In this comprehensive post on franchising, I’m going to show you why franchising is so good.
(Video clip courtesy of Young Frankenstein and YouTube)
One reason franchising is so good, is because it’s enabled hundreds of thousands of people to become small business owners.
Take Subway® for example. Do you have any idea how many Subway franchise owners there are across the world?
So why does franchising work so darn well?
What is it about franchising that makes it one of the best and most talked-about business types?
I’ll show you.
Franchising: The What
A serious discussion of franchising needs to start at the “what.”
As in, what is franchising?
Franchising typically involves the granting by one party (the franchisor) to another party (the franchisee) the right to carry on a particular name or trade mark, according to an identified system. Franchises are usually located within a territory or at one specific location, for an agreed upon term. The franchisee is granted a franchise license to use the franchise company’s trademarks, systems, signage, software, and other proprietary tools and systems in accordance with the guidelines set forth in the franchise contract. Note: My translation of that paragraph can be found here.
Next, it’s important to know how (and where) the franchise business began.
But why? Why should you read about the history of franchising?
“The answer is because we virtually must, to gain access to the laboratory of human experience. When we study it reasonably well, and so acquire some usable habits of mind, as well as some basic data about the forces that affect our own lives, we emerge with relevant skills and an enhanced capacity for informed citizenship, critical thinking, and simple awareness.”
– Peter N. Stearns, Historians.org
Please read “A History of Franchising as We Know It,” so you’ll have an appreciation of the business.
Popularity Of Franchising By City
Look at these important statistics, courtesy of Lending Tree.
In the franchising world, it’s all about the system.
That’s because you can offer the best product or service in the world, but if you don’t have a powerful, efficient business system to get it in the hands of consumers and businesses, you won’t have a business. You will have debt, though.
In short, if you’re the founder…the creator of the product or service, you’re the one who’s going to have to create the system. But how?
Trial and error is how.
And once you’ve come up with the “system,” you’ll have to duplicate it. Like Louie did. And you’ll have to hire a franchise salesman or saleswoman to sell your franchise concept to would-be franchisees.FYI: Small business expert and radio host, Jim Blasingame, calls franchising, “America’s gift to the world.”
Louie Has A New Twist on Pasta
Pretend You’re Louie
Your name is Louie, and you’ve come up with a new twist on pasta. And you want to introduce it to as many people in the U.S. as possible.
You’ve perfected a unique pasta production technique, your homemade sauces are ready for prime-time, and you’ve come up with what you feel is a workable restaurant design. So you find a location for your pasta restaurant and build it out.
The build out goes pretty much like you expected it would. In other words, it cost a lot more than you thought, and you opened for business 2 months later than you had planned. Such is the life of an entrepreneur.
But you did do something right. You documented every single thing related to the build out of your restaurant. That means you have a blueprint (of sorts) for the build out of your second location!
Next, while your contractor did his thing, you created your menu, figured out pricing, picked out uniforms, purchased supplies, and figured out 100 more things. In reality, what you’re doing is putting together a franchise system! Your franchise system.
Louie’s Healthy Pasta House Is Open!
Now that your business is open, it’s time for you to tighten up system. This is where a lot of trial and error comes into play. In other words, you’ll make mistakes. That’s fine. Mistakes are what you want now. That way, you can fix them before you open location #2.
In the meantime, you continue to documenting everything. (Smart move!)
Payroll costs. Food costs. Inventory turn. High and low traffic times. Your marketing and advertising efforts. Everything. You know what you’re doing by documenting everything, right?
You’re creating your operations manual.
And you’re going to need it.
Because pretty soon, you’re going to open that second location. And if things go well, it will be time to turn Louie’s Health Pasta House into a franchise business. Now the work begins.
Franchising A Business
Anyone who’s thinking of “franchising” their business has the same visual.
They imagine owning and operating a business with hundreds (if not thousands) of locations. It gets better. Let’s do some math.
Let’s say you’re Louie, the entrepreneur who came up with the idea to start a chain of healthy pasta restaurants. And franchising them.
Your 10-year business plan is to have 500 highly profitable franchise business units up and running. Your figures look like this.
Upfront Franchise Fees: $40,000 x 500 units = $20,000,000
Royalties: 5% of sales = $90,000 x 500 units = $45,000,000 (based on each unit doing $1.8 million annually)
Of course, Louie needs to subtract his cost of sales, marketing, payroll and a plethora of other expenses, but when all is said and done, Louie will be a multi-millionaire. Not a bad payday, huh?
Without question, that’s why so many people want to “franchise” their business.
But as the saying goes…
That said, my friend, Charles Internacola, just published “The Ultimate Guide to Franchising Your Business.”
In it, he shows you the business franchising process, step-by-step.
I encourage you to read it and bookmark it so you can go back and review it whenever necessary. Franchising Your Business Guide
Franchising: Getting Involved In The Franchise Business From The Other Side
If you’d like to benefit from franchising, but you don’t have a business you want to franchise, you can become a franchisee.
Specifically, you’re leveraging the franchise model by investing in it as an owner-operator.
Though some might argue that it’s better to be the franchisor…the entrepreneur who came up with the franchise concept, being a franchisee can be quite lucrative.
For example, I wonder if Chad Motsinger and Ben Walsh (franchisees) had any idea that their Taco Bell® franchises would be purchased* by an equity firm.
*Bessemer Investment Partners, a New York-based equity firm, purchased all 73 locations for an undisclosed amount. I’m comfortable telling you that the purchase price was in the millions.
To be sure, transactions like that don’t happen all that often. And most multi-unit franchisees own less franchise units than Chad and Ben did.
As a matter of fact, the majority of multi-unit franchise owners own between 2 and 5 franchises. But as you can see, lots of people own 10 or more units.
Recommended Reading: “Go For It! Become a Multi-Unit Franchisee.”
1. You need to determine if you are the right type of person to own a franchise business.
2. You need to take a financial snapshot. In other words, you need to know where you stand financially. My Free Net Worth Calculator will help you do just that.
3. You must determine your strengths and weaknesses, as they pertain to owning and operating a business. Once you have a good idea of what they are, you’ll be able to focus on franchises you can best utilize your strengths with. Make sense?
4. This step will involve lots of screen time. That’s because you’ll be spending time on the top franchise opportunity websites, looking at franchise opportunities that may end up being a good fit.
5. Franchisor calls. This step involves contacting the specific franchises you found, so you can get more information on the business to see if it fits what you want in a business.
6. This step is the most important one. It’s where the rubber hits the road. It’s the research. Please make sure you know how to do it.
7. Financing your franchise. This step involves figuring out how you’re going to pay for a franchise…if you find the right one. Options include paying cash, getting a loan backed by the SBA, or using a portion of your retirement funds.
8. This is the business plan step. Without exception, you need to have a a solid business plan. First off, a solid business plan is a must when you apply for a small business loan. Secondly, if you end up buying a franchise, you’ll want to track the growth of your business. Good News: there’s now a way for you to track everything in real time. Look!
9. Lawyer up. That’s right…this step involves hiring a franchise attorney. She’ll go through the FDD with you, read the franchise agreement, and maybe even do what I talk about here, so you’ll be able to sleep well at night if you say yes to buying the franchise you’re interested in.
10. The final step in the process is the decision step. It’s a simple (but not always easy) yes or no.
Franchising Can Change Your Life
If you’re an entrepreneur who has a great business concept that’s franchise-worthy, franchising has the potential to make big things happen for you. Like growing one location into a multi-location, nationwide, revenue and profit generating machine. Would that be life-changing enough for you?
Or maybe you’re someone who wants to take control of your life by becoming your own boss. If that’s the case, franchising…owning a franchise business, can give you the freedom and control you’ve always wanted to have. And if you play your cards right, you’ll have a profitable business you can be proud of.
Either way, you need to decide if you want to embrace the franchise business model.
Because franchising is good.