The Franchising Company’s How to Build A Successful Franchise Series
Our team at The Franchising Company is putting together a new blog series for our clients or anyone interested in franchising their business. This also includes those who have recently franchised.
Step 1 - Unit Economics/Proving the Model!
Want to build a successful franchise system? Want to claim your spot in the illustrious Entrepreneur Top 500 list? Before you start thinking about selling hundreds of franchises, or even your first, there's something we need to talk about first...Unit Economics!
The very first question you need to ask yourself before deciding to franchise is whether or not your numbers make sense? Believe it or not, you can spend hundreds of thousands of dollars on fancy marketing campaigns to sell your brand but if the numbers (unit economics) don't add up, it's going to be an uphill battle that will only get tougher as you add on new franchisees.
So before you spend a penny on franchising your business, take the time to prove out the model first! How many locations do you have? Just one? Maybe you should look at opening a second, third and even fourth location corporately before franchising. Already have multiple locations? Are they all performing at similar levels? If not, how do you get your lower performing locations to the same level as your top performing? Are there reasons for the lower performing locations? Are there markets that your franchise may not perform well in? Does your business require an owner-operator to be successful? If so, does the unit economics support the owner's salary requirements?
If you spend the necessary time to build your business the right way, you will enjoy the benefits from these efforts when you move forward with franchising. A brand with strong unit economics will almost sell itself. You will attract multi-unit operators. If you look at the more successful franchisors (with the exception of a few - Chick-fil-a being one of them), you will notice a high percentage of multi-unit operators. It makes the system easier to manage for the franchisor and also provides for more consistency throughout the brand.
On the flip side, if you don't take the time to prove out your model, you will have franchisees that struggle to survive. They won't validate well. You'll have a higher rate of closings (which gets disclosed in the Item 20 and negatively affects your standing with the SBA). And before you know it, you won't have a franchise system any longer.
So you might be asking yourself what your numbers should look like to be considered "Strong Unit Economics"? The answer? It's more complicated than an exact number. It depends on the brand. It depends on the initial investment. It depends on being an owner-operator model versus passive or semi-passive. It depends on the industry. It depends on the competitive environment. It depends on the franchisee. However they should allow for a franchisee to make a reasonable and consistent return on their investment. If your model can provide this, franchisees will find you!
If you would like to learn more about franchising your business and/or if you've recently franchised and have questions, please contact us! We're a bit nerdy when it comes to franchising and love offering free advice and/or suggestions. If you're looking for something more, we can discuss that too!