Franchising: Take Your Small Business to the Next Level


Mark in Florida writes: I have a successful small restaurant business and I want to create a franchise. Should I do it? What are the pros and cons?

Mark, congratulations on your success! Restaurants are one of the toughest businesses to run, especially in today’s tough economy. No doubt you have what it takes.

We are asked by a lot of restaurant owners whether they should create a franchise. There is a lot that goes into this decision and, as you know, not all of it is financial. You will have to trust others with your good name – to provide the same high quality, service and dedication to the brand that made you a winner. Franchising your business is like bringing on partners – lots of them – many of whom you won’t know very well. Before you dive in, here are some things to keep in mind.

Make A Plan. As a franchiser, you will need to keep your brand sharp and your business focus up to date and fresh. You will need to create training programs for your franchisees. This takes time, energy and money and can distract you from your existing business. Before you decide to franchise you might want to conduct a feasibility study to look at the pros and cons of franchising your specific business; you can hire consultants to do this. And you will want to bring in an experienced franchise attorney should you decide to pursue the franchising opportunities.

Provide Real Value.
To be a successful franchiser you have to offer continuing value to your franchisees so they will stay with you. Some successful franchisers do that by having a strong recognized brand, like McDonald’s (Stock Quote: MCD) or IHOP, which brings in customers and increases sales. Others do it by offering their franchisees ways to keep their costs low, like the benefits of volume purchasing. However you do it, you will only be successful if your franchisees make more money with you than being on their own. Understand what advantage you are giving them before you launch.

Know Your Markets. Spend some time reflecting whether your brand will be successful in other markets. For instance, we’ve tried (unsuccessfully) to find biscuits and gravy (the Southern kind) in New York City. Why hasn’t a franchise brought in that type of food? Probably because when we mention it to New Yorkers, they look at us like we are insane – people won’t buy it in the city. Make sure your brand will work in the market where you hope to franchise it. You also need to assess if there is demand for your franchise from potential manager/owners. Do you already receive unsolicited requests for franchising? If so, that’s a good sign of interest.

Crunch the Numbers. In terms of who pays what: The franchisee provides most of the initial investment in the restaurant; so growth can occur at a lower cost to you. As a franchiser, your investment will include documentation and recruitment efforts and the legal items we mentioned above. You will also have to provide the local franchisee with branding, signage and advertising materials, ways to source their equipment and supplies, and policies for quality control, customer service and human resources in order to protect your brand. And you will need a way to audit franchisees to make sure they are living up to the agreement. Some franchisers also provide marketing and advertising support for franchisees. All this needs to be worked out in the initial agreements.

Your revenue will be a share of restaurant sales – often 15%. Make sure that stream of revenue is enough to compensate you for the time and money you will spend to make it happen.

Whatever you do, Mark, congrats on your success so far. We’ll be looking for your restaurants as we travel across the country.

Dani Babb is the dean of Andrew Jackson University's College of Business in Hoover, Ala., and founder of the Babb Group. John Rutledge is the chairman of the private equity investment firm Rutledge Capital.

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