In this episode, we discuss what types of businesses make good franchises. We also cover key decisions when setting up your franchise as well as considering competition and evaluating your industry.
Hi and welcome to another episode of All About Franchising.
Often folks will ask- is my business good to franchise and what type of businesses are good for franchising? Well, there is critical criteria to consider when evaluating your business or trying to develop a business to eventually franchise. The most important item to consider right off the bat is- the business must be in a strong industry, one that’s not only strong now, but could grow in the future.
To use a simple example, you would never franchise a horse and buggy business now since it’s been replaced by the car. So, no matter how good of a horse and buggy business you have now, it’s not going to survive because it’s just outdated, and it doesn’t compete in today’s marketplace. There are great businesses that are still profitable and thriving but wouldn’t be the best franchise going forward because the industry is not good long-term. You must be realistic about where your industry is going when considering if you should franchise a business within the industry. Another thing to consider is the investment compared to ROI. Obviously, the less expensive the upfront costs are to buy franchise, (that means the total costs and/or the amount you must put down in order to secure a loan), should be reasonable and as low as possible; that way you have more possible buyers.
One of the most important items is, what is the payback on the investment? If the franchisee follows your system and does an excellent job? How quickly can they make back the money that they put in? How quickly can they reach profitability, and over time justify the investment that they put in upfront?
Another consideration is, can the product or service can be learned reasonably? How long would it take to become proficient at providing the product or service, which is going to be the main component of the franchise? That’s important for a bunch of reasons because obviously folks can’t be away from home for long, long periods of time trying to learn a business. If they send managers or other staff to training and then they lose those staff members, how quickly could they replace them? And would there even be ample staff available that might already have background in providing that product or service?
A few final items to consider when setting up your franchise is, lower cost franchises are going to have more possible buyers, and part-time businesses, franchises that can be started, “on the side,” can be immensely popular. However, you do have to be realistic about them. Often businesses that are billed as, able to be “run on the side” are treated like things on the side. So, while some simple businesses might be able to be started on the side, it shouldn’t be the main component in the sales approach for the franchise, because you might attract, unfortunately, folks that think the business doesn’t require much attention- and all businesses require attention.
Another thing to consider…is it a mobile service? Is the business brick and mortar? Meaning, does it need a physical building or office? Can it be run out of home? These are important items to consider. Obviously, businesses out of home are lower start up. But again, do they have a dedicated office in their home? Are they going to take it seriously?
For brick-and-mortar franchises, you should consider the economy and availability of real estate. Sometimes when times are really, really, good and people are bullish about expanding and opening a business, real estate may be exceedingly high and startup costs may be very high as well. So, it might create an extended ROI, although when times are good, that’s when people are the most confident in buying a business.
So, you do have to consider when you’re looking at a brick-and-mortar business, what the real estate market is at that time. It’s not always true that when the economy is good, real estate and start-up costs are high. So, keeping on top of market fluctuations effecting brick-and-mortar businesses, is important. We will talk about this more in a different real estate video.
Service businesses are always extremely popular, they tend to be bought strategically. Meaning someone may work in a certain industry and then seek out a franchise in that industry. What you find with service businesses is people will look only for that specific service. If a prospective franchise buyer had a home inspector come to their home and they paid $500 for a home inspection, they may think, “Jeez, what a great business”. And they will only seek out various home inspection franchises and compare them to each other. They purchase the business thinking- “I’m really technical, I’m handy, I have background in computers and other technical things necessary perform this business, it looks like a good business for me.”
Service businesses tend to be bought more strategically while franchises like food oftentimes are passion projects. It doesn’t mean they’re not strategic, it just means there are people that dream their entire lives of owning a restaurant or running a restaurant. They can oftentimes be passion projects, and it doesn’t mean that’s a bad thing. It just means there’s a lot of folks that never worked in food who have always been fascinated by it. So, there are special considerations when launching a food franchise.
In other videos, we are going to cover mistakes brands make when setting up their franchises because there are many brands that could have been great but made key mistakes. There are plenty of pitfalls out there when setting up a franchise.
Another key decision when setting up your franchise is, the number of moving parts at the local franchise level. How much burden are you going to put on the franchisee and how much you are going to take on at the corporate office. Division of duties can be a big part of people’s buying decisions as well. Look at your business and consider how many moving parts do I have here? Does the person have to master five, six, seven different things to be successful? Or can we just limit them to one specific key task to perform locally, and we can take the rest of the burdens off of them?
As a final thought, we should discuss competition. One big worry is often competition, and frankly, that shouldn’t be on the top of the list. If you look at the burger industry, you would have never considered after there was already McDonald’s, Burger King, and Wendy’s, you could have all these other brands come out like Five Guys and Smashburger and many more. And yet there’s many, many, successful brands now in the burger industry that would have been deterred by the “experts” from even entering the industry just 10, 15, 20 years ago. So, competition is not as big of a factor as most people would think.
All businesses and franchises are unique, and the criteria we covered are just some of the items that should be considered when evaluating and setting up a franchise system.
There are experts that can help you, too. And there’s a plethora of information online, plus lots of examples in the marketplace from which to draw information.
As usual, please put comments or questions below. We’re going to answer questions in future videos. We may even do live open forum meetings where we answer questions and respond to comments. The more comments we receive will help us know the type of videos to create and what questions need to be answered. We appreciate you watching and listening.
We hope you enjoyed this episode of All About Franchising!
Comment testing 123
Comments are closed.