In making a decision to franchise one of the first things that you should look at is the question of franchisability. Franchisability, or the question of whether or not your business has what it takes to succeed as a franchise, is a relatively complex question. We have a DVD that we provide to our clients and to companies thinking about franchising that goes into a great deal of detail on the subject. But it basically boils down to 3 core issues:
The first issue is whether or not you have what it takes to sell franchises. In order to be able to sell franchises what we’re typically looking for is company that has some credibility, that has an operating prototype, that is making money. We look for a company that has maybe gotten some public acclaim or public relations. We look for something that is unique, that has a strong value proposition to the potential franchisee. That ultimately will tell us whether or not that it is saleable. There are some old studies out there that talk about the salability of a franchise and how much franchises get sold. They talk about median numbers are four franchises in the first year and they talk about 9 franchises are the average number in the first year. But franchise sales is really about franchise marketing. How much money to spend on franchise marketing. And having a good concept to begin with, something that is saleable. So number one under franchisability is: Can you sell franchises?
The next thing that you want to look for in determining franchisability is your ability to duplicate the concept from one market to the next. So we look at things like “is the business teachable? Is the business systemized? Is it going to work from one market to the next? Is it adaptable?” Because ultimately as a franchisor we need to clone this business from one market to the next. And the last thing we’d look for is return on investment. And this is really the acid test of franchising. Is this business going to throw off an adequate return on investment, both for the franchisee and for the franchisor? So when we’re trying to make that determination the first thing we want to do is we want take a look at the size of the investment for a franchisee. How much is the franchisee going to have to spend to not just on franchise fees but also on building out an operating unit, the working capital that they’re going to require.So we start by taking a look at that investment and that is going to give us one half of the equation.
The other half is how much can that franchisee earn? Not necessarily in year one but by year two or year three. How much can that franchisee earn? And while we’re looking at earnings we’re trying to look at earnings adjusted for the salary that a franchisee would take out. So a franchisee’s entitled to get a return both on the time that they spend (if they’re an owner operator) and on the money that they invest. Ultimately what we’re looking for an individual franchise something that would be run by an owner operator as a return on investment of at least 15% and that’s cash on cash. Basically taking up the amount returned on a fully adjusted basis, divided by the investment. And if we take a look at that we’re looking for a 15% right of return on that investment or for somebody who’s going to be selling area development contrast where they have one franchisee operating multiple locations we’re going to look for about 20% because that area developer is going to have to support an infrastructure to provide support to their own units.
Now the calculations for this is a lot more complex for that. As I mentioned at the beginning of this video. We do have a video tape of a one and half hour long DVD on how to franchisee a business that’s available at no charge at www.ifranchisegroup.com. So if you would like to learn more about franchisablility and see some real world examples on how this might work, contact us at either 708-957-2300 or got to www.ifranchisegroup.com and request one of our DVDs on how to franchise a business.
12 Criteria of Franchisability
While it is impossible to determine the franchisability of a business concept without a significant amount of analysis, the iFranchise Group has identified a series of 12 predictive criteria that assess the readiness of a company for franchising and the likelihood that it will achieve success as a franchisor.
To sell franchises, a company must first be credible in the eyes of its prospective franchisees. Credibility can be reflected in a number of ways: organization size, number of units, years in operation, look of the prototype unit, publicity, consumer awareness of the brand, and strength of management, to name the most prominent.
In addition to credibility, a franchise organization must be adequately differentiated from its franchised competitors. This can come in the form of a differentiated product or service, a reduced investment cost, a unique marketing strategy, or different target markets.
Transferability of knowledge
The next criteria of franchisability is the ability to teach a system to others. To franchise, a business must generally be able to thoroughly educate a prospective franchisee in a relatively short period of time. Generally speaking, if a business is so complex that it cannot be taught to a franchisee in three months, a company will have difficulty franchising. Some more complex franchisors offset this handicap by targeting only franchise prospects that are already “educated” in their field (e.g., a medical franchise targeting only doctors).
Next, measure how well a concept can be adapted from one market to the next. Some concepts (e.g., barbecue) do not adapt well over large geographic areas because of regional variations in consumer tastes or preferences. Others (e.g., medical practices) are constrained by varying state laws. Still other concepts work only because they are in a very unique location. And some work because of the unique abilities or talents of the individual behind the concept. Finally, some concepts are only successful based on years of perseverance and relationship building.
Refined and successful prototype operations
A refined prototype is necessary to demonstrate that the system is proven, and is generally instrumental in the training of franchisees. The prototype also acts as a testing ground for new products, new services, marketing techniques, merchandising, and operational efficiencies. The occasional exception to this rule is with companies whose franchises involve the direct sale of a proprietary product or service.
All successful businesses have systems. But in order to be franchisable, these systems must be documented in a manner that communicates them effectively to franchisees. Generally speaking, a franchisor will need to document its policies, procedures, systems, forms, and business practices in a comprehensive and user-friendly operations manual and/or computer-based training module.
Affordability merely reflects a prospective franchisee’s ability to pay for the franchise in question. This criterion is as much a reflection of the prospective franchisee as it is of the actual cost of opening a franchise. For example, a multi-million dollar hotel franchise is affordable to real estate developers, whereas a franchise with a $100,000 start-up cost that targets prospects with clerical experience might not be.
Return on Investment
This is the real acid test of franchisability. A franchised business must, of course, be profitable. But more than that, a franchised business must allow enough profit after a royalty for the franchisees to earn an adequate return on their investment of time and money. Profitability is always relative. It must be measured against investment 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 dollar. Typically, the iFranchise Group looks for the franchisee to achieve a ROI of at least 15 percent for owner-operators, and 20 percent for area developers, by the second to third year of operations. To see how your business measures up to this criteria, take the iFranchise Group Acid Test.
Market trends and conditions
While not an indicator of franchisability as much as a general indicator of the success of any business, these trends are key to long-term planning. Is the market growing or consolidating? How will that affect your business in the future? What impact will the Internet have? Will the franchisee’s products and services remain relevant in the years ahead? What are other franchised and non-franchised competitors doing? And how will the competitive environment affect your franchisee’s likelihood of long-term success.
While franchising is a low-cost means of expanding a business, it is not a “no cost” means of expansion. A franchisor needs the capital and resources to implement a franchise program. The resources required to initially implement a franchise program will vary depending on the scope of the expansion plan. If a company is looking to sell one or two franchised units, the necessary legal documentation may be completed at costs as low as $15,000. For franchisors targeting aggressive expansion, however, start-up costs can run $100,000 or more. And once the costs of printing, audits, marketing, and personnel are added to the mix, a franchisor may require a budget of $250,000 or more to reach its expansion goals.
Commitment to relationships
Successful franchisors focus on building long-term relationships with their franchisees that are mutually rewarding. Unfortunately, not all franchise organizations understand the link that exists between relationships and profits. Strong franchisee relationships enable the franchisor to sell franchises more effectively, introduce needed changes into the system more easily, and motivate franchisees and their managers to provide a consistent level of products and services to their customers.
Strength of management
Finally, the single most important aspect contributing to the success of any franchise program is the strength of its management. The iFranchise Group has found that the single most common contributor to the failure of start-up franchisors is understaffing or a lack of experience at the management level. Oftentimes, new franchisors will try to take everything on themselves. In addition to absorbing several new jobs for which the franchisor has little to no time, the franchisor needs to exhibit expertise in fields in which he or she may have little or no experience: franchise marketing, lead handling, franchise sales, ad fund management, training, and multi-unit operations management.
An appropriate first step in the decision to franchise is an examination of the question of whether or not a business concept is actually “franchisable.” Any organization seriously considering franchising should undertake this analysis before implementing a franchise strategy. For further information on whether your business is franchisable, request our free video or schedule a free consultation with one of our Senior Consultants.