Every month, I receive several hundred inquiries from companies that think they ‘have the next McDonald’s.’ And while most have successful businesses, only a handful will have what it takes to make it as a successful franchisor.
So what sets these few apart? And, if you are just starting a business with the hopes of franchising, what do you need to do to get there?
First, Your Most Valuable Asset
The single biggest mistake new franchisors make is failing to protect their trademark. When a potential franchisee looks to purchase a franchise, a large part of that value proposition is the brand. And the bigger the company, the more important the brand becomes. Yet many companies overlook this vital and inexpensive first step. The end result: They may invest heavily in promoting a brand they cannot protect or even keep. When these companies decide to franchise, the choices are limited and often difficult: change the name, buy it from the trademark owner or go home.
To avoid these problems, your first step should be to develop a name that can be protected with a trademark. You may find that the process of coming up with a great name is harder than it looks. Generic or descriptive names are difficult to protect. Once you have several names you like and believe you may be able to protect, engage the services of an experienced trademark attorney who can complete the registration process.
You do not need to have a registered trademark to franchise. Your rights to that trademark vest on the date you file your trademark application. With this in mind, many of our clients begin franchising before this process is completed.
Next, The ‘Value Proposition’
To be a successful franchisor, you must first sell franchises. And to do this, you must create a business that people will want to buy, own and operate. Called a variety of things – from marketability to sex appeal – a franchise should have some quality that makes it appealing to the potential buyer. Value proposition is created by marketing campaigns, the look of an operation or rapid growth of the market. It can be based on the nature of the work involved, the taste of a recipe at a restaurant or pure return on investment. Often, it’s created by the nature of the prospective franchisee. But regardless of how you create it, you must develop a business that people want to purchase.
To have an adequate value proposition, a business must also be well-differentiated from its major franchised competitors. This can be achieved by a differentiated product or service, a reduced investment cost, a unique marketing strategy or different target markets.
Success is Not Enough
The next factor to take into account is the unique financial characteristics of franchised businesses. If you are going to be successful as a franchisor, the business model must have a high level of profitability because a franchise must allow enough profit for the franchisee to earn an adequate return on their investment, even after deducting its royalties and fees.
Profitability is relative. It must be measured against the capital invested to provide a meaningful number. In this way, the franchise investment can be measured against other investments of comparable risk that compete for the franchisee’s money. To be competitive, aim for the franchisee to achieve a return on investment (ROI) of at least 15% to 20% by the second to third year of operation. This return must be calculated after deducting a market-related salary for the owner-operator franchisee.
All other things being equal, the future franchisor will want to focus on lower start-up costs. At the same time, by focusing on ROI, the franchisor can have the greatest impact on franchisee returns. Future franchisors with physical operations should generally avoid expensive materials and custom design work, and instead commission a designer to create unit operations that will be duplicable at a low cost with readily available materials. But bear in mind that your physical unit will act as a ‘showroom’ for franchise prospects.
The Cloning Factor
The final, and perhaps most critical element for the future franchisor is the ability to duplicate the success you achieved in your first business. If a business only succeeds because of your unique skill set, a one-of-a-kind location or another factor that is impossible to replicate, it is unlikely that you will be able to franchise it.
Assuming that the business can be cloned, you must focus on making the process as simple as possible. Start by documenting everything – the factors that went into your site selection process, unit build-out requirements, key suppliers, advertising. Develop systems and forms that help you track your own internal performance. Know your numbers – including every key driver of unit profitability. All this information is essential when transferring your formula for success to your future franchisee.
The bottom line is that the best franchisors have the strongest value propositions. Just as your job as an entrepreneur is to create value for your customers, your job as a franchisor will be to create value for your franchisees. And while some of that value will come from the support you provide as a franchisor, much of it is designed into the franchise from day one.