Franchise Development - When is the Right Time?
More than 750,000 franchised business locations are spread across the American business landscape. All together, franchised businesses generate more than $1 trillion in sales. A new franchise business opens somewhere in the U.S. every 8 minutes each business day. Franchising is arguably the most efficient and leveraged way to expand a company in today’s marketplace.
When a business owner is considered whether to franchise a business, the question often arises , “should I franchise after having only one location in operation or is there a need to open additional company owned locations prior to offering franchises?”
This is a question with no “right answer”. There are as many business decisions have, two ways to approach the question. One from a more conservative standpoint and the other from a more aggressive standpoint.
As you may have guessed, the aggressive business owner franchises before opening additional location for the following reasons:
1. Opening additional company owned stores pulls the owner further into the “operating” side of the business. You have a tendency to work more as a manager and less as a business owner.
2. The cost of opening additional company owned stores slows the growth and development of the business. Many times, an additional company owned store will take several years to break even from a cash flow standpoint and requires too much capital to justify the investment.
3. Stores where the owner is not present on a regular basis often produce less operating cash flow because of increased management expenses and decreased operating efficiency.
4. In the same amount of time that it takes someone to open a company owned store, several franchised locations could have been opened successfully.
5. They see a limited window of opportunity to capture a market and build the brand on a regional or naitonal scale.
The more conservative business owner looks at whether to franchise a business differently. They prefer to have additional company owned stores open prior to launching a franchise program for the following reasons:
1. They want to confirm that the concept works in other markets and it isn’t successful only because of where the store or business is located.
2. A business owner would prefer to prove that the concept can be replicated successfully with the same standards of operation and quality service when they are not present at the location overseeing the day to day operations.
3. More company owned locations proves to a franchisee that the concept has been proven and is more stable.
The fact is that a good business system and operating model is either in place or it is not. Whether it has been replicated 1, 2, 3 or 30 times over is irrelevant if the system works and has been proven. How many franchise systems have been launched with only one operating location in place?
1. Wetzel’s Pretzel’s – The California pretzel chain was founded in California using an oversized pretzel sold through a retail location. The concept was quickly successful and sold the first franchise to a family member. Today, the chain has over 175 locations.
2. Auntie Anne’s Soft Pretzels – Not to get too “over-pretzeled”, but here is another example of a franchise success story that started with one location. Anne Beiler sold her delicious pretzels from a cart location going from festival to fair around Pennsylvania. Upon starting a successful trend in pretzel’s throughout the area, her next locations were all license partners – seven of them – until she converted to a franchise system.
3. McDonald’s – The biggest franchise of the all started with one location prior to launching the franchise model. The McDonald’s brother famously founded the concept in San Bernandino, California and sold the franchise rights to Ray Kroc. Mr. Kroc then proceeded to sell franchises to the balance of the State of Illinois and then the rest of the world.
4. H&R Block – The tax franchise was born in Kansas City, Missouri out of an idea to offer discounted tax services. When the brothers decided to move to New York, they sold the original location as the first franchise of H&R Block. Today, the tax service company has a network of over 12,500 locations consisting of both franchised and company owned stores.
There is no right or wrong way to approach the franchise industry, it all comes down to how fast a business owner wants to move in growing a business and a brand. For more information on how to franchise your business, contact us: (800) 610-0292.
FMS is a team of expert franchise consulting professionals based in Canada that provides solutions for franchise development, franchise consultation, and expansion of businesses globally.