Are You A Franchise Player?

Boring meetings. Pointless paperwork. Working your tail off for a 2% cost-of-living pay increase. The 9-to-5 can be a grind - all the work, but not sharing in the rewards. You're smart, dedicated, and know how to run a business. You decide it's time to venture out and start your own business. Finally, you can be your own boss. However, those that choose to open their own businesses are in for a tough road ahead. It’s estimated that 20% fail within the first year of opening their doors, and a staggering 70% within the first decade. If you’re looking for stability, the deck is stacked against your long-term success. But what if there was a way to start your own business with less risk? Enter the franchise. In a franchise model, a company offers franchisees the opportunity to operate an extension of their brand, typically within a geographic territory. While your mind may go to fast food chains like Subway (which I will deep-dive next week), there are franchises for many business sectors. This will be the first of my series on franchises. This week, I'll focus on the franchise model and how it works for the franchiser and franchisee.

Goatee? Check. Lame sunglasses? Check. Yup, that's a franchise baseball player.

Why Would A Business Franchise?

Let’s say you start your own fast-casual Italian restaurant in your community. The first two years were rough – you barely broke even and invested heavily in marketing to get the word out on your business. However, the investments pay off, and by the third year, your lasagna is the talk of the town. In fact, your reputation has crossed city limits; based on some market research, you find you have customers coming from miles away. After some careful consideration, and another bank loan, you decide to open a second location. This time around, you’re finding it difficult to dedicate your time to the new store when the existing store remains busy. The second store is successful as well; however, you’re stretched too thin between the two stores.

You ponder your options. Do you turn away business or close a location? Of course not – you recall how difficult it was getting your first store off the ground, and this was your dream. Could you open a third location? Sure, you would probably make more money, but you’ll be spread even thinner. You see the potential for having more locations, trusting your food is truly unique and your brand is growing off the buzz of your first two restaurants. But you can’t do it all yourself: here’s where the franchise model makes sense. As a franchiser, you get the ability to scale up quickly with less effort and investment (money and time) than opening a store yourself. While you won’t realize the full financial windfall you would if you opened it yourself, you do get to capitalize on your brand where you wouldn’t have been able to otherwise. Plus, you can write the franchise agreement to be as restrictive as desired to maintain your brand’s identity. You can specify every detail - down to how many ounces of ricotta go into your famous lasagna!

Of course, it needs to be attractive enough of an opportunity to draw in potential franchisees. Oh, and you need to recruit franchisees. You can work with the likes of a middle man like these cats and their 2005 website, or your can seek out your own franchisees. If you go it alone, you should strongly consider having an attorney draft or review a franchise agreement to avoid getting caught in a difficult situation later.

Why Would You Buy A Franchise?

Franchises are appealing for many reasons. If you’re a person wanting to open a franchise, you typically see potential for that particular brand. You either see a gap in the current market, or believe this particular franchise is superior to current competitors. A franchise presents the opportunity to step into ownership of business without the legwork of starting your own business. Some franchises (McDonald's, for example) go as far as to help you find a sufficient location and secure the necessary real estate for your business. Plus, you are buying into more proven business compared to starting your own. Many franchises provide equipment, marketing, software, and everything you need to make it work - you're simply executing the plan.

For anyone from the southeastern U.S., I wanted to open a Zaxby’s in my city… that is, until Raising Cane’s took over! I was half-joking about it, but if I was serious, it would hard for my new Zaxby’s to overcome the saturated fried chicken market.

Types of Franchises

When we think franchise, we typically think fast food. Even all my examples above are food-oriented. While they are probably the most visible to the average person, you may be surprised by all the brand-name businesses which are franchises. Most insurance agencies are franchised, where agents hang their shingle in a community under a large insurer's name. Home service companies like housekeepers, exterminators, and plumbers are commonly franchised. Someone even franchised home owners association management companies - and they're just as awful as the independent ones! Really, any business model that has geographic limitations and is easily repeatable makes for a good franchise model. It doesn't make sense to franchise, say, an manufacturing facility. There's not much value in standing up hundreds of facilities, under different ownership, to produce something that could be centralized.

Now that we've covered the concept of a franchise, I can share my personal experiences with the franchise model and caution you before jumping feet-first into the next Blockbuster.