Let’s say that you own your own pizza business. You have been working very hard for many years to establish your business. Your efforts have paid off. You are very successful. Except for the long hours that you have worked, your wife and kids are very happy. It is a good life. Yet something is still missing. You still have that burning desire to grow and expand your store by adding additional locations. And more income would always be nice! But you know how many hours you already spend working in the store. You just don’t know where you could find the time to devote to additional locations. You know that absentee ownership does not work very well. To be successful one has to be there watching the store working many hours. And you can’t be in more than one place at once. If only you could clone yourself!
And then there is the need for additional capital. It costs a lot of money to open another location. Sure you have been successful, but little Johnie’s soccer costs a lot of money too. Perhaps you could borrow the funds, but that adds additional expense which eats into your profit margins. So how do you expand?
That is where franchising your business comes in to play.
With franchising you can utilize the talent and capital of others. When you sell your franchise rights to a franchisee, you will be passing on your proven business model. Included with that will be everything that is needed for the franchisee to be successful. You can grow as quickly or as slowly as you wish by controlling the number of new franchised units every year. You will receive an upfront franchise fee (something in the $10,000 to $50,000 range is customary, but I have seen them as low as $100 and as high as $100,000 or more). For the most part these franchise fees do nothing more than cover the costs associated with advertising, recruiting, and training any new franchisee. There is really not a lot of profit made at this point. However, once the franchisee is operational, you will also receive periodic royalty payments from the franchisee. These royalty payments are where the franchisor really makes a profit. A typical royalty payment might be 5% of gross sales.
As you can see it is in your best interest to make sure that any franchisees are successful. You must choose potential candidates wisely. You need to make sure that they have the ability to succeed by using your proven business model. They must have the capital, experience, and probably most importantly, the desire to succeed. When they succeed, you succeed.
So don’t be afraid of leveraging the talent and capital of others for your benefit. Done right, franchising can be very rewarding! |
