SmartCEO

Franchising

Facing your franchising fears: Is the franchise model a good fit for your business?

By Alyssa Hurst

Your business has been running smoothly for years, you’ve opened several other company-owned stores, and people ask you every day how they can get involved with your brand. Your company has reached a turning point in its lifecycle of growth. You could hold steady with the stores you have, expand with a company-owned model — or you could consider franchising.

For most CEOs, franchising is a scary word. It comes shrouded in baffling regulations, endless documents and so many other moving parts. Ultimately, many decide that it’s not worth the hassle. But for those who do dive into the world of franchising, there are rewards to be found — so long as they do it right. 

Who should franchise?

When you look around any city, the obvious franchises stand out. Food chains make up a great majority of the franchising industry, but they aren’t the only businesses that can benefit from this growth model. FranNet franchise business consultant Heather Rosen works with franchisees across the DC area. “There are over 90 different industries where you find franchises,” she says. “That’s surprising to a lot of people.”

In fact, franchises are prominent in almost any sector of the market, from the auto and retail industries all the way to fitness and B2B. Some franchisees in the service category are even able to work from home.

Who shouldn’t franchise?

Though industry shouldn’t play a restricting role in the world of franchising, according to experts, a few things should. A company starting out needs to have a few ducks in a row before it can even think about creating a franchise system. James A. Goniea, partner at Philadelphia’s Wiggin and Dana, says, “If someone comes to me and says, ‘Look, I’m thinking of going into franchising. Do you think this will work for me?’ the things I’m looking for are: Do you have three or four open units under your brand, and have you shown that it can work in different locations and in different circumstances?”

In addition to proven success in the industry, having a reproducible model is key, says Michael Einbinder, founding partner of New York’s Einbinder & Dunn, LLP. A business that is very complex, detailed and unique often doesn’t find great success in franchising. “The look and the trademark, the décor, the way the restaurant looks — those things are critical because people need to see the franchise units as being the same as the existing units,” he says.

Another caution: Don’t take on franchising if you aren’t ready for some hard work, says Elizabeth D. Sigety, partner at Fox Rothschild LLP. “People think you just have to put together a few contracts and then people are going to run your business and pay you royalties, and it’s going to be simple. But franchising really is complex. It’s something that has to be thought about.” Sigety adds, “To really expand into a system takes a lot of work and planning.”

Another major element of bringing the franchise model to fruition is capital. Sigety calls money one of the “basics” when it comes to franchising, saying, “I’ve had situations where potential new clients come to me and, once I see the finances of their company and locations, they’re not doing that well. So, how are they going to spread the wealth? They need capital. The franchisors need capital because they are going to grow.”

A plan for growth is another important duck that new franchisors must keep in mind if they want to find success. “You have someone that comes in with a fairly established brand, but their marketing plan leads to, ‘Man, I want to roll out a hundred stores in the next 18 to 24 months.’ I’m usually running in the other direction,” says Dr. K. Jameson Lawrence, Esq., founder and CEO of Baltimore’s BVFR & Associates, LLC.

Facing your fears

The Federal Trade Commission regulates the sale of franchises, and each franchisor must prepare a franchise disclosure document for potential franchisees. What’s more, many states have various additional hoops through which franchisors must jump, and in a political landscape focused on the Affordable Care Act and raising the minimum wage, experts like Goniea have taken note of a looming feeling that the franchise model is under attack.

On top of all this, not every franchisee is going to be a stellar addition to the brand. “There’s always going to be a couple of bad eggs out there. If you have hundreds or thousands of franchisees, somebody is not going to be good at running a business,” Sigety says.

In the face of all of these well-founded reasons for trepidation, why is franchising still such a successful model for growth?

There is a reason companies are willing to wade through state-by-state regulations and paperwork, and place their brand in the hands of franchisees. Goniea sums it up: “Franchising is one of the most successful business models that has ever been developed.”

Einbinder agrees: “I think it’s a great way of extending a brand and growing. That’s why people choose it. You can open a lot more pizza places around the world if you’re doing it as a franchise than if you’re doing it on your own.”

Franchising, when done right, can open doors to growth that some companies just can’t access on their own.

 

We asked local executives to share their experiences with franchising, and the lessons learned.

Reid Bechtle

Reid Bechtle
CEO
ZIPS Dry Cleaners

“Franchising seems to get a bad rap because in a lot of cases, it’s ‘Anybody can do it. Come on in. Make a lot of money.’ Unfortunately, that’s not the case. It’s darn hard work. In today’s day and age, it’s not about the money. You have to be the diplomat, you have to be the leader, you have to be the motivator, you have to be able to understand how to get people excited. It cannot just be about a job. The thing I like about it is that it is the American dream. It’s an opportunity for somebody to come in that wants to work hard, put their heart and soul into it, have some passion and make a better life for themselves.”

Edward F. Kelley IIIEdward F. Kelley III
President
BGR: The Burger Joint

“Make sure everyone plays a role in gatekeeping the brand, as brand damage hurts everyone. Maintain transparency with your operators, and ask them to conduct themselves likewise. … Each franchisor has its own unique franchising DNA, with different skill sets, access to resources, different business models and different consumer demographic needs. Understanding your franchising DNA is the first step. Growth starts with having an overall plan and a market-specific plan, and finding operators who have the skills requisite for allowing for parallel market growth, and for running the business once they open their doors. This can be challenging for an emerging franchisor.”

Todd LeffTodd Leff
President and CEO
Hand & Stone

“We view the franchise sales process as a mutual due-diligence evaluation. We look for great professional experience, we have a face-to-face meeting with prospective franchisees by members of management, and then of course a financial qualification. The largest challenge is keeping the service and culture at the same level across locations in 26 states and Canada. It is easier to keep look and feel consistent, as we control the design and construction process. Keeping service levels and culture right comes from having a strong, objective consumer satisfaction measurement platform, increased training, and making sure all members of the system understand the mission and vision for the brand.”

Jerry FlanaganJerry Flanagan
President and CEO
JDog Junk Removal & Hauling

“The reason I wanted to franchise was because I wanted to put military veterans into small business ownership around the country. When you franchise, you teach a system and you put people into their own business, so it’s a much easier way of managing a large-scale business. … Really connect with the people that you’re selling your franchises to. Try and have everyone on the same system as far as values and goals. If you sell to franchisees just to sell a franchise, it could become a problem. You want to make sure there is a really good fit. I think people should interview every single franchisee.” CEO

Signup for SmartCEO Emails!

The how-to of franchising

Once you’ve decided to take the plunge into franchising, there are a few things you’ll need to know. Our expert tips will set you off on the right foot.

  • Embrace your new role and play it well. “The franchisor has to realize they are no longer running a restaurant, or at least they aren’t only running a restaurant. They are now operating a different business, which is a franchise,” says Einbinder. Instead of focusing on the day-to-day of selling a product and ensuring its success, leaders need to focus on the business
    of selling franchises and supporting their franchisees.
  • Have the right advisors on hand. Drawing upon experience is absolutely essential to getting through the process of opening up a franchise or any kind of new business,” says Goniea. “It’s really important to work with somebody who really understands the landscape, both in terms of the franchise industry and what’s out there. It’s kind of like buying a house without a real estate agent,” Rosen adds. An advisor also can provide a much-needed independent perspective, says Lawrence. “You don’t want someone to simply tell you ‘Yes, this is a great idea.’ You certainly want someone who is going to be independent in their assessment of viability.”
  • Relinquish control and trust your franchisees. “Too much topside control into the day-to-day operations of the franchise tends to lead to catastrophic failures, typically within the first six to 12 months; and if a franchise is likely to fall, it is likely to fall in that time frame for those reasons,” says Lawrence. Of course, it’s important to have processes streamlined for franchisees, but it’s equally important to remember that at the end of the day, your franchisee is operating the business as the owner.
  • Build lasting partnerships with your franchisees based on communication. “Your franchisees are not employees, and they are the key to your future because they are producing revenue, which then allows you to make money through royalties,” says Rosen. “So it’s a business relationship with your franchisees. You should try very, very hard to keep that relationship friendly.” To keep the relationship on great terms, lines of communication need to remain open, says Sigety. “I think the most successful franchisors … embrace the successful franchisees and communicate. The more secretive and defensive a franchisor gets, the more they end up having problems.”
  • Make sure you can support new growth, and choose locations wisely. Rapid expansion is tricky and can lead to the downfall of a franchise system because it often catches companies unprepared. “When do you bring on new people to support the franchisees? Often, people are hesitant to hire new staff in the face of rapid expansion until it’s desperately needed. And then mistakes can be made,” says Sigety. Einbinder adds: “We tell people to open in concentric circles. Don’t start a franchise in New Jersey and then have your first franchisee be in Arkansas. The stakes are huge for the franchisor in the beginning to get their franchisees up and running successfully.” One of the primary values of a franchise is the goodwill associated with that brand, says Goniea. “If somebody is developing a franchise and they’re based in the New York area, I would encourage them to grow geographically in that area first before they open up in California, where the brand might have no value because nobody knows about it.”
  • Choose your franchisees carefully. “I can tell you that any franchisor shouldn’t be in it for the check, the franchise fee. They should be making sure the people they are bringing into the system are people who they want representing the brand. They are people with the wherewithal to succeed in the franchise,” says Einbinder. Many franchise agreements last for about 10 years. That’s a long commitment, and you want to make sure you have the right partners.

Leave a Reply