Small businesses face difficult decisions on whether to stay a mom-and-pop shop or expand into a franchise. Whether you are the WaveMax laundromat, the Flying Locksmiths or Shake Shack, which started as a hot dog stand in New York City, it’s hard to tell which company will become a successful franchise and which businesses will remain stand-alone mom-and-pop shops.
If you are looking to grow your business into a franchise, here are some expert tips on how to proceed.
- Start in Nonregistration States
The Federal Trade Commission handles registration for franchises. Because it takes weeks or months to get registered, businesses should start growing in nonregistration states, said Rick Grossmann, author of Entrepreneur Magazine’s “Franchise Bible.” That will save the business money and the hassle of going through processes. However, if you are based in a registration state and plan to sell in your state, you must register.
Paul Segreto, president and CEO of Franchise Foundry and founder of Acceler8Success Group, noted that 13 states are considered registration states, including New York, California and Illinois. Check with your state for the latest rules regarding franchise registration. Some rules have been relaxed following the COVID-19 pandemic.
- Hire a Franchise Attorney and a Franchising Coach
In addition to turning to a franchise coach, business owners should hire a qualified franchise attorney rather than a “business-only” attorney, Grossmann advised.
“They have to be a franchise specialist,” he said. Grossmann suggested that franchising is too specialized to turn to a lawyer that is not handling franchise law all day long.
When considering whether to become a franchise, look for a franchising coach that can take you through the process. For example, Franchise Bible Coach works with mom-and-pop shops as they go through evaluation, which leads to a three- to six-month project to launch them into franchising, Grossmann said. Services such as Franchise Bible Coach, Franchise Foundry and Franchise Scale coach executives on what they need to know to grow a business into a franchise. Franchise coaches also help write your operations manual and marketing plan while your franchise attorney is drafting your franchise disclosure documents.
“Attorneys are an important part of the process, but you really need a franchise mentor,” said Dennis Mulgannon, founder and principal of Franchise Scale. “That is somebody that’s guiding and building out the infrastructure of a franchise system to be able to support nationwide growth or regional growth, depending on what the goals and the aspirations are of the founders.”
As a franchise mentor, Mulgannon gets pitched four or five times a month from businesses looking to grow.
“When I launch a new brand, I play stealth CEO, meaning they generally don’t have that experience in the franchise space, they’re experienced at whatever business they’re in, and they’re really good at it, or I wouldn’t be talking to him,” Mulgannon said.
- Build Franchise Businesses That Are Repeatable
The entrepreneur should also have a duplicable business that can succeed almost anywhere and have a need to help people in other communities, Grossmann said. There also should be a need for the company’s product or service.
“The system has to be transferable; it has to be relatable,” said Segreto, who has worked with hundreds of franchises. “It has to be able to be implemented and deployed just like the original business.”
Repeating the business in just one other location will not be enough, according to Segreto. He recommends a “hub-and-spoke” philosophy in which a franchisor opens a few locations around the main location.
If you use Atlanta as the main location, you can set up other locations within four hours of that city, including additional franchises in Atlanta as well as in Nashville, Montgomery, Alabama and the Florida Panhandle, Segreto said.
“You’re always going to have that central one in the core part of town, and then you’re going to spoke out,” Segreto said. He suggests moving toward saturation in a particular market before branching out to other areas. Saturating a single area with franchises also helps the supply chain, particularly for food chains, Segreto noted.
- Establish a Culture-to-Growth Philosophy
Businesses looking to become a franchise should have a “culture-to-growth philosophy,” according to Segreto.
“You have to have the right individuals on your team, and then as franchisees come on board, you have to make sure that the culture is such that you’re not treating them like employees,” Segreto said. “You’re treating them like investors in your business.”
Segreto cites Jersey Mike’s Subs in Point Pleasant Beach, New Jersey, as a franchise with a “tremendous culture-to-growth philosophy.” He says the franchise’s owner, Peter Cancro, is always giving back to charity. Cancro is also known to put an apron on and get behind the counter to help out, according to Segreto.
“There are not enough of them like that,” Segreto said.
As part of the “culture-to-growth philosophy,” businesses need to have “positively memorable experiences” for all stakeholders involved, Segreto said.
“If you don’t have that type of mentality and mindset, franchising is not for you,” he said.
A culture-to-growth philosophy incorporates people skills and having the skills to manage workers from diverse backgrounds, Mulgannon noted.
- Prioritize Branding for Your Business
To have a business that can become a franchise, put yourself in your customer’s shoes and see if the business is branded correctly when you walk in the door, Segreto said.
Consider the social media, online branding and online PR that you will need to grow your business, he advised.
Businesses should have a modern appearance with clean branding, Segreto added. Avoid handwritten signs on the walls or windows or the appearance that furniture or counters have been built by hand. Digital signage and the uniforms that employees wear are elements that make a business look like a franchise, according to Segreto. Consider how employees throughout franchises like Best Buy or Verizon are dressed in similar attire.
“Create a marketing plan that’s customized and tailored toward people that will resonate with your brand, not just a shotgun approach,” Grossmann said. “If you’re a physical therapist and you’re going to target physical therapists, you should have a marketing plan that specifically targets physical therapists.
- Consider the Financial Cost of Building a Franchise
Many companies fail to take into account the financial requirements of building a business model. Franchisors must have a certain net worth and exceptional credit. To build a small business into a franchise, a franchisor should have at least $150,000 for franchising costs, according to Segreto. Those financial resources will go toward developing a franchise disclosure document, obtaining trademarks, drafting manuals and hiring people.
The real income for franchisors will come in ongoing royalties, and the franchise fee will be a “wash,” according to Segreto.
Success in growing into a franchise comes down to leadership, according to Grossmann.
“I’ve seen mediocre businesses with great leadership thrive, and I’ve seen really great concepts with lousy leadership fail,” Grossmann said. To grow your small shop into a winning franchise, ensure that your leaders have strong management skills and seek input from franchise coaches as needed.