To Franchise or Not To Franchise

If your small business has a unique product or service or if the demand well outpaces your anticipated supply, you may find yourself wondering about Franchising. Is it a path of exploration for your business?

When I co-owned an indoor dog swim center a decade ago, in the first quarter of operation, we saw ourselves asking this very question, as our business was unique. In fact so unique, that we had a dog business in town send “spies” to ask about the eco-friendly filtration to see about adding it to their offerings. In retrospect, what a compliment. At the same time, an out of town water dog club with locations on the East Coast contacted us about Franchising. The rest of this article is a synopsis of what we uncovered on the topic.

First, we were honored. Second, we were overwhelmed, and third, we did not pursue it. I was fortunate enough, at the time, to have a working banker’s knowledge of Franchising. I reached out to the CPA firm in town that I knew had extensive experience with Franchising, both on the Franchisor and the Franchisee side. It did not take long to learn some of the basic tenets of Franchising and that our fledgling business did not meet the criteria.

Money, you need to be making money, not losing money, as a business, if you consider franchising your business. Hard to do when you are just a startup which required a six (6) figure investment for equipment. So, right away, I knew we did not qualify. Time, something neither my business partner nor I had as we both had full time professional level careers. You must be willing and able to devote significant time upfront to teach the Franchisee about your operation. That entails providing them with essentially a “How To” manual, from concept to profit making. Supporting them with branding, marketing, advertising, operations, etc. all falls on you as the Franchisor. Think of it as a “Turn Key” effort. This means all the Franchise has to do is turn the key to open the door and they can start operating, per your instructions, and make a profit. Again, something our business and our owners could not provide.

We did offer the water dog clubs the option to buy our naming rights, use of logo, etc but they were not interested. They did not want the risk of having to operate on their own. And we could not meet the criteria of a Franchisor nor did we have the time or personnel to devote to the effort, it we did. But we all learned some very valuable information.

First, make sure you are in the profit making stage of your business and second make sure you have personnel to devote to educating, tutoring, and overseeing the Franchisee. If you meet both of these criterias, your next stop should be an experienced CPA and Attorney. Franchise Bankers do exist but are normally included in the Commercial/Corporate Bank and to engage their expertise means your company must meet several size thresholds. A small business usually cannot meet their thresholds. And, often, this niche group will only work with the largest of Franchises in the country or the globe.

On the Franchisee side, the SBA (Small Business Administration) may be a good place to inquire about which of their programs can be used to buy into a Franchise. If you are looking to become a new Franchisor, understanding which banks have the appetite for Franchisee lending is important and may help you sell your concept to prospective buyers if you can direct them to a Bank that is experienced in providing SBA backed loans for start-up Franchisees. While this is not a requirement for you, it is always good to be able to show you have done some research on where to direct them if they need financing.

Expanding your product, service, or geographic reach has many options. And, certainly one of them, is to consider if Franchising is a real opportunity for you to reach your growth goals. Do your research, meet with your Circle of Trust Advisors, and find yourself an experienced CPA firm and Attorney. This will protect your business and any potential interested parties in the long run.

Be like Masi, the White Shepherd in our Blog photo, do your research and evaluate your next move before you pounce on an opportunity. (For the animal lovers out there, the rabbit did make it out of the fence unscathed. :))

Be well.