This article by Tom Spadea was featured in the March 2021 issue of Franchise Dictionary Magazine.
What Business Are You In?
Seems like a simple enough question. However, I think many franchisors forget they are in two businesses. One is the underlying subject matter expert on the service provided to consumers, such as a restaurant, gym, roofing, etc. But the second, and increasingly more important, as your system grows, is the business of franchising.
Franchisors who neglect the business of franchising and who don’t embrace the rules of the road, will create unnecessary and perhaps insurmountable obstacles to their success. Rule number one is that successful franchisors are the exception, not the rule. It is not enough to have a successful underlying business that is franchise-able. Success in franchising requires success in both businesses. Many people throw around statistics about franchisees being 80% or even 90% successful. I would say from my experience franchisors, are the exact inverse of that. The upside is that unlike a franchisee success that will build a solid business for an owner to support his or her family year after year, a franchisor’s success can be a generational wealth event taking a six-figure investment to an eight- to nine-figure payout in as little as a decade.
The franchise business model is more like a software or tech business, where there is a high initial investment and tough path to profitability, but once profitability is reached, the margins on each incremental unit can be astronomical. In franchising, it takes a tremendous effort to get the first few units open and profitable with a scalable foundation. Not only does it take a lot of money, it takes special grit, determination and patience. It’s not about short-term profitability, it’s about building a scalable system. Valuations are driven by the system and the future potential.
As franchise attorneys, our role is to help keep the entrepreneur within the guardrails of the myriad of legal issues that can stunt or even reverse growth. We have to have the file “ready” for the final dance for the ones with what it takes to have a huge exit. When a franchisor is making decisions about their business and are tempted to cut corners or take short cuts, they should stop and think about the multiplication of those errors down the road. If you go the extra mile to do things right today, you have a much better shot at winning the franchise game.
To see all of Tom’s featured articles on The Franchise Dictionary Magazine, visit this page.