Determining Your Priorities
At its core the decision to open a franchise isn’t a trivial decision. You are making a serious investment, but if you take all of the factors into account it can be an amazing one. But before you get there you need to sit down, analyze your needs, capabilities and limitations in relation to a franchise business. This could take a few days to consider or a few weeks or months. In either case, it is one of the most important steps in the franchising process, so don’t skip it.
Let’s say you have looked at both independent businesses and franchises and have definitely decided that a franchise business is for you. Your next step is to carefully answer questions like the following:
- Where will the business be located? In the city? In the suburbs? Do you
want to have commute? If so for how long? Most people don’t want to have a 2
hour commute, but in some cases it can be financially worthwhile.
- Do you want a home based business?
- Do you want to work five days a week? How about four? How about six or
- Do you want to be an absentee owner? Or do you want to be engaged in the
day to day operations?
- Is there a specific industry you want to work in?
As you start to understand the answer to these questions you can start to understand what is important to you about your business and what franchises would fulfill these priorities. We’ve broken down some of the key questions into an easy to take quiz that will help you determine what franchises are a good fit for you.
Big or Small? Or Something in Between? Determining What Size Franchise is Right for You
An important choice that you will have to make, either as part of your priorities list or later when you’ve zeroes in on a particular industry or business, is the choice between a large, established franchise or a small, newer one, or something in between. This is a crucial decision because the age and size of the franchise that you join will impact you in a number of ways.
The highly visible, larger franchise systems, such as Choice Hotels, Dunkin' Donuts, Jiffy Lube, Pizza Hut and Century 21 Real Estate are well-capitalized and have a demonstrated track record and an experienced management staff. For the most part, they can be looked at as lower risk investments.
Since they have a greater number of franchisees, the new franchisee will accrue more co-operative benefits. This means a powerful advertising reach, better name and brand recognition, preferential treatment from suppliers and lower operating costs through volume purchasing.
But before you sign on the dotted line, also consider the downside of a big name franchise. For one, the larger, mature franchises tend to be in flat markets with many competitors. More important for new franchisees, there are often few good locations available. Then, too, participation in this lower risk opportunity usually means a very large entry cost, because the brand name is so strong—less risk means a higher entry fee.
On the operating side, these systems often become more authoritarian and bureaucratic as they grow. The corporation can get so enmeshed with administrative duties that it loses touch with its marketplace. Some franchisees feel lost in the shuffle while others have even the smallest decisions dictated to them by their franchisor. Some franchisees flourish with this type of control. When asked how the franchise operates, a happy casual restaurant owner replied, "We follow the franchisors' guidelines 100%. What they say, we do. They want everything to be very uniform and they tell us how much we should be using and how much we should be selling."
Several of the fast-food franchisees we talked to emphatically stated that you get both instant customers and nearly instant profits with a big name. But George Hayden, a Wendy's franchisee, says, "It still isn't for everybody. You must have the temperament to be able to deal with large bank debt to start the business." In addition, several franchisees mentioned the heavy degree of control exerted by the franchisor. One gave as an example a case where the fast-food restaurant needed a separate women's bathroom but the store size stipulated only one bathroom, so the franchisor refused to allow it.
One franchisee was critical of a large fast-food purveyor who only allows people who come up through their system to buy a franchise. Typically, the prospective franchisee comes out of college with no real business experience, and goes through the ranks, working at various jobs. The interviewed franchisee summed it up like this: "The system is looking for a pliable person only trained in the franchisor's way of doing business."
But the franchising world isn’t only made up of these large household names. About 60% of all franchise companies have fewer than 50 locations, so you'll have a bigger choice if you opt for the newer, smaller systems. However, just as with the big name franchises, you will have a variety of negatives and positives to consider first.
One big feature is that the up-and-coming franchisor tends to be in an uncrowded industry that is not overrun with competitors. Ideally, the business is currently considered "hot," the franchisor has royalty fees, and it will negotiate the terms of the transaction. The system management is usually flexible, not set in its ways and encourages participation from the franchisees.
These benefits, however, are offset by some costs. The newer franchise poses a somewhat higher risk than the established one. For one thing, there's no demonstrated track record. The franchisors may not have worked out all the bugs in the system, and you'll have to experiment right along with them. Then, too, a small number of franchisees undoubtedly brings less advertising power—with a corresponding lack of name recognition—and usually higher wholesale prices for the franchisee.
Once you have made a choice on the size of the franchise system, you might want to be even more specific. For example, if you prefer a smaller franchise system, you can set a minimum number of operating units to act as a guideline. You may limit your choice to systems that have, say, 20-100 units, or perhaps a mid-sized franchise with 150-400 units. Conversely, if you find the larger systems more appealing, then you may set limits of no less than 500 or more than 2,000 units.
You will undoubtedly find pros and cons with each size system. Here are some comments from franchisees of varying-sized systems that may help you zero in on what size will work best for you.
From franchisees of Papa John's, a large regional chain: "When Papa John's was a lot smaller, five or six years ago, they didn't give us much support. They do now and communication is much better. The franchisor is very supportive and franchisees get memos which discuss where we are ranked in our region and other important information. With growth, things have gotten better for the franchisees."
From franchisees of another regional chain, Taco John's, which, like many regional franchises or smaller franchises, worry about brand strength: "The product name is only strong where there are a lot of Taco John's. Taco John's has been around 20 years, but we are still a small company. There are not enough stores for name recognition." (In spite of this worry, however, most franchisees of this system were happy.)
From a fast-food franchisee of a large system that has been going through some image re-vamping as a result of decreasing sales: "We've been franchisees for 14 years with two stores. Pretty much we're on our own and any problem we have, we solve in-house. We have almost no contact with the company with the exception of an inspection once a year. When we first started out, we had more help from the franchisor. Now we feel their attitude toward us is like it doesn't matter because we are not growing or contributing enough to warrant assistance."
From a franchisee who ran an independent studio business and then converted to Glamour Shots, a small franchise system: "The franchisor is very supportive and questions get answered very quickly. I can pick up the phone right now and speak with the president of the company, and if he's not there, I can leave a message and I know he will call me back."
Large franchises can give you added stability, a more valuable brand name, and can generally be lower risk investments. But they also move slower and may not have as high a potential for growth as some smaller franchises. However, there is always the risk that a smaller franchise may go under taking franchisees with it.
Three Keys to Franchise Success
The first is to understand the key drivers of success in your business -- that is to say, the three or four major strategies or operational processes that make up the engine of profitability and success for your organization. As an example, for a restaurant these factors may include things such as speed, consistency, freshness, cleanliness and friendliness. For an auto parts store the key drivers will probably include inventory availability, customer service, expertise and pricing/margins. Once you understand the key drivers, it is critical that you focus on them incessantly and help everyone in your organization understand that it is their responsibility to make sure those drivers are the top priority for them every day at work.
How To Maximize Your Experience At This Fall's Online Franchise Expo
Once again, we sat down with Tom Portesy and Sheila Fischer from MFV, the parent company that puts on the event, to talk about how attendees can maximize their online experience.
Should Franchisors Consider Private Equity Investments?
How can you be sure it’s the right choice for you? We asked Glen Kaufman, Managing Director at American Securities, a private equity firm with a consistent track record in the industry. The middle-market firm invests in companies with revenues ranging from $100 million to $1 billion.