Blog

So You Want to be a Franchisor?

June 24, 2010 by Don Fox — CEO, Firehouse of America

I wish I had a franchise fee for every time the owner of a fledgling restaurant concept stopped to ask me whether or not they should put their concept out on the street for franchising. I always follow such an inquiry with a simple question: how many units do you currently own and operate yourself? I need know little more than this number in order to provide them with sage advice.

The fact is, the highway is littered with wannabe brands whose owners thought they had the next great thing in franchising. But they never gave the concept a chance when they failed to develop the concept themselves, at least to the extent that they understood the most critical aspects of the restaurant: What are their customer demographics? On what occasions are their typical customers using them, and with what frequency? What is the ideal size of a trade area that a single store needs to be successful? What are the most important, non-negotiable aspects of site selection and approval? What type of sales volume is needed to generate a respectable return on investment? Is there a complete understanding of the dynamics of the P&L for the typical restaurant? For that matter, do they even have their operating systems established and completely documented? The franchise you are selling isn’t just a brand idea or concept. It’s a total package…a product in its totality… that should be geared for the optimum success of prospective franchisees.

The hard, cold fact is that the best way to get into the franchising business is to build it on a foundation of successful company-owned restaurants. There’s nothing that stops aspiring franchisors from jumping right in with both feet after having developed only a store or two. But the chances for failure are increased. An even of greater consequence…and shame…is the potential impact on the novice franchisees who likely didn’t know the right questions to ask.

How many restaurants should you operate before franchising? There are many things to consider, but none is more important than understanding how the brand works at the DMA level (Designated Market Area…i.e., television market). If you aspire to franchise in multiple markets, then it is imperative that you understand how you would develop a market. The key question: What is the optimum size of a trade area for an individual restaurant? If you don’t know this, then you will stumble blindly into the sale of franchises. Your past industry experience may be beneficial, as would the study of similar brands. But each brand is unique, and until you build a real-life example, you really don’t know for sure. And in the end, it is the franchisee that serves as the guinea pig, and your brand may not survive the experiment either.

Being a quality, successful franchisor comes with a price tag. And so another key reason for building your franchise business on the foundation of company operations is the fact that it will supply the cash flow required to fund your support of the franchise side of the business. Should you launch your franchising operation on too small a budget…or worse yet, on borrowed money…you will find yourself under pressure to do deals that you otherwise might never consider. And let’s face it: if your company restaurants aren’t generating enough cash to fund your efforts as a franchisor, you have no business being in the franchising business to begin with.

Building your foundation will take time, money, and a lot of sweat. But this exactly what you will be asking of your franchisees. So before you draft that first Franchise Disclosure Document: Walk the talk.

Franchising