Although franchising is an excellent way to expand a business quickly and with less capital, not all companies can be franchised successfully. Businesses with a proven track record, that are financially healthy, and that have clear and easily standardized processes lend themselves to franchising.
Before an owner considers franchising, his or her business concept must be proven: if the local press has given acclaim and the company has consistent consumer interest, franchising is more likely to succeed. Industry wisdom states that expansion should not begin with a franchise. Companies should demonstrate success at other locations before venturing to franchise. In addition, profitability at every location should provide a return on investment of 15% to 20% after a royalty percentage (between 4% and 8%) in order to attract franchisees.
While franchising is more economical than traditional expansion, it does require capital. Initial investment to convert a business to a franchise ranges from $100,000 for smaller ventures to $1,000,000. This investment includes the cost of legal documents required by the Federal Trade Commission, as well as separate applications for each state in which the franchise will operate. Many companies also spend heavily on training materials and/or training facilities in order to help ensure franchisee success.
One of the most important tenants of franchising is to try and maintain the same level of quality and integrity as the original business. When Ray Kroc expanded McDonald’s, the watchwords were “Quality, Service, Cleanliness, and Value,” when training franchisees. To create this brand standard regardless of location, company protocols and procedures must be standardized and easy to “clone.”
Proven success, initial capital, and clone-ability are good indicators of a successful franchising experience. Good leadership by the founder is another—he or she must be decisive, collaborative, and a good communicator in order to properly support the franchisees.