The risks of franchising

Franchising is a great way for many companies to expand. When you franchise you are able to take advantage of both the skills and the financial assistance of investors which grow your business at a phenomenal rate compared to what you could achieve from the profits from your existing business locations. There are, however, a great number of risk factors which must be carefully considered if you are to reap the benefits of franchising your business. Here are some of those risk factors and what you can do in order to identify them ahead of time and avoid letting them turn your attempt at franchising into a failure.
In general terms, we can divide the risk factors which are involved in forming a franchise into two groups – internal and external. The internal factors are those which have to do with whether or not you and the company that you are forming will have the time and the resources needed to form a successful franchise business. Forming a franchise business is not a simple extension of the business that you already have – it is in fact very different, requiring the formation of an entirely new company and the hiring of a staff dedicated to the various aspects of the franchise process. The external factors which determine the amount of risk inherent in the formation of your franchise have to do with the current state of the franchise market and whether or not the market can sustain the kind of business that you want to franchise.
Starting with the internal risk factors of starting a franchise, one of the biggest risks is that you will run out of money while developing the franchise business and not be able to run it to the point that it becomes a financial success. As with the company that you have already developed, you are going to need a lot of money for the start-up process – hiring the personnel that you need to staff your franchising office and all of the various fees which will be associated with creating the new company and installing it in its offices – all of this will cost money, and it is likely to cost more money than you spent on the creation of your first business location.
If you are able to afford all of this out of your own savings, then fine. However, most people find that they need to take out another bank loan in order to successfully create their franchise company. You are going to need to show that the franchise plan which you have developed is capable of being a financial success, and you will have to be able to do so to the extent that you can convince a bank. This means that you need to do your research in advance, be aware of all of the other risk factors, and show the bank that not only do you understand the variety of risk factors which are involved, but that you are more than prepared to adequately deal with them and make the franchise business into an outstanding success.
What are some of the other risk factors involved in franchising your business? One is that you may not have the right level of business know-how in order to create a franchise. When you made your existing business you probably based it on skills which you already had from some sector of industry – when you create a franchise company you are going to want to point out all of the business experience that you have had, but maybe the business experience that you have at this point is not enough to deal with a franchise company – you may want to bring in additional consultants. You are definitely going to need the help of specialist franchise legal counsel and you may want extensive business consulting to make sure that your plans are well constructed – share all of the results of your consultations with the bank when you apply for your loan and have the details ready with your business plan.
The more expertise that you are able to show having signed off on the plan, the better – you will be able to have the confidence which comes with knowing that people who are well versed in the industry believe in your abilities and the ideas that you have set forth. Not only will this make it easier for you to get the financial backing which you need, but the consultants that you listen to will be able to help you identify all of the external risk factors which may lead to problems with your business later on. What are some of these external risk factors?
It may be that your business model, while it was well suited for the area in which you started, is not particularly well suited for expansion beyond the local market. If you are running a food franchise, for example, it may be that tastes are different beyond the area where you were originally successful – the success that you had there might not translate when people in a different area fail to appreciate the tastes that you are providing. The best way for you to make sure that these concerns are not a big enough problem for you to forget about expanding into a franchise is to perform extensive market research.
See whether the products and services that you are providing through your business will fill a demand in markets beyond your own – hire a market research company to test your products with people across the country and see whether or not they are as good candidates for a franchise business on the national market. The answers that you receive may surprise you – you may find that a product which was not particularly successful in your home market is a much greater success when translated to the national market. , The identity of your brand doing business on a national scale may shift subtly over the years and you may find that your success is of a different nature than you had originally anticipated.
Another set of external risks has to do with the logistics of your business and how you are going to provide the supplies and equipment that your franchisees need to get their franchise locations running – you need to have the right business contacts which will allow you to consistently supply your franchisees. Any hiccups in the logistical train will make it less likely that the individual franchisees will be successful – you need to minimize all of the potential risk factors for the franchisees in order to minimize the potential risk factors for yourself, and this means having suppliers who you can rely on so that the franchisees will be able to rely on you as a supplier. If the supplier that you are counting on as your primary source of goods has a problem getting you the materials you need at the prices you need what will you do? Do you have a backup supplier waiting in the wings that you will be able to rely upon in case of trouble?
You will also find that a potential risk factor is the visibility of your brand and the degree to which investors in the franchise market will be interested in taking on your brand and working for your franchise. A certain level of success is critical before you go into the franchise market – you want people to recognize your brand the second that they see it. If people see your franchise at a franchise fair are they going to know what kind of place it is and remember it from the advertising? Are they going to already know that it exists, and therefore be that much more likely to consider it as the franchise opportunity that they have been waiting for? The marketing that you have done to promote the successes of your company are going to be vital in getting franchisees interested in working under your banner, so see to it that the base business is a success before you even try to make the jump into franchising it.
These are just a taste of the various risk factors which are involved in creating a successful franchise. You are going to need a full legal department for the new franchise company and you are going to want to get all of the best counsel and consulting that your money can buy. Building a franchise out of your business is a big move and will completely change the character of the business activities that you are involved in from this point on – however, if you do all of the research that you need and collect all of the relevant information on the risk factors, you can minimize them and maximize your chances that the franchise you create from your business will be the next great success story in the franchise market