are so abysmal. The franchise businesses that do not typically succeed lack five things from the outset. So, before you attempt to franchise your business, first consider these five points:
1. Determine your profit-to-investment ratio
Does your current model make good money? Often when you deconstruct a franchisor’s model, it doesn’t actually make much money. To dig deeper, we need to look at the investment required to make the target profit. For example, if I invest $400,000 into a franchise and only make $50,000 per year, is it worth it? Probably not. I could find much cheaper alternatives to make that $50,000 per year. But if I only had to invest $10,000 to make that $50,000 per year, now that is a good investment that will make the right franchisee very happy.
This profit-to-investment ratio is one of the key metrics that most franchisors never consider. But it is probably the most important metric when determining whether you should franchise your business, or not. It is also a crucial metric for all franchisors, regardless of size and number of locations.
Related: The acid test: will franchising your business be profitable or not?
2. How hard is it to turn a profit?
Perhaps we find that our business has a great profit-to-investment ratio. Excellent, but don’t stop there. How hard is it to turn that profit? And how long will it take?
I’ve seen enough franchise models to know that some just make money fairly easily. Others might do well eventually, but it isn’t going to be easy and it can take a long time.
There are typically three problems in franchise models:
- The business ramps up too slowly and it takes a long time to get to the point of a healthy return on your investment in time and money.
- The business relies on you getting out there to do door-to-door sales. That is fine if you like it and are good at it. But if you aren’t naturally wired for sales, or your franchisees are not, it will make growing your business a lot more difficult.
- There is too much competition in your sector and not enough differentiation of your brand to cut through the clutter in the market. We often see this when a company has been in business for many years. Their original business is successful. It hasn’t had to fight for customers because it has been around so long and is a trusted brand in its local market. But franchising into new markets may not work for it.
Related: 3 Common Obstacles of Franchisors
3. Does your company’s success rely on you?
Many businesses owe their success to the charisma and sheer entrepreneurial force of the founder. And let’s just admit it — founders and franchisees are different beasts! Founders are trailblazing entrepreneurs. The outstanding ones are resourceful enough to be successful at almost anything they do. Franchisees are not typically classic entrepreneurs. They buy a franchise because someone else has blazed the path before them and they can piggyback off of that success with fewer risks. It is amazing how many founders we meet trying to launch a franchise system who say, I don’t need marketing systems, we succeeded without doing any marketing. This is almost always a warning sign that things are going to go badly for that company’s franchisees. A founder’s personality, drive and long-term standing in her local market are not going to help her franchisee open in a brand-new market. Your franchisees need to buy into a proven marketing system to acquire and keep customers. They aren’t buying your personality, drive and connections.
Related: Four Factors Influencing a Franchisor’s Success
4. Does your concept have a secret sauce?
Just because you have been successful in your local market, doesn’t mean this will translate to success elsewhere. Success in your local market can be due to many reasons: your charisma and personality, a lack of competition locally and your network. Many times I have witnessed founders — who have worked in an industry locally for many years leveraging their contacts — be surprised when their franchisees — who have zero relationships in the industry — are not successful.
To ensure franchising success, your product or service needs to have a secret sauce: a highly differentiating factor that makes customers want to buy it. Perhaps your concept is the first of its kind. Or your fried chicken recipe has a unique and special blend of spices. Or your cleaning company’s brand promise and guarantee to your customer is simply unmatched by competitors. Before even considering franchising, you need to spend time developing and operationalizing your secret sauce.
We recently helped launch a franchise system of a company that helps women strengthen their pelvic floors to prevent bladder leaks after giving birth and as they age. The business has been wildly successful right from the start because they are a unique, first-of-type concept. And, they are world-class at showcasing their product and why women need it. They have a secret sauce.
If you do have a secret sauce, then you must systematize it. It must be repeatable by people other than yourself, and this is easier said than done.
5. Have you invested in your brand?
I find that very few new franchisors have sophisticated brands. You might have spent years building a great local business, but your brand may be plain, outdated or boring. As I say to all new franchises I work with, you may only have one location, but to sell franchises, you better look like you have one hundred.
How do you do this? You need to invest in making sure your brand is unique in the way it looks, sounds and in the way you deliver your product or service. It also helps if your brand’s logo and colors are visually beautiful or striking.
These are not the only factors that you will need to build a great franchising system, but in my experience, they are the top five. Franchising is an amazing way for an entrepreneur to scale his or her impact across the country. And build a powerful brand that is a force in their industry. But make sure you have these five factors in place first. If so, the probability of your success will be far higher than the average new franchise system that fails to grow beyond 10 units.