What you need to know about franchising your business
For some business owners, their companies have been doing rather well, even despite the economic downturn. Now is a good time to move toward expanding the business, notes Doug Schadle, CEO of Rhino 7 Franchise Development Corporation in Apex, N.C. “We’re on the edge of the economy getting ready to come back – there are a lot of signs,” he says.
Unlike some operators who want to keep their business small, you’ve had dreams of branching out. While mergers and acquisitions (M&A) is one way of doing it, an alternative to expanding your company’s success is through franchising.
What’s to be gained by franchising? It’s one more approach to gaining market share. It’s not so much what product or service is being sold as how it’s being marketed that makes a franchise operation successful, says Schadle.
Schadle, who’s been in the franchising industry for 20 years, and his partner John Cohen help people build their businesses into franchise operations, and also help those who are already established improve their systems. “The first thing to understand with whether your business can be franchised or not is a franchise by generic description is a proven effective business model, tested and developed,” Schadle says. “You need to have a business model that’s been operating for a minimum of a year or more that shows it has an effective vehicle to deliver whatever product or service you have to the public through proven marketing programs and implementation services.”
Although numbers vary, the success rate of an individual business started from scratch versus buying a franchise operation is much smaller, because the latter approach comes with a proven track record.
One of the signs that you should consider franchising your operation is when customers, friends and family tell you it would be a great idea. Having family support is critical to its financing; having customer support is critical for its marketing.
“If somebody’s got a business that’s pretty good, the first thing they have to realize is that they’re getting ready to start a completely different business by becoming a franchisor,” says Schadle. “What they are really operating is an independent business and what they’re getting ready to start is a franchise system. The franchisor’s business is to deliver to the franchisee so that they can implement that business.”
One of the most common mistakes people make when pursuing a franchise operation is that they don’t realize there are more than just legal costs in setting up operations. “It’s very easy for somebody to go to some franchise development firm and say, ‘Listen, I’ve got a business I want to turn it into a franchise’ and they say, ‘Sure. Let us write you a legal document. We’ll help you put your operations manual together and then you can go legally sell franchises,’” says Schadle. “The problem is that’s just a small fraction of what really needs to happen,” Schadle adds. “The owner needs to be prepared for long days and having a different customer … the customer now is really the franchisee, the person who bought into the business. It is the person who spends their life savings to buy into that franchise system so they can earn a living for their family.”
In addition to legal considerations, a primary concern is having a good marketing plan, Schadle points out. “Don’t rush your brand to market,” he says. “Have it well-tested. Get with somebody who knows how to develop a franchise system from scratch. That will save you so many years and so much pain of slow development; and then roll it out after you’ve got all of the systems in place.”
Most of the time, those who implement a good business model for a franchise system have a high rate of success. “One of the things that people say is they can’t wait until they own their own business so they don’t have to work as hard anymore,” Schadle says. “That’s not the case, but it can become the case as the business grows larger. There are different business models. If I want a business where I don’t run it, but I oversee it, they are out there. They just have a tendency to be more expensive and more visible to the public. If I’m looking for a lower cost business to get into, I can find them,” he adds. “In fact, most of them are in the lower $50,000 or less range, but I’m an owner-operator then. Typically, the business comes and goes with me as the owner until I get down the road four or five years where I could layer it in management.”
One way of testing the waters to move toward becoming a franchise is to establish a few satellite operations of your individual business to assess market interest. “That’s a good way to go if you’ve got the capital for that,” Schadle says. If the satellite operations are demonstrating success within a six to 18-month period, franchising may be a good idea, he adds.
There are two business models for such business development. One, like Wal-Mart, is a publicly-owned company with multiple locations, but is not a franchised operation. “We all know of Wal-Mart and we see those brands out there that are all publicly-traded, but there’s really not that many of them. Most people don’t realize that most of the businesses they’re going to or utilizing are franchises,” Schadle says. “They just don’t know it, and really, that’s the way it’s supposed to be. It’s supposed to be a seamless system to the public that offers a very high-quality at a reasonable price, and it works well.”
The business model of a franchise operation that has significantly grown is typically due to “pretty good brainpower at the helm at the franchisor level,” Schadle says. “What happens is you’re bringing in the cream of the crop from the public. Most people who can afford to buy into a franchise have been successful in their own right. Now you’re getting more and more brainpower into the franchisor – recommendations and policies that could be enhanced.”
Good franchisors are not the “end all,” notes Schadle. “They want input from their franchisee because they know that’s how they can escalate up. Everybody uses McDonald’s as an example of a successful franchise, but McDonald’s strongest products were not created by Ray Kroc. They were created by franchisees and then tested by the corporation and rolled out nationally. That’s the strength.”
Looking for areas in which to expand doesn’t necessary mean seeking out those regions where there are fewer competitors, Schadle says. “Everything is about marketing and sales,” notes Schadle. “If you can find a market that has fewer competitors in it, that just means that competitor is getting it all. Because of that, they’re probably not that strong. It sounds strange, but the fewer competitors you have in the marketplace makes it easier – the client seeks them out because there are very few options. That can typically be a weakness of that company.”
The service being marketed doesn’t matter as much as the willingness to hit the ground running and put the money into the business that it takes to properly and aggressively market it, says Schadle. “Nobody ‘owns’ it all. Otherwise, there wouldn’t a Wendy’s, a Burger King or a sub shop,” he says. “There would be one brand for everything everywhere. The strong survive in this country and that’s really what we’re based on. You can have big industries out there and sometimes it’s easier to get underneath one of them,” he adds.
While it’s good to have confidence in a product, “what you really want to have confidence in is the marketing blueprint,” Schadle says. “It’s about how that product is delivered,” he adds. “People won’t use what they don’t know exists.” Most people who go into business for themselves don’t have a marketing blueprint “that tells them what to do every day of every week, every week of every month, and every month of every quarter, so that there’s an attack plan constantly going on,” Schadle says.
When focusing on the product to the exclusion of marketing, independent business owners “need longer to ramp up, because people have to find them and they hope that the word-of-mouth spreads, and if it spreads and they do a good job, they’ll make it,” Schadle notes. “A franchise system typically doesn’t leave that to chance.”
A franchise is more expensive to open than an independent business in the same sector, but the return on the investment is much greater: there’s typically a 90 percent success rate with a franchise as opposed to a 20 percent success rate for new independent businesses, Schadle says. “Most of their extra dollars are not going towards a better piece of equipment, it’s going towards the marketing plan,” Schadle says of franchise operations. “We focus most of our time with new franchisors getting them to realize that this is a different model for your franchisee. This is a quick ramp model. This is what we’re going to help build so they can implement this right out of the gate and come out quickly, no matter what the product or service is. The approach is the same for all of them.”
While social media can play a role in marketing strategies, Schadle thinks it’s gotten more attention than it deserved. “It’s made you think you have to do it as a business owner or you’re behind the times. In some businesses, it works fantastic.” Schadle suggests the primary social media sites to use are Twitter, Facebook and LinkedIn.
“Traditional marketing is still probably the best,” he says. “That really relates to what’s called neighborhood marketing. If your product is consumer-based, not business-based, then you’ve got to be hitting the households.” On the other hand, if a company is a business-to-business operation, “then you need sales people – lots of them – who are on the streets knocking on every door relentlessly every day,” Schadle says.
Being capitalized is the key to success in starting a franchise operation, Schadle says. “You don’t have to have millions, but to really start a franchise, you need at least a couple hundred of thousands of dollars to build infrastructure and hire employees that the franchisees are going to need,” he says. “Get your legal documents done. If you’ve got your own business and you want to turn it into a franchise, delay that franchise a little bit so you can save more of the money that you need, because sometimes it means getting partners or venture capitalists. There are all different ways to do it, but trying to come in on a skeleton really makes it difficult.”
Getting credit to run a franchise may not be easy these days, Schadle points out. “But, there are different avenues,” he says. “Banks lend to the more expensive, established franchises or Small Business Administration preferred. Right now, the banking community does not want small loans, they want bigger ones – the $350,000 to $400,000 plus loans. People who are hoping to get out and get an SBA loan on $100,000 are not going to get them. Today, you’re getting into business via your own funds.”
An IRA can be rolled over into buying stock in one’s own company with no taxes and no penalties, Schadle says. “That’s probably the number one vehicle right now because you’re shifting your wealth from keeping it in the stock market into putting it into yourself,” he says. “Who’s the person you trust the most on the planet? Most of the time, it’s yourself. Most people can’t even tell you who’s pulling the trigger on what stocks are being purchased. They know their broker, but their broker isn’t making the calls. The broker is taking their money, so using some IRAs to get into a business is a very smart way to go, because you’re basically forming your own 401(k) and buying your own stock in your own company. What is does is it seeds your business well; you’re fully capitalized with no debt service. If you go get a loan from the bank so you can keep money in the stock market, they’re going to take your house. If you use the money you have, you still have your home. I really don’t like that people say to not risk your retirement, but risk your house.”
While it’s a good time for expanding one’s business as the recession is showing signs of lifting, this also is a good time to negotiate leases for business expansion, Schadle says.
Carol Brzozowski is a member of the Society of Environmental Journalists and has written extensively about environmental issues for numerous trade journals for more than a decade. She resides in Coral Springs, Fla.