I am neutral on franchises. I have a Wharton classmate who opened a total of eight Subway franchises in northern California. He loved it. It’s been about eight years since I last communicated with him. (I lost touch with him when I moved from the Bay area to Atlanta. I need to reconnect using LinkedIn, right? I wonder how he’s doing since Subway switched to its $5 footlong.) I also know a couple of Wharton peers a few years ahead of me who purchased a group of 15-20 Popeye franchises from one entity using private equity. They are doing well.
With that said, I watched a webinar on Wednesday by PLM’s Franchise Consulting’s Phil Mastrolia that was part of the Economist’s Franchise Fair. Here are some of the main takeaways from that webinar. (These all assume you buy into an existing franchise that has a successful track record and high franchisee satisfaction.) As you read this, compare this to your small business operations.
Franchises have a high likelihood of success (vs. the typical start-up). Why?
- Franchisor has a proven, replicable system in place that has a track record of several years to several decades. The franchisors have been improving and refining their systems over this period, in response to market changes and to customer feedback.
- Franchisor often helps locate business in an area with the least competition and the most applicable prospects.
- Initial and ongoing training provided.
- Company (franchisor) has established brand awareness and corporate image supported by advertising and branding campaigns.
- Easier to obtain financing. Some franchise systems have in-house financing or strong relationships with specific financing providers. Also, in general, commercial banks and other financial institutions look at the lower default rate among franchises and are therefore more receptive to lending to such entities.
- Ongoing support provided, both from the franchisor and from fellow franchisees through groups or direct contact.
- Marketing is driven by the franchisor, which has personnel on staff who are highly skilled in this area. This marketing includes marketing plans, advertising campaigns, and brand recognition initiatives.
- Franchisors often create and drive loyalty programs to retain existing customers and encourage referrals.
- Exclusive territory protects franchisee from competition from other franchisees.
Another way to obtain some, but not all, of the benefits is to buy an existing business that already has most of these in place. You can find a company with documented operating systems, strong supplier and vendor relationships and supporting documentation, a strong marketing program and the personnel or vendor relationships in place to continue to drive this. The smaller the company, the more difficult this is to find but they do exist.
If you are thinking of selling your company, now or in the next few years, you can use this synopsis as a guide to your small business operations. To the extend that your service business has all of the above in place, your company will be that much more valuable and easy to sell. Most people (financial buyers), companies (strategic buyers), and all in between want to buy companies they believe will continue to deliver value after the purchase. With a service business the primary way to ensure this is to put the systems in place that allow the company to run itself with good people. If you need help understanding what I mean, read Good to Great and The E-Myth or The E-Myth Revisited.