The most common question I get as an entrepreneur is, “How should I go about franchising?” I suspect it’s a popular query because franchising is widely believed to result in fast and easy growth.
Franchising certainly is an attractive way to finance expansion at relatively low risk, because you use other people’s money (i.e., franchise fees) to build out your infrastructure. But while I love the franchise model — it’s the foundation of my company, 1-800-GOT-JUNK? — it’s no guarantee of success. Not every company is suited to franchising, and even those that are can fumble the ball. Here, as I see them, are the five cons of franchising:
1. Franchising requires a proven business model, strong systems and the right people — things that take a lot of time to develop. However, entrepreneurs are impatient by nature, so too many of them franchise too soon — it’s the deadliest sin of franchising.
2. Another mistake is compromising on the quality of your franchisees. While they might have the money to help build your business, they might not have the chops. Besides, you can’t get rid of franchisees the way you can employees. If you don’t select the right franchisees, they will drain your business and put it in a downward spiral.
3. One challenge that many franchisors don’t anticipate — I didn’t — is the dramatic difference between the business they were running (i.e., the concept they franchised) and the business they end up running (i.e., a franchisor). When you decide to franchise, you leave your area of expertise. Jumping from the junk-removal business to the junk-removal franchising business in 1999 entailed more learning than I could ever have imagined! One month I was overseeing a team hauling away junk, and the next month I was overseeing business owners trying to build profitable operations in disparate markets.
4. Creating a franchise concept is expensive. While you can use other people’s money to grow, you still must make a large investment in testing the prototype, creating support infrastructure and systems, and marketing your concept to potential franchisees. There are lots of lawyers to pay, too; even in jurisdictions in which franchising is not heavily regulated, you must invest in contracts that protect both parties.
5. Lastly, your success is heavily dependant on the satisfaction of your franchisees. Last year, 94% of our operators were satisfied or very satisfied with being a partner in 1-800-GOT-JUNK?. But just imagine what happens when the numbers aren’t so high — a lot of people complain and/or start telling you how to run your business. Operator revolts have crippled many companies in the franchising industry.
If you still think franchising is worth a closer look, here are the key steps I’ve discovered to franchising success:
1. The first is simple: read The E-Myth Revisited, by Michael Gerber. The book outlines how to create a replicable set of operating systems, i.e., a franchise prototype.
2. Spend time refining the model. People are buying your proven recipe — not your idea of a proven recipe. They’ll want to know that you’ve worked out most of the bugs. It took 10 years before 1-800-GOT-JUNK? was ready.
3. Create a sound financial model that generates profit for you and your franchisees. Our model allows for net margins of 18% to 22% on the franchisee side.
4. Create operations manuals. This process will not only generate recipes for franchisee success but also help you identify gaps in your systems.
5. Determine which services you will provide to support the growth and profitability of your operators. Our biggest value-add is our call centre; rather than leaving booking and dispatch to our franchisees, we allow franchisees to focus on sales and, of course, hauling junk.
6. Create your franchise-disclosure documents, which are legally required in Alberta, Ontario and throughout the U.S. This is an expensive process ($200,000-plus) but it forces you to think through your obligations to your franchisees and your expectations of them.
7. Find your first franchise partner. Crawl before you walk, because you need to prove that your recipe works for others, not just for you. The biggest lesson I learned here was from the late Greg Brophy, the founder of Shred-It International. In the early days of 1-800-GOT-JUNK? he told me, “Never compromise on the quality of people you bring into your system.” I took his advice to heart. Your system will only be as strong as your weakest franchise partner.
If you perform each of these steps correctly, hockey-stick growth will come. In the 2004 through 2006 period, we grew from system-wide sales of $16 million to $106 million. But it took us 15 years to reach that inflection point. It didn’t come fast, and it definitely didn’t come easy.