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Is My Baby Ready for the
Franchise World?

By Mark Siebert

Alot has been written about franchising, but it still remains a mystery to most business owners. When considering franchising, you may find yourself asking the following questions: What is the difference between franchising and simply opening additional stores myself? How do I determine whether or not my business is franchisable? How does one go about creating and selling a franchise, and how much does it cost to franchise?

These are the same questions asked by Al Levine in 1986, when he first considered franchising. In learning more about franchising that day, Al saw the immediate applications franchising held for his business. Was Al a restaurateur with another hamburger or pizza concept? No. Another real estate broker or rental car company operator? No, again. Al Levine operated a handful of baby furniture retail stores. Al saw the competitive benefits of increased purchasing power, better name recognition, and advertising economies franchising would afford him and his franchisees, and he pioneered franchising into another new industry.
Less than 15 years later, Al has grown his company to a 50-unit franchise system operating under the names of USA Baby and The Baby's Room. One may ask, "Wouldn't Al have enjoyed the same benefits of increased name recognition and buying power if he opened up 50 company-owned stores himself?" Simply put, the answer is "yes." However, Al couldn't open 50 stores on his own for the same three reasons most business owners can't: time, people, and money.

Back in the mid-1980s, much like today, the baby and children retail sector was undergoing major change. The mass merchants were entering the business with vigor and the independent retailer, long the backbone of the industry, was having difficulty adjusting and competing. The mass merchants had better name recognition, better buying power, and much larger advertising budgets.

Al got big fast. By doing so, he could compete better on price and go head-to-head with mass merchants in advertising. He already knew he could beat them on quality of selection and service. Al knew it took him a decade of "bootstrapping" to grow from one location to several, and he no longer had the time to afford slower growth. Franchising was the answer. In less than 10 years from the time he began franchising, he grew ten-fold. In fact, this speed of growth is not a typical in franchising. According to one industry survey, the average start-up franchisor will sell 9 franchises its first year, 11 its second, 13 its third, and 20 per year from that point forward.

For many businesses, the issue holding them back from opening more locations is people. As many retailers know firsthand, it is difficult finding and keeping good managers. Entrepreneurs like yourselves don't like depending on anybody but yourselves, but the truth is you can't be everywhere at all times. To grow past two or three units, you need to find good managers—managers who care about the business as much as you do. Managers with a "do whatever it takes" mentality, as if it was their money on the line. Truth is, there aren't many people like this out there. You make the sacrifices for your business that you do because it is your business. The strength in franchising is that you have owner/managers who think the way you do at the unit level. This is the reason why franchised locations typically outperform company-owned locations within the same companies.

Even if finding good managers is not a problem for you and you foresee having no trouble opening the number of units you desire in a timely fashion, your growth may be stunted because you don't have the money to open these additional locations. Franchising makes rapid expansion affordable because it is fueled by the franchisees' capital. The franchisees pay for the construction, the equipment, the utility and lease deposits, the initial inventory, the insurance, the licenses and permits, and the other start-up costs themselves. In fact, as a franchisor, you receive money from your franchisees in the form of franchise fees, royalty fees, and advertising contributions for granting them the right to be part of your system.
This is not to say becoming a franchisor does not require a financial investment. However, the total cost for the required up-front business consulting, the necessary legal work, the operational documentation, and the preparation and production of the marketing materials, is usually between $50,000 and $80,000: less than the typical cost of opening just one more store.

How do you know if you can sell franchises? Franchising entails a company's granting of the right to use its name and/or trademarks and its proprietary operating system to another company in exchange for a fee. If you are engaged in doing so, you will be viewed by the Federal Trade Commission (FTC) to be a franchisor, and you will be subject to the laws governing franchising.

Of course, once you are legally registered as a franchisor, you still need to sell the franchise. In order to sell franchises, the franchisor first needs to show credibility. Franchising must start with a successful concept, but today's prospective franchisees want more. They want to see a well-established business and a well established track record. To satisfy their expectations, you should be able to demonstrate several years of healthy sales and profits at more than one location. Another factor influencing franchise sales is uniqueness. Whether it's a unique recipe, a proprietary product, or an entirely new concept, originality sells. And that uniqueness can be created. Boston Market wasn't the first company to sell rotisserie chicken, but their merchandising — with their signature chickens and "home cooked" side orders on display—has set them apart from the crowd.

"But will it play in Peoria?" With fraudulent franchisors in the news selling nothing more than "blue sky", it becomes abundantly clear that selling franchises is only half the issue. Without "successful" franchisees, no franchise system will last. Franchising is second-wave technology. It starts with a successful concept. But not every successful concept can be cloned.

Some concepts, like barbecue, are very regional by their nature. In South Carolina, barbecue means shaved pork on a bun. Try to sell that in Texas, where barbecue means beef served on the bone, and you might be hung from the nearest tall tree. Another factor limiting a franchisor's ability to grow quickly is the overall teach-ability and systemization of the concept. While every good business relies on an established system, that system cannot reside solely in a franchisor's head if it is to be successfully passed on to the franchisee. Operations manuals, reporting forms, performance requirements and compliance checklists must be integrated into a franchise program if rapid growth is to be accompanied by a tight grip on quality control, which means in addition to knowing what works, the franchisor must know why it works.

The Acid Test—Most importantly, today's successful franchisor needs to offer its franchisees an attractive return on investment. Franchising must operate as a "win-win-win" environment if it is to be successful. The customer must get value for his or her money. The franchisee must make an attractive return. And, lastly, the franchisor must prosper.

Now that you understand more about franchising and how to determine whether your business is franchisable or not, I have one question for you: Is your baby ready for franchising?

Mark Siebert is the CEO of iFranchise Group, Inc. of Homewood, IL. During nearly 20 years of franchise consulting, he has consulted with more than 30 Fortune 2000 businesses and with some of the world's most successful franchisors, including Ace Hardware, McDonald's, Texaco, USA Baby, Auntie Anne's Soft Pretzels, and Armstrong World Industries. Mr. Siebert can be reached at (708) 957-2300 or via e-mail at MCSiebert@ifranchise.net. You can learn more about franchising at www.ifranchise.net.