Lessons Learned From Franchising a Business
Every year, new franchises enter the scene. They offer unique opportunities and keep the economy stimulated with innovative ideas, products, and services. But the challenges that await a new franchisor are far different than those facing a new franchisee.
We wanted to get an idea of the type of hurdles that come along with franchising your business, so we asked Kimberly Downey, founder of Admirroration, an interactive multimedia advertising firm, to share the top lessons that she’s learned since franchising her concept in December 2008. We also turned to Tim Howes, principal of Spyglass Strategies, a franchise consultancy practice focused on improving individual and organizational performance, to get his insights on how you can avoid learning these lessons the hard way.
4 lessons learned from franchising a business
Lesson #1: Hire legal counsel that has several years of experience in franchise development, state filings, and franchise disclosure documents
In an attempt to cut initial costs, Downey hired an attorney with minimal experience. This turned out to be a costly mistake when, unaware of certain state requirements and expensive certified audits, she set the initial franchise fee too low, resulting in a loss of nearly $7,000 on the second franchise sale. “Upon learning this process and its costs, it appeared that our attorney was learning this for the first time as well,” says Downey. “This was a hard lesson learned and, naturally, we increased our [initial] fee immediately.”
“The vast majority of franchise systems make no money on their franchise fee once you factor in legal costs, marketing expenses, and other overhead,” says Howes. “The idea is to get franchisees into the system and get them succeeding. The money is made in the royalty stream, not [from] franchise fees.”
As for registering the franchise opportunity in various states, Howes advises taking things slow: “There is no need to register in all states from the get-go unless you plan a nationwide rollout immediately, which I don’t advise at all.”
Lesson #2: Spend your franchise marketing dollars wisely
As a new franchisor, Downey was constantly receiving invitations to attend franchise expos. Such events could translate into valuable exposure, but they were also quite costly to attend. Because of the hefty price tag, Downey decided to go with a low-cost way to create buzz. “Rather than spending $15,000 to $40,000 attending these expos and exhibiting, we chose to gain awareness through social networking sites, such as Facebook and Twitter, and through word of mouth,” she says. “During our first year in business, we sold six franchises without spending a dollar on advertising.”
While social networking has been effective for Downey, Howes recommends determining which social network your target franchisee is hanging out on. “One element of keeping your marketing costs down is to view franchising like fishing,” says Howes. “You have to find out where the fish hang out and make sure you have the bait that they like. With franchisees, you have to find out what type of person makes an ideal franchisee and cater your message to them.”
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Lesson #3: Choose franchisees carefully
As a new franchisor, you may be anxious to get anyone and everyone on board. But be careful who you choose, as poor choices could have a long-lasting negative impact.
Downey has faced some challenges in finding franchisees who are financially responsible. She recommends verifying that interested investors are financially capable of buying a franchise and fine-tuning the questions in order to determine their level of commitment, self-motivation, and enthusiasm. Says Downey: “Selling your franchise to an individual who does not eclipse your growth goals can introduce several risks, including slow name branding, loss in revenue, delinquent payments, and loss of market share.”
How can you find the best people to help you grow your franchise? Howes recommends approaching franchising with the right attitude and defining your corporate culture as best as possible. “To this day in franchising, there is still this mind-set that [franchisors] are selling franchises,” he says. “That is a disaster waiting to happen. You do not want to sell a franchise. You want people that fit your corporate culture.”
In addition, Howes advises franchisors to streamline the application process with clearly marked steps so that franchise candidates know what steps they will need to follow in order to come on board.
Lesson #4: Centralize your resources for your franchisees
In the beginning, Downey gave all franchisees electronic copies of the resources that they would need. However, when she started receiving more than 15 calls per day from franchisees with questions, it became apparent that the franchisees didn’t have the resources on hand when they actually needed them. As a result, six months after launching the franchise, Downey centralized the information and created a “virtual office” that franchisees can sign into via the franchisor’s website to access the information needed.
“Possessing an intranet is a great start for younger franchise systems,” says Howes. “Keep in mind that when you’re new to franchising your concept and you’re training franchisees, there are bound to be gaps in the education process. As franchisees ask questions, incorporate these answers into the next franchisee’s training.”
Take these lessons to franchise your business
Franchising your business is far from a cakewalk, but, hopefully, Downey’s personal experiences and Howes’ expert advice will at least get you pointed in the right direction.
RELATED: Important Factors to Consider Before Franchising Your Business
About the Author:
Sara Wilson is a freelance writer who specializes in issues related to small businesses. Contact her at wilson.sara@gmail.com.
