Vancouver-based Brian Scudamore has built 1-800-Got-Junk into one of Canada’s fastest growing companies based in part on franchising his business model throughout Canada and the United States.
Franchising can be a fast-growth way to scale up your business as you engage an army of motivated franchisees to follow your money-making formula while sharing a slice with you.
But how do you know if your business has the right characteristics to be a franchise? For answers, I spoke to Mark Siebert, president and CEO of Homewood, Ill.-based iFranchise Group, a consultancy that specializes in helping business owners franchise their company.
Mr. Siebert says a business has to meet three criteria in order to be franchise-able:
1. Is there enough money to go around?
You need to have a fat profit margin to ensure a return for both the franchisee and the franchisor. Mr. Siebert looks for a 15-per-cent minimum projected return on investment for the franchisee on the set-up costs.
To do the math, take last year’s profit and loss statement and strip out any expenses your hypothetical franchisee would not have to pay (such as logo development) and add in expenses for a franchise manager salary and a royalty (usually a percentage of revenue) to be paid to you, the franchisor. This gives you a rough financial model of how a franchisee would perform using your business concept.
Now estimate the start-up costs a franchisee would incur. Mr. Siebert believes that for a business to be franchise-able, the franchisee should be able to get a 15-per-cent plus return on the set-up costs after a couple of years of operating.
For example, let’s say a franchise requires $500,000 to set up, and you project your franchisee could earn — after a couple of years to get established — $100,000 of pre-tax profit from the franchise after paying a manager and a royalty stream to you. One hundred thousand dollars in pre-tax profit on a $500,000 investment equates to a 20-per-cent return on investment and therefore would meet the first of Mr. Siebert’s three criteria.
2. Can you sell franchises?
According to Mr. Siebert, given the difficulty of finding bank financing, the best selling franchises are cheap to get into and take advantage of macro-economic trends. For example, Nurse Next Door has become one of Franchise.com’s top 25 new concepts by providing home health-care support to the growing number of seniors who want to remain in their homes.
Mr. Siebert cautions would-be franchisors to be mindful of franchise concepts that may not travel well. As an example, he points to Ohio-based Gold Star Chili as a concept that has sold more than 100 franchises across Ohio, Kentucky and Indiana but may not work as well in other regions whose taste buds are not ready for Gold Star Chili’s unique approach: it starts with spaghetti, adds the chili and then tops it with cheese and onions.
3. Can you clone it?
The third part of the acid test is whether you can replace yourself or if your business requires a unique set of skills. “You need to be able to train a franchisor within three months,” Mr. Siebert says. For example, “you could never franchise a fancy French restaurant because it would take too long to train the chef.”
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable – sellable – company.