So you have a successful business or a great new business idea and you want to head down the path of becoming a franchisor?
Do you fully understand the mechanics of the franchise model and what is required to make it a sustainable success, so that you can continue to grow the business and your brand for your future franchisees and as the custodian of the business?
Taking the time to consider this upfront, before you make the leap into franchising, may just be the most important step that you make on a franchise journey.
It could help to identify any weaknesses in the franchise potential of your business, and also highlight that franchising might not be the ‘pot of gold’ for you that you thought it would be.
The time to find this out is now, in the stage before you franchise your business, not years down the track when you are stuck in a model that cannot deliver the necessary volumes required to ensure a solid, sustainable and rising income stream back to your brand and franchise system.
One of the key factors to understand about establishing and operating a franchise business is that it requires a long-term focus and commitment.
Being in it for the long term is essential for franchisors, and arguably the biggest influence on long-term growth and success is the ‘scalability’ of your franchise system.
Scalability in this sense refers to the overall volumes and revenues that the franchisees can generate and, in turn, deliver royalties back to the franchise.
This is where knowing how franchisors actually make their revenue is so important. Under a franchise agreement, the franchisor usually grants exclusive rights to a franchisee for the local distribution and/or sale of a service or product, in return for royalty payments. The average royalty payment is 7% of a franchisee’s turnover (and this goes back to the franchisor to run the management of the franchise network).
What is interesting to note is that the origins of this average franchise sector royalty percentage stems from the biggest players in the field and is based on the assumption of large franchisee turnover.
It is easy to see how the big global names in franchising can generate larger revenue, with their high-turnover outlets and rapid growth strategy delivering a consistent and growing revenue stream in royalty payments back to the franchise support office.
But what about the smaller, more niche franchises, of which there are plenty out there? If you have a specialist product or service, with a narrow and defined market without much scope for future diversification and expansion, have you considered what level of royalty streams will actually be flowing back to your franchise business?
It may not be the profitable growth strategy that you initially thought, especially when you take into account the upfront cost and time of establishing the franchise system and the ongoing staff required and associated cost and time managing it.
Scalability is a crucial question in the franchise equation and it goes hand-in-hand with the long-term commitment that franchising demands. The feedback we receive from franchisors is that most do not really start to make substantial money as a franchisor until they reach a network of 20-30 outlets. This may be even higher for specialist or niche franchises, particularly in the service sector, that do not usually generate large revenue volumes.
Learn more about scalability and everything else involved in becoming a franchisor with the ‘How to franchise your business online course’ here.