“Should I franchise my restaurant?” is both an exciting and daunting question. Hopefully, if you are asking yourself this question, it is because you have an exciting business concept that you want to quickly grow. It doesn’t have to be daunting, though. In this post, we demystify franchising and offer lessons-learned to accelerate growth and avoid costly mistakes.
Franchising is more common than you might think. In the US, there are more than 750,000 franchise establishments, employing over 8 million people and generating nearly a trillion dollars in economic output. Quick Service Restaurants represent the largest segment of franchises but many other industries scale through franchising (check out the 2020 Top Global Franchise Rankings).
Because franchising is so common, there are thousands of business advisors and lawyers with the experience to help you franchise. If you need a referral to a competent advisor, please don’t hesitate to we are ready to help.
With that said, if you are asking yourself “Should I franchise?” then it is important that you know what franchising is, and isn’t.
What is Franchising?
Franchising is not:
- Franchising is not the only way to grow and scale your business nor is it always the best way to grow and scale your business.
- Franchisors are not an “industry” or a “business” in themselves. Rather, the businesses who use franchising as a growth strategy all compete for customers in their own specific industries and competitive sets.
- Finally, franchising is not a fundraising scheme to get other people’s money without any intent to create a financial return. That’s fraud and it sadly happens.
For practical purposes, we like Bob Gappa’s definition: “Franchising is one of three business strategies a company may use in capturing market share. The others are company-owned units or a combination of company-owned and franchised units.” Bob’s detailed thinking on franchising is absolutely worth a read, so bookmark it for later.
Because we at Consult to Grow® see franchising as a business strategy, our work focuses on helping clients clearly articulate their business vision, understand the operations/economics of franchising, and document a unique plan to grow and scale businesses to maximize success and minimize risk.
For legal purposes, the Federal Trade Commission regulates franchises and defines a franchise as a business relationship where one party (the franchise seller) promises or represents that:
- The other party (the franchisee) will have the right to operate a business that is identified or associated with the franchise seller’s trademark.
- The franchise seller will exert or have the authority to exert a significant degree of control over the franchisee’s operations or provide significant assistance in the franchisee’s method of operation.
- The franchisee makes a required payment or commits to make a required payment to the franchise seller.
Note that the sale of franchises is regulated both by the Federal Trade Commission and so-called Registration States. Many successful owners want to license but not franchise. Be careful, some find themselves in an “Accidental Franchise” failing to comply with important rules and regulations.
Before you franchise:
The legal definition is also a good reminder, no matter your specific expansion plans, that:
- First, if you haven’t already done so, register brand names and trademarks with the USPTO. A trademark is an essential element of a license agreement and takes months to years to obtain. If you need a great trademark attorney, contact us anytime we can recommend a few of them.
- Second, it’s always prudent to document your Standard Operating Procedures by detailing the system, recipes, standards, procedures, brand DNA, etc. Written SOPs help locations to operate efficiently and consistently. SOPs are also the foundation of accountability with franchise partners in the future.
Never Franchise Because of a Prospect Inquiry
It is common to hear from a business owner that they have been approached by a friend or nearby entrepreneur asking, “Can I franchise your restaurant?” Inquiries from prospects are flattering and a good sign for the potential to use franchising to scale. But being overly eager, prospects moving too quickly can become problematic, especially when the prospect is more sophisticated.
Filter Opportunities to Your Strategy
Your strategy should be the filter for opportunities rather than opportunities being your strategy. Creating strategy requires franchisors have a crystal clear vision for their business and then document a defined strategy & plan to achieve that vision. Taking this approach is more difficult upfront because it take time, self-confidence and deeper consideration. But, in the long run, a written strategy & plan maximizes the brand potential & team alignment while avoiding costly tangents.
Your strategy should be the filter for your opportunities rather than your opportunities being your strategy.
Be Wary of Early Prospects
Finally, if the prospect is overly sophisticated, experienced in franchising, or wants as little formal documentation as possible, please stop and consider these are all red flags. Other red flags include prospects who want right of first refusal on territory or development rights, to lock up large areas of territory without substantial investment, or to buy part of your business as part of their agreement with you.
These are all deal points that can be negotiated but you should do so with counsel from a competent business advisor and/or franchise attorney. The investment in experienced advice on the front end will be well worth de-risking the opportunity on the back end. And, if the prospect is as sincere as you believe them to be, they will want you to go into a business opportunity with them eyes-wide-open.
Never Scale an Unsuccessful Business Model
Problems scale just as quickly as success. As you decide if your business has what it takes to franchise, make sure you can positively respond to most, if not all, of the following questions:
- Is franchising the right strategy to scale & grow my business?
- Is my concept successful & easy to duplicate?
- Can the franchisee make a return on their investment after fees?
- Have I been in operation long enough to prove the concept/model?
Is franchising the right strategy to scale & grow my business?
Just because you can franchise your business doesn’t always mean you should. Franchising has pros and cons:
- Typical Pros: Lower (not no) capital investment, motivated business partners, local knowledge, quicker growth, higher quality revenue and profit, minimized growth risk.
- Typical Cons: Upfront costs, less control over franchisees, brand dilution, franchise relationship management and challenges to innovation.
Is my concept successful and easy to duplicate?
In franchising, the ability to easily replicate the model matters. Replicability is, in part, why more quick/limited service restaurants franchise to grow rather than other formats. If your brand only works because of a superior location, superior management team, or the owner works 80 hours per week without pay, then it may not yet have the magic to grow beyond the initial location or talent.
Can the franchisee make a return on their investment after fees?
Franchising is a strategy to use other people’s money to grow and scale your brand and capture marketshare. Franchisees need profit to continue to operate and invest in growth. Having company-owned restaurants making some profit isn’t enough. Your economic model needs to include the royalties and fees you intend to charge franchisees and still make a profit equal to or better than comparable investments.
Have I been in operation long enough to prove the concept/model?
If you have limited experience in the business, franchising can create real risks for you and your prospective franchisees. Don’t find yourself scaling a model that hasn’t been tested and evolved. We wouldn’t recommend franchising any concept that didn’t at least have a few units operating for at least a few years. Otherwise, you risk lacking the experience and infrastructure to support successful franchisees and franchisees may not get a proven model that generates an economic return.
Never Start Franchising without the Right Resources
Franchising is largely about relationships and support.
Maintaining Healthy Relationships
If you struggle to build and maintain relationships, franchising may not be for you. We often say that we have to give employees the experience we want them to give our customers. That logic holds true with franchising. To have a successful franchise system, franchisors have to be committed to making sure franchisees are successful. And, in turn, franchisees have to take care of employees and the customers of the brand. Healthy relationships don’t happen by accident, it requires time, effort and attention to build and maintain those relationships.
Capital to Invest
We said earlier that a “pro” of franchising is that it’s low-cost, but it’s absolutely not no-cost. New franchisors need money to develop legal documents, operations manuals, training programs, sales programs, marketing materials, support teams, and more. Those programs won’t execute themselves. So, successful franchisors also have to invest talent to support franchisees in opening and operating locations.
Should I franchise my restaurant?
Back to the question at hand: “Should I franchise my restaurant?” You’re absolutely doing the right thing by stepping back and assessing your readiness.
Hopefully, we have given you insights that will allow you to pause and determine if you can and/or should use franchising as a strategy.
If you are in the process of scaling your business, strategic planning, project prioritizing, or anything else relating to scaling your restaurant business, don’t hesitate to contact us at Consult to Grow®. We would love to be part of your restaurant journey!