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5 Questions to Ask Yourself Before You Franchise Your Business

franchisingyourbusiness

As a business owner, you’ve probably heard of franchising as a way to scale your business and make more money. It’s a proven model that works. In fact, it works so well that you’re probably familiar with popular franchises like Subway, Hampton Inn and 7-11. Hampton Inn alone has expanded to more than 2,000 hotels worldwide thanks to franchising.

According to a 2015 report by the International Franchise Association, improved economic conditions led to rapid growth of the U.S. franchising sector in 2014. They expect 2015 to present a 1.6 percent growth in franchising, and a continued growth in franchise employment and the sector is expected rake in $521 billion by the end of the year.

On the flip side, you’ve probably also heard some horror stories of people losing all their money due to a failed attempt at franchising. While it’s true that you run the risk of losing your money, that doesn’t have to happen to you. In fact, if you do careful research and answer some important questions, you’ll be able to determine whether or not franchising is the right move for you. 

What Kind of Franchise Works for Your Business?

According to the SBA website, there are two forms of franchising. The first is product or trade name franchising. This means the owner owns the name or trademark and sells the right to license to the franchisee, similar to what internet entrepreneur Danellie LaPorte has done with her Desire Map licensing program.

In LaPorte’s case, she’s selling what she calls a business in a box. It’s a system she sells to workshop facilitators who want to use her Desire Map process. If people want to run their own workshops in the same manner, they can purchase the license to do so.

The second form of franchising is business format franchising. This means the franchiser and the franchisee have an ongoing relationship, and the franchisor provides site selection, training, product supply and marketing plans. They may also have to provide assistance with securing funds. This is the model we see with franchises like Subway or 7-11.

You have to decide which franchise your business qualifies under and then make a decision based on that. The SBA website has a lot of resources that will help you get started.

Are You Willing to Put in the Investment?

While franchising allows businesses to take advantage of many economic benefits that they may not be able to afford individually – such as market dollars, supply chain demand and buying power – a sizable investment is still required to franchise your business.

As the franchiser, you would have to invest in infrastructure, marketing, support and training the franchisee. Granted, the franchisee is responsible for running the actual business, but that doesn’t mean you won’t have to continue putting money into the franchise.

For some business owners the investment in both time and money is more than acceptable when expanding their business, but for others it’s a consideration worth looking into. If you’re not careful, you can lose a lot of money when trying to franchise, so consider the financials very carefully.

Can Your Operations Be Duplicated?

The success of a franchise depends on whether the business operations can be easily duplicated. You’ll notice that every Subway is run the exact same way. There isn’t a single Subway on the planet that deviates from how the business make’s it’s money.

Many business owners considering franchising realize their businesses cannot be easily duplicated. Sometimes this is because the owner’s personality is too connected to the overall brand, so much so that the brand cannot stand on it’s own. Other times it’s because the business itself has not yet implemented systems to make it more scalable.

Are Your Profit Margins Large Enough to Attract Franchisees?

Without franchisees, your business is essentially dead in the water. In order to attract individuals to open up a franchise and potentially invest a lot of their own money into the business, there needs to be a clear benefit to doing so.

The first question you’ll be asked is whether or not your businesses is making a large profit. If franchisees are to invest, they want to make sure they will be getting a return.

The actual timeframe for a company to become profitable is nearly impossible to estimate because there are several factors that go into it; however, a good rule of thumb is that it takes about three years before a company starts bringing in enough money to cover expenses, pay the owner a salary and still have plenty of money left over.

How Long Have You Been in Business?

A big mistake that often times happens when people try to franchise is that they jump the gun too soon. Just because your young business is experiencing rapid success, doesn’t mean you should franchise.

It takes time to work out the kinks of a business and keep it profitable, and if your business is only a few months old you don’t have enough information to make an educated decision about franchising.

Plus, as we mentioned earlier, it could take up to three years for your business to be considered profitable and therefore worthy of a franchisee’s attention.

Only You Can Make a Decision

While these guidelines are meant to give you a rough idea of when you should franchise, you’re the only one who really knows the answer. Just do yourself a favor and make sure to research as much as possible before jumping in. Also, make sure to consult with your accountant and your attorney so you can gather all of the information you need to make an educated decision. The last thing you want is begin the process of franchising only to realize you weren’t ready for it.

Do you have any experiencing in creating a franchise? Is it something you’re interested in? Let us know in the comments below.

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Kabbage Team

The Kabbage Team is here to not only fund the small business loans you need, but to help you grow your business through free marketing tips, webinars, tools and more. Is there something you'd like us to cover or want to get your small business featured on our blog? Send us a note at content@kabbage.com.

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