Why Franchising works [time & time again]

Most people often think of fast food when they consider franchising. It s no longer the case as the franchise business model can be found in almost every industry including retail, home services, automotive, business services, real estate and lodging.

As a growth strategy, franchising provides franchisors [a company or individual who owns the franchise system] with the ability to gain market share by increasing their points of distribution through franchise and corporate locations.

Franchisors are able to grow with less capital requirements while franchisees are able to get into business with the support, brand name and proven business model, which help to reduce the risks involved with getting into business.

The franchise business model has appeal because someone has taken a leap of faith to build and open the first one. There is a different risk-reward proposition for both the franchisor and the franchisee. For the franchisor, potential profits from each unit are traded off in return for a percentage of the future sales from those units. For the franchisee the reward is a good return on investment [ROI] in a proven concept.

It should be stated, however, that no franchise is risk-free. As a potential franchisee the number one danger is to go in undercapitalized. Working capital is needed to pay staff, the grand opening & promotions and a reserve for unforeseen circumstances. The statement equally applies to the potential franchisor and an amount of anywhere between $50 – $100K should be set aside to cover all of the upfront costs in getting the business “franchise ready”

An important ingredient of the franchise business model is a tried and tested formula for replicating success. The potential must be proven in the first unit and then add a second one to monitor results to make sure that the first is not an anomaly. It is rare to find that one unit alone means the concept is ready for franchise success.

If some of the leading franchises like McDonald and Tim Horton did not franchise until they had covered all of the bases then it is a message well worth repeating.

The sound advice to any potential franchisor is to wait until they have grown two or three units in different geographic markets.

Checklist:

  • Make sure your concept can be duplicated
  • Assemble a great support team including an accountant, a lawyer and a consultant who all have expertise in franchising
  • You will need adequate financial resources [anywhere from $50-$100k] to cover upfront costs
  • Speak with your financial institution [banker] at the earliest opportunity
  • Familiarize yourself with regulatory requirements if your franchise is to be based in different provinces
  • Speak with other successful franchisors and learn from their experiences

The franchisor needs to do everything possible to ensure franchisee profitability thereby ensuring a win-win concept for both franchisor and franchisee alike.

Indeed a model for success.

Peter Thompson

Plutus Consulting Group

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