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Small Business
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Franchising Your BusinessFranchising has become one of the most popular ways of growing small businesses. A study by The International Franchise Association and FRANdata found that over the past 3 years there were 900 new franchise companies started in the United States. From 2004 to 2005 alone, there were 500 new concepts introduced. One reason franchising has become so popular is that when a business operation franchises its concept, growth can be fueled at least in part with the capital provided by franchisees. But franchising doesn't eliminate the need for capital, and it's not the right solution for every business that wants to grow. To help BusinessKnowHow.com readers get a better perspective on just what kinds of businesses should consider franchising and what they need to know about the process, we interviewed franchise expert Ed Teixeira. Ed is the President of FranchiseKnowHow, LLC (not affiliated with businessknowhow.com) a franchise-consulting firm. Ed has spent over 26 years in the franchise industry as a franchise executive and also a franchisee. Ed is the author of Franchising From The Inside Out and has spoken and written on the subject of franchising in the US and overseas. Janet: Ed, if a business owner is considering franchising their business what are the first things they need to consider? Ed: There are several key items that are important. First, does the business lend itself to being franchised? The term we use: is the business franchisable? Second, does the business owner have the capital necessary to franchise their business? Third, is there capable management staff to operate both the existing business and manage the new franchise? Janet: Ed, can you be a bit more specific regarding these questions? Ed: In terms of the business being franchised there are certain key considerations: 1. Is the business unique and the market large enough for a successful franchise? If the business is easily copied or duplicated it will be more of a problem. 2. The business products or services should have appeal in diverse markets rather than in small or niche markets. 3. The franchisees must be able to earn a reasonable return on their investment. It shouldn't require extraordinary results for this to happen. 4. The operation of the franchise must be capable of being set into a process or system and the franchise should be capable of being operated without the need for special skills. 5. The existing business operation must be profitable and credible. As regards the capital necessary for franchising there needs to be a minimum of $50-$75,000 available for the franchise documents, manuals, trademark registrations, etc. Janet: Are there other costs? Ed: The numbers I quoted will equip a company to sell franchises. It doesn't include advertising for new franchisees, hiring a franchise salesperson and certain other items. Janet: What are the pitfalls or risks a business owner needs to avoid? Ed: First of all, not to let vanity or ego drive the decision to franchise. There are some consultants who will say a business will be a successful franchise in order to get the assignment. Secondly, the business owner ought to conduct or have someone conduct a feasibility study. At the very least, put the concept of franchising their business through a rigorous test by using trusted business advisors. Janet: What does a feasibility study cost? Ed: It can be done for $2,500 to $25,000. Most should cost between $2,500 and $5,000. Better to invest in that cost versus spending $50-$75,000 and be wrong. Janet: Any other pitfalls? Ed: I've encountered a number of franchisors that spent a good deal of money to franchise their company and then couldn't sell a franchise. The franchise attorney and consultant got paid their money and provided the tools but the new Franchisor didn't know how to use the tools. They were mired in a slump. Janet: How can this situation be avoided? Ed: The business owner must use their capital wisely. Simply relying upon franchise consultants that roll out a long list of clients shouldn't be the only criteria. Some consultants deal in volume and as such they provide the franchise tools and move on. Be sure to speak with former clients. Prospective franchisees are advised to speak with other franchisees, therefore prospective franchisors should conduct appropriate due diligence as well. Janet: You work with companies looking to franchise, what is your approach? Ed: My credo is not just to provide the tools but also to teach the franchisor how to use them. I have a rather flexible approach to franchising a business. If the owner wants to perform some of the functions themselves I can adapt to that. I prefer to have a longer-term relationship with my clients, whenever possible. Janet: Any other advice for businesses considering franchising? Ed: Some business owners try to avoid the costs and responsibilities of a franchise by using licensing or offering a business opportunity. In many cases they end up operating a franchise without even knowing it. They face very hefty fines if this is the case. The best suggestion I can give is to get good advice. Janet: How can people contact you? Ed: You can send email to edt@franchiseknowhow.com or call 631-246-5782. My website is www.franchiseknowhow.com Ed Teixeira is author of Franchising from the Inside Out. Ed has over 25 years of experience in the franchise industry. He has held executive positions with a number of leading franchise companies in industry sectors including manufacturing, retail and healthcare. Ed was also franchisee of a multi-million dollar healthcare operation with six locations. Visit his site at http://www.franchiseknowhow.com.
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