Several thousand businesses, in several hundred industries, sell business format franchises in the United States.
But not all are equally successful at attracting buyers.
While there are many reasons for this differential performance, one important explanation is that some ideas are more easily franchised than others.
My research suggests three factors are crucial to making a business franchisable: having an effective method of meeting the needs of customers; documenting that method in a clearly defined operating system; and providing a product or service that can be delivered by a wide range of people.
No one will buy a franchise unless it offers a better way to meet the needs of customers than an entrepreneur can come up with on his or her own. Consider a hamburger franchise. No one will buy into a system that fails to offer better recipes, access to higher quality or less expensive ingredients, a superior process for restaurant management, or something else that goes beyond what an independent operator could develop him or herself.
One of the best indicators that the franchisor has a valuable business is the number of locations that he or she already has.
Another good indicator is a proprietary product or service, or a unique process for producing and delivering that product or service. A recognizable brand name that customers view positively is another good sign.
For franchising to work, the business concept needs to be replicable. If the buyer cannot run an outlet as well as the franchisor can run it, then the system won’t be attractive to potential purchasers.
Buyers need to be able to learn the franchisor’s system relatively quickly, even if they have little or no experience in the industry. For that to happen, the franchisor will need to develop a well thought-out operating plan and document it in a clear manual.
Finally, the franchisor needs to appeal to a large number of potential franchisees. To achieve necessary scale economies in advertising, promotion, purchasing, and support services, and to recoup the cost of creating the system, the franchisor needs to sell a sizable number of outlets.
Businesses that appeal to only a handful of perspective franchisees — perhaps because they require a very large investment without offering financing or demand extensive industry expertise from potential owners — are less likely to succeed. If only a small number of would be franchisees are willing or able to buy into a particular system, the developer will be unlikely to attract enough outlet operators to build a successful chain.
Franchise Location  Photo via Shutterstock