Should I Franchise My Business?

It’s a common question small business owners ask at one time or another…should I franchise my business?

Though this is a personal choice for each owner, here are just a few of the reasons that the model has been proven over the years.

  1. Faster Expansion
  2. Lower Costs
  3. Simple Management
  4. Greater Commitment
  5. Better Market Penetration
  6. International Potential
  7. Less Recruitment

If these reasons weren’t enough, scaling a business at a managed pace can be quite lucrative!

In fact, a franchising concept can be one of THE best ways to grow a brand when an owner doesn’t want to figure every detail out from scratch.

Why should I franchise my business, can’t I just grow it on my own?

The problem with most small businesses is that the first and only location, the heart and soul of the on-site owner.  That location may be successful thanks to the instinct of the owner on location.

That is, though the business ‘works’ with one location (generally because the owner uses his intuition), it’s generally not a formula for successful reproduction on its own.  Why?  The same thing that makes the primary location work, the owner, is missing from all the other locations!

When an owner asks ‘should I franchise my business’, he is generally at a point where it’s clear to him that on site intuition is not the best way to take advantage of OTHER people’s skills and capital to grow his brand.

What’s missing?  Well, to run many ‘copies’ of a primary location, precision is required…the business must run like a military unit ‘type of precision’ in fact.

Most small businesses simply don’t have the experience or know how to process steps in such an outlined and repeatable fashion.  The idea of making successful photo copies of store number one quickly unravels.

This is where franchising consultants step in with proven methods for franchising models.  In fact, sources claim that in 2007 almost 10% of all businesses across nearly 300 industries were franchises…it works.

Franchise development consultants, or franchise consultants, are often there to guide a business owner through the legalities, planning, training, documentation, marketing, the list is exhausting for a business owner to tackle alone (all the while running his business).

So, you may ask as a business owner, should I franchise my business?

We say the proof speaks for itself.  Could you do it on your own?  Sure, but why would you risk the time and uncertainty?

Call NFA today, as experienced franchise development consultants, we are here to help!

Alternatives To Financial Performance Representations

In my over three decades as a franchise consultant, people have frequently asked me, “As a Franchisor, should I give out earnings claims or financial projections to prospective Franchisees to help convince them my franchise opportunity is a sound investment?”

In the previous four blogs, I tackled various aspects of this topic. In my October blog, I wrote about the role “Special Circumstances” may play in a Franchisor’s decision to compile and distribute Financial Performance Representations (FPRs) in Item 19 of the company’s Franchise Disclosure Document (FDD). NFA’s September blog addressed the cons of giving out FPRs in the FDD.

In NFA’s August blog, we discussed the pros of giving out FPRs and in July, we defined FPRs and examined the rules pertaining to them. Always remember any FPR must have a “reasonable basis”.

In this blog we discuss some alternatives the Franchisor may decide to utilize rather than compiling and distributing FPRs in the FDD.

These alternatives include the following options:

  1. The Franchisor may choose to offer one or more company-owned locations for sale as franchises. In this situation, the Franchisor can show real income statements for the specific company-owned locations that are available to interested potential buyers. When selling an operational unit as a franchise, the Franchisor can charge the new Franchise Owner the business’ value as an existing business, including its equipment, furniture, supplies, customer list, goodwill, other assets and future profits. This type of franchise sale can often be quite profitable for the Franchisor.
  2. The Franchisor can elect to reveal only the expenses for a standard franchise location to prospective franchise buyers, as long as the Franchisor does not relate the expenses as a percentage of income or sales. This disclosure of costs only is not legally deemed to be an FPR.
  3. The Franchisor can show to the potential Franchise Owner industry averages, provided that the industry averages presented are not said to be the actual income and expenses of the particular franchise.

FPR Special Circumstances

In my over three decades as a franchise consultant, people have frequently asked me, “As a Franchisor, should I give out earnings claims or financial projections to prospective Franchisees to help convince them my franchise opportunity is a sound investment?”

In the previous three blogs, I tackled various aspects of this topic. NFA’s September blog addressed the cons of giving out Financial Performance Representations (FPRs) in Item 19 of the company’s Franchise Disclosure Document (FDD).

In NFA’s August blog, we discussed the pros of giving out FPRs and in July, we defined FPRs and examined the rules pertaining to them. Always remember any FPR must have a “reasonable basis”.

In this blog, I will review various “Special Circumstances” that may apply to a particular franchise opportunity.

These special circumstances include:

  1. If the franchise’s industry has several entrenched, thriving rivals that include FPRs in their FDDs;
  2. If the Franchisor’s location(s) has a strong, devoted following in its original market that may not be duplicated in other areas;
  3. For a newly launched franchise opportunity, if no franchised locations exist for a prospective Franchisee to contact to discuss financial operating history;
  4. If the company-owned locations for a new franchise opportunity have a long operating history, which may not be relevant to a new franchise unit;
  5. If the locations for a new franchise opportunity will be clustered geographically;
  6. If the franchise opportunity has diverse locations, making it hard to compare sales, such as units in stand-alone buildings, malls, shopping centers, pop-up stores, kiosks and seasonal locations;
  7. If new franchise units will be offering additional or different products or services from existing locations;
  8. If the franchise opportunity is not yet familiar to its potential customers; or
  9. If the franchise opportunity is confronted by regional concerns – e.g. the locations in one part of the country are more profitable than those in other areas.

If one or more of these conditions exist, you may wish to include FPRs in your FDD for your franchise opportunity. A Franchisor must evaluate the wisdom of providing FPRs to help stimulate franchise sales against the possible liability if a Franchisee fails to reach the sales, profits or other figures listed in the FPR.