To Franchise or Not to Franchise - That is the Question

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Should you franchise?

It's decision time. You have a great business concept, profitable operations and a good location, and you want to expand. Should you expand by opening one or more new locations, or would it be a smarter move to grow your brand by franchising your business model? Both expansion methods have merit but if you want to ramp up your market share more quickly, you should consider franchising.

If you decide that franchising is your best bet, you need to develop and formalize your strategy, which will enable you to expand within the limits of your financial and human resources. The strategy should consider whether the company will:

• Offer single or multi-unit franchises,
• Sub-franchise an area to an entity that has the resources to act on your behalf as sub-franchisor,
• Find an Area Developer.

Each of these approaches has its own benefits and challenges so it is important to determine your format first.

The Concentric Circles Approach

Now examine your expansion strategy in terms of your target franchise areas and their proximity to your base of operations. Generally if you are going to use the single unit or multi unit franchise model, it is better to open locations in concentric circles out from your base. This will enable you to provide the necessary support to your franchisees without overly taxing your resources. As locations are opened further and further away, having numerous locations closer to your base of operations will ensure that the royalties paid by the existing franchisees will more than cover the support costs of newer, more distant franchisees.

Sub-Franchisors and Area Developers

If your decision is to expand by sub-franchising or using an Area Developer, then the need to use the concentric circle approach is reduced. With sub-franchising you will be looking for an individual or group who has the financial resources and the business acumen to act as if they were the franchisor (i.e., you) within a specified geographic area.

Generally the Sub-franchisor or Area Developer takes on some of the responsibilities of the franchisor, in return for a significant portion of the initial franchise fee and ongoing royalty stream. These responsibilities include:

• franchisee recruitment,
• location opening assistance, and
• franchisee training and support.

The Sub-franchisor will be a party to the franchise agreement. An Area Developer is similar to the Sub-franchisor except for the fact that typically the Area Developer is not a party to the franchise agreement.

Analyze the Market

Before you start putting your expansion strategy to work, make sure that you complete a detailed analysis of the markets where you want to expand. Include the following factors in your analysis:

• Customers
• Consumer buying indices
• Cost of real estate
• Critical mass
• Units needed to support critical mass
• Competition
• Employment statistics
• Government regulations

Pick markets where you have the greatest opportunity for dominance. Decide how this dominance will be measured.

The Next Step

You’ve decided on the expansion strategy, both in terms of the type of partner you want and the areas you want to expand into, and you've completed your market analysis. Our upcoming posts will discuss how to find the perfect franchisee, sub-franchisor or area developer.