by iFranchise Group
CEO, Mark Siebert
The Ultimate How-To Guide on Franchising Your Business
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All too often, inadequate planning and development of a franchise business structure before offering franchises is reason why newcomers to franchising will fail.
Sometimes, they will just ask their lawyer for input. But while good franchise lawyers are invaluable when it comes to legal issues, they are unlikely to have the business experience, education, or expertise to develop sophisticated cash flow models and the organizational development plans that should accompany them. Instead, they must provide their input based on “what they have seen” in the marketplace. In fact, many franchisors will make the mistake of simply copying the franchise structure of their competitors when entering into the complex world of franchising. The rationale is that “if it worked for them, it should work for me.”
The problems with this approach are threefold.
First, this approach assumes that the new franchisor’s franchise offering should be similar to the offerings of their competitors. Unfortunately, “copycat” is not a strategy. Often, it is a recipe for disaster. A new franchisor must distinguish itself from their competitors in order to attract a franchise buyer who has a choice between them and their more established rival. This difference can come in the form of the consumer offer, franchise marketing, franchisee support and training, or franchise structure. And all of these will have implications for the way in which the franchise offer is crafted.
Second, this approach assumes that even if a similar strategy is implemented, that the resources of both organizations are similar. Every organization comes to franchising from a different starting point – with different strengths and weaknesses. Competing with an established franchisor by going head-to-head in an area of their strengths can be a huge mistake.
Third, this approach assumes that a new franchisor’s competitors did it right in the first place. What if they simply made decisions at random? Often, it may take years for a franchisor to realize that an early decision is resulting in diminished profitability.
A mistake of a single percentage point on a franchise royalty can easily cost you millions of dollars. How?
Consider the following example:
A franchisor expects that the average unit revenues of their prospective franchisees will be $500,000 and hopes to sell 100 franchises in the first year. But instead of charging a 6% royalty, they opted for 5%.
It does not seem like a big mistake, when accounting for a single franchisee. It simply means that the franchisor will make $5,000 less in royalty revenues. But in franchising, we are talking about growth on steroids, and this mistake might be multiplied 100 times or more. And, since there are no expenses associated with this $5,000, this mistake comes right off the bottom line.
So do the math:
$5,000 in annual lost royalties multiplied by 100 franchisees = $500,000Multiplied times a 10 year franchise term (or longer) = $5,000,000Lost enterprise value assuming 10X earnings multiple at exit = $5,000,000TOTAL LOSS = $10,000,000And an incorrect royalty is only one of a number of different business decisions that a new franchisor will make early in the process that could impact long-term profitability. Just a few of the many others include:
In order to best position new franchisors for success, iFranchise Group will often take a six-step approach to the development of your franchising strategy and business plan:
By following the steps outlined above, the business structure and franchising strategy that we ultimately recommend for our clients is based not only on best practices in franchising and within the client’s industry, but also on a close examination of our client’s culture, goals, business economics, and the resources available to implement a franchise program.
To learn more about how this franchising strategy and business planning process can help provide you with your best chance of success in franchising, contact us. Email us at [email protected], or call one of our franchise consultants at 708-957-2300. And be sure to request our free video on How to Franchise Your Business – which will go into greater detail on this important topic.
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