Do you own a cleaning company? A tax preparation service? A travel agency?
If you own the above kinds of businesses -- and many others -- expanding your business via franchising might be a good idea. In fact, as the graphic in this story shows, persuading an entrepreneur to invest in your company as a franchisee could be an easy sell because 64 percent of franchisees recoup their investment within one year.
A decision to franchise can provide you -- the franchisor -- with capital for your business to grow, increase the brand recognition of your company so much that your existing business might significantly increase its profits, and result in you collecting a significant part of the franchises’ profits. Entrepreneur magazine reports in "Should You Franchise Your Business?" that franchisors typically receive 4 to 8 percent of their franchisees’ sales revenues via the franchise agreements that both parties sign.
Many business executives might not consider franchising because of the stereotype that franchises are for certain kinds of industries such as the fast food industry, but Entrepreneur magazine’s “2014 Franchise 500 Rankings” show that some of the most successful franchises are in personal services industries such as cleaning, tax preparation and travel reservations.
Of course, there are pros and cons to franchising. One pro reason is that a company can expand without taking out costly loans or investing money it might not have while simultaneously receiving start-up and licensing fees from the franchisees. One con reason is that the franchisor is essentially ceding a large share of its expansion-based profits to the franchisees.
If you own a company, you should consider franchising when:
* The Demand Is There:
Your company should hire a market researcher to ascertain if there is market demand for your service or product outside of where your business is now.
* Your Success Can Be Replicated:
Franchisees should be able to learn how to successfully operate your business within three months, according to "Should You Franchise Your Business?
* Your Franchisees Will Be Satisfied:
Persuading prospective franchisees that they will earn an approximately 15 to 20 percent return on their investment is crucial. Other issues of concern should be ironed out in the franchise agreement.
* You Lack Time:
Every new business that wants to expand needs to invest a lot of time in finding the proper site, buying the necessary equipment, hiring and training employees, and managing the business. You might not have the time to do all that, but franchisees might.
* You Lack Personnel:
Your company might employ successful and talented managers. If it doesn’t finding franchisees to manage your new office or store might be advisable. The franchisees are also more apt to stay with your company longer than your current employees because they have an ownership stake in the company.
Franchising also requires a lot of legal documents. The Federal Trade Commission has a lot of information that can help you prepare a franchise agreement, including the “Franchise Rule Compliance Guide.”
Making the decision to franchise your business is a difficult one, but it can also save your company a lot of time and money and significantly boost your revenues and profits.
This article was the second in a series of advice columns for business executives and entrepreneurs. “Should Today’s Economy Spur You To Be A Sole Proprietor?” was posted on Storeboard.com on April 30.
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