November 21, 2014

Want to Franchise a Business? 5 Sacred Rules to Become the Next Great Franchise

I’ve recently been engaged to help sell a very successful national franchise company and been able to observe firsthand many reasons why a franchise company grows to $10 million in sales through 600 nationwide locations.  Last year I also worked on the other end of the spectrum, helping two business owners locate the necessary capital and expertise to begin the journey of becoming the next great franchise company.

These two experiences have helped deepen my understanding of the five Sacred Rules that distinguish great franchise opportunities.  I offer them here, in case you are considering converting your business into a franchise company.

5 Sacred Rules

Rule #1: Make your partners profitable.
This first rule sounds easy, but it often gets obscured by the economic pressures you will begin to feel preparing your financial projections.  First and foremost, your concept must allow your franchisees to make a significant profit.  The more the better.

Yes, a unique, exciting concept is helpful in attracting attention and selling franchises, but the business process and procedures, both operations and marketing, must give your future business partners (franchisees) the opportunity to be successful financially.  The more successful they can be, the more successful your franchise company will become.  If you maintain focus on this rule, many of your other challenges will become much smaller.

Rule #2: Have a great answer for the question, “What have you done for me lately?”
Creating ongoing value is critical for a successful franchise relationship.  Once you have trained your franchisees and helped them establish their businesses, the value the franchisor contributes to their future success will diminish with time, at least conceptually.  Are your recipes unique and always changing? Does your scheduling system make your franchisees more efficient and profitable? Is your marketing process effective and inexpensive? Is your budgeting software critical to profitable projects? Does your real estate department help find great locations? These and other questions are ones franchisees will ask.

While a strong franchise agreement will protect the franchisor, the objective is to create a win-win relationship, and to continually innovate to make your business, service, marketing and products better.

Rule #3: Quit or hire.
Keep in mind you are embarking on an entirely new business endeavor in which you have no practical experience: franchising.  You are no longer running your business and training others how to do the same; you are the CEO of what you hope will become a successful national franchise company.

I’ve seen many companies fail and wind up entangled in the legal system because they never make the full commitment to their franchise company.  Hiring a franchise development company to create marketing and sales documents and prepare your Federal Disclosure Document is enough to help you sell a couple of franchisees.  But if you want to become a meaningful and successful company, you have to support your earliest partners and make sure they are successful.

Christian Faulconer, CEO of Franchise Foundry, offers some good advice here: Remember, if you decide to build a franchise system around your successful business, it’s like starting a second business. Selling your products or services to your customers will still require significant time and effort, but now you also have to find time to build the franchising infrastructure and market and sell your franchise opportunity. It can seem like you are running two separate businesses, and the demands can become overwhelming without the right partners.

Keeping your current full-time job as president of your business and then working in your startup franchise company almost never works out.  Consultants don’t cut it, either.  Make a commitment and either quit your job as president or hire someone to run the franchise business, but recognize you probably cannot be successful at both jobs at the same time.

Rule #4:  Raise capital.
There are two reasons for this sacred requirement.  First, it is a great reality check and screening mechanism.  When you begin to talk with others, friends, customers and especially franchise consultants, you’ll hear only positive feedback.  If you want to really hear the truth, ask for a check.

Consultants will tell you the idea is a sure success because they have a hammer and you are the nail.  Friends want to support you and it is always easier to praise and encourage than provide constructive feedback. Your customers already love your service, so they are not the best ones to offer feedback on the viability of national expansion.

Kert Gennings is the COO of Boardwalk Fresh Burgers and Fries and has grown two large food-service franchise companies. He offers this thought: “Preparing a formal business plan for converting your company into a franchise company is a very enlightening exercise as it will help you crystallize your thinking.  Once complete, use that document to raise the money you will surely need to have a fair chance at success.  If you cannot raise the money, listen to what the marketplace is telling you.  Not that you have a bad business, but that perhaps it is not ready for national expansion.”

Secondly, you will need the money you raise to help with marketing, sales, franchise support, registration in states that require it, and hiring a person to help run your old or new business (see point 3).

Rule #5:  You must have a great selling process (selling is service and vice-versa).
You must have a process to sell your franchise to people you do not know.  Ninety-five percent of your customers who tell you they are interested in becoming a franchisee will never write you a check.  And even if all of them do, it is not enough to create a viable business.  You need to sell to people you do not know. All successful sales are the natural outcome of a successful process.  If you want a great example of an automated process, you can visit Process Peak.

Keep in mind, your initial franchisees will be early adopter personalities, risk takers.  They will become franchisees because they like ground-floor opportunities and are easier to sell based on a concept and an opportunity.  However, when you update your FDD, you are required to list your current franchisees (with contact info).  Those people will become a critical part of your sales process weather you like it or not.  The key to your long term-success is how happy you make those early franchisees, and if you are cutting corners to save money or because you are not committed to the idea of franchising your business, their negative comments to prospective franchisees will really hurt future sales.

Keep in mind that franchising is a heavily regulated industry. The IFA has developed a process for selling franchises called FranGuard. Your sales team should be familiar with that process and the steps you need to take to protect your system as you sell franchises.

Becoming the next great American franchise is a worthy goal, but there are many challenges along the way.  Make sure you’ve done all of your research and identify partners who are truly vested in your future success.

15 Comments ▼

Todd Taskey


Todd Taskey Todd Taskey is a principal with Potomac Business Capital, Inc., a strategy, planning and M&A firm to small and mid market companies in the Mid Atlantic area. Todd helps entrepreneurs and CEO's maximize the value of their company through successful transactions including joint ventures, licensing deals and representation to sell a company.

15 Reactions

  1. The more I read about the franchising process the more respect I have for successful nationwide franchises. Dang!

  2. You quote Kert Gennings in Rule #4 that writing a formal business plan is “a very enlightening exercise as it will help you crystallize your thinking.” How would a franchise business plan differ from a conventional business plan?

    • What is a “conventional” business plan? There is no difference as every business plan should be custom built for that specific enterprise. I would add that one item that must be kept in mind with a franchise business plan/model,is that the key components of the franchise or UPS must be able to be duplicated and the activity/output of the franchise is consistent and recognizable.

  3. Great tips! franchising takes a ton of hard work. It is a rewarding option for those who have the smarts, passion and most of all drive to succeed.

  4. Great post, Todd.

    Christian is correct; becoming a franchisor is like having a second business.

    The day-to-day responsibilities of running a business, and learning how to run a second, new business, (at the same time) can be rough.

    Becoming a franchisor isn’t as easy as some folks think. Not every concept is franchise material.

    If folks are thinking about franchising they’re business, it would behoove them to learn about the process itself.

    One more thing; as you know Todd, there are franchise development companies around that are assembly-line types of operations. They’ll tell prospective franchisors what they want to hear, and promise to “sell franchises for them.”

    Folks; add the research step. Get some background information. Talk to other folks who have used the franchise development company that you’re thinking of spending money with.

    The Franchise King

  5. Terrific info! I will use this to help me find my next career opportunity in franchise development!

  6. As you probably know, a business plan is successful because it can identify potential problems and opportunities in an industry. If you are planning to franchise, expertise is clearly required and should be reflected in your business plan.

  7. Great point, Joel. The franchise development industry is very willing to “rubber stamp” many ideas that do not have a realistic chance of success. They should not be a place one turns for validation of their franchise plans.

  8. I’ll second the question regarding the “franchisability” of a business. A few questions I’ve found helpful:

    1.) Does the business require deep, intrinsic knowledge of the subject matter? Or are the core skills required to run the business easily communicated? For example, mechanical engineering would not be a good fit, while a car wash would work well.

    2.) Does your business require a large geographic area? The smaller the geographic area required, the more efficiently you can oversee the operation. If you can fly to city and visit 4 franchisees in a single trip, you’ll save a lot of coin. Also, your franchisees will benefit from operating in a combined marketing area.

  9. Does anyone have a referral to a reputable franchise development company?

  10. These are all great considerations for having success with the franchise model. We learned early on the importance of hiring for the future (instead of just looking at our needs today), which was also a key to experiencing growth. I share many of the key lessons I’ve learned along the way – the good, the bad and even the ugly – in my book “Grow Smart, Risk Less.”

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