How to Grow Your Franchise and Sell Franchises
As a franchisor selling franchises and on-boarding quality franchisees is critical for long-term success. Many start-up and emerging franchisors get stuck in a franchise sales process and cycle where they struggle to sell franchises. Many experience franchisee acquisition costs that are just too high, marketing that doesn't yield results, or franchisees that don't perform.
For many franchise brands the reason why they are not selling franchises and growing is because they haven't adopted a franchise growth strategy focused on a 5 year plan and one that is focused on allowing their franchise system to season and grow. Below and in this video with Charles N. Internicola, founder of The Internicola Law Firm and Brent Dowling of Raintree share strategies for seasoning, scaling, and growing franchise systems.
To grow your franchise system and sell franchises, you should:
- Making sure that now is the right time to franchise
- Budget strategically for marketing and recruiting
- Identify your brand differentiators
- Season your brand organically and early-on
- Over-support your first few franchisees
- Build up solid unit economics
- Adopt a growth mindset
- Work with seasoned experts
- Use multiple marketing channels to recruit franchisees
- Cultivate relationships with franchise brokers
- Appreciate the deeper meaning of being a franchisor.
More important than any specific formula, fits important to adopt more holistic approach to franchise success by incorporating strategic planning, financial discipline and personal accountability into daily operations as a franchisor. Below we discuss each growth strategy.
1. Make Sure Now is the Right Time to Franchise
Timing is everything – especially when it comes to making sure your business is positioned to enter the competitive and highly regulated franchising industry.
To make sure your business is franchisable and that it’s the right time to franchise, Internicola recommends that prospective franchisors conduct a thorough review of their financial performance before attempting to scale – something many startup franchisors don’t do until it’s too late, especially when working with “one-stop-shop” developers that sometimes overlook that step in the franchising process.
“A typical scenario we’ll have is where [a client] went to a franchise developer, they paid a fixed fee. They were told by the franchise developer, ‘We cover everything from A to Z – legal, accounting, everything else, marketing.’ And the difficult part about that conversation is that the individuals that franchised their business didn't do it with the right understanding, and really with the right planning framework,” Internicola says.
Often, the clients that approach Internicola’s firm to correct mistakes made by other franchise developers have missing Item 19 financial performance representations – something Internicola says is critical for the majority of franchises to include within their Franchise Disclosure Document (FDD).
“The next part of the conversation is, ‘Did you have a conversation as to why [Item 19] is important, whether it's there?’ And I'll get one or two things: one, the numbers weren't good enough so they don't have one – and then I politely explain that, probably, you're not ready for franchising – or, no one looked at the numbers and they're really good. And so it's not these franchisors' fault. It's just that their mindset entering the franchise world is a very different one than what it should be,” Internicola says.
To make sure now is the right time to franchise, prospective franchisors should evaluate their business’ track record and systems (including their operations manual and unit-level economics), their position within their industry, and their goals as a founder.
2. Budget Strategically for Marketing and Recruiting
Although franchise experts often disagree on the amount of capital a franchisor should have available before launching a new franchise, with numbers ranging from minimal sums to several million dollars, Dowling says the experts at Raintree look for franchisors that are spending at least $150,000 on their marketing program alone in the first year.
“Ultimately, if you're doing what you need to do – if the model works and you're finding franchise owners – you should see that take care of itself in the first six months in terms of five or six franchisees in the door and setting franchise fees appropriately,” Dowling says.
Dowling also advises new franchisors to invest their money wisely when developing their franchise, making sure to allocate sufficient funds for franchisee recruitment while diversifying sales efforts to maximize profits. To do that, franchisors and franchise sales organizations often use several techniques.
“Most FSOs out there – there's a few really, really good ones – their strategy is ultimately to almost exclusively work with consultant networks. The really good part about that strategy is there's not a lot of upfront capital needed for marketing. You pay a monthly fee to the consultant networks, those leads come in, and they're low-risk rate leads – you pay on the commission if you do happen to close them. So, that's all well and good. We do support that. We do rely on consultants, especially initially, to help us start to feel markets with our brand,” Dowling says.
But because working with consultants can also mean the franchisor must pay the consultant fee (typically at a rate of around 50%, though it can sometimes be more competitive), in addition to paying the FSO their percentage, returns on initial franchise fees can be limited for franchisors dealing exclusively with consultant networks.
Instead, Dowling advises taking a multi-pronged approach to franchise sales early on.
“We believe a good approach is a balanced strategy where you use the consultant networks, you leverage them, but you also invest in the digital side – you hedge your bets. And you'll have some deals come in where you really only see 10% of the franchise fee. But hopefully, if you've done everything right in terms of your ‘why you, why now,’ … if that's all there, then they should start to see some traction on the digital side where you get to keep all, or a huge chunk of, the franchise fee,” Dowling says.
3. Identify Your Brand Differentiators
One of the biggest mistakes new franchisors make early on in their franchising journey is believing there is nothing that sets their brand apart from other competitors in their industry.
To identify a brand’s differentiators, even when it might seem like there aren’t any, Internicola advises conducting a thorough analysis of your business, industry and brand story to find the details that make your company stand out.
“On a surface level in a traditional business, there doesn't seem to be differentiators. But if you do that SWOT analysis, if you do the deeper dive and really focus, potentially on the founder story, the motivation behind the brand, that customer engagement and what you do for customers – it does show that they're ready if they make that analysis, but it's only in that deep dive that you really get to the brand differentiators,” Internicola says.
For prospective franchisors that aren’t able to identify anything that makes their business unique, Internicola cautions that it might not be the right time to franchise.
“If you're a franchisor, you really need to focus on those brand differentiators. It's funny, because if someone is in, say, the junk removal industry, many times they'll say, ‘Well, there's really no differentiator because we all do the same thing.’ And I'm like, ‘Well, then that's the wrong mindset.’ If you don't have that differentiator – it could be you as the founder, it could be a bunch of things – then you're not ready to franchise,” Internicola says.
4. Season Your Brand Organically and Early-On
Although working with consultants and franchise brokers can be worth the investment as a franchise grows and matures over time, startup and emerging franchisors should focus on growing their brand organically during the first few months of operations.
“What we coach [clients] on all the time is to view this first year, and even a significant portion of the next year, as sort of that seasoning phase where you're focused on … organic contacts, your organic reach, but also that you’re marketing or you're communicating with people that know your brand and should be good-fit franchisees,” Internicola says.
In addition to allowing new franchisors to identify potential pain points within their franchise system, growing organically can also provide franchisors with enough time to properly support franchisees early – all while saving money.
“It's more affordable to find franchisees [organically], but I think it's [also] more responsible to go slow for that first year. Understand your deficiencies, and then be in a position to figure out who in this industry can help you fill them. If you find them out too late, it can cripple brands and they can never recover from it,” Dowling says.
5. Over-Support Your First Few Franchisees
In addition to being a more responsible option for franchise development early on, Internicola stresses the importance of organic growth for franchisee validation in the future. By going the extra mile to over-support franchisees early on, new franchisors can make sure their systems work and their franchisees are satisfied before scaling more rapidly.
“Naturally, those first [few] franchisees that you're talking about – their experience and whether or not they validate and are satisfied in their unit-level economics – is going to impact the franchise system for years. It's going to impact Item 19 and where we grow,” Internicola explains.
When it comes to working with development firms as a franchise grows, Dowling says positive franchisee validation is critical – and it’s something Raintree specifically looks for in brands when deciding whether or not to work with them.
“For most brands, we want to see at least a couple of franchisees in the door. And we want to validate with them to understand their experience. Are they well-supported? Is it meeting or exceeding their financial expectations? And ultimately, would they do it again?” Dowling says.
6. Build Up Solid Unit-Level Economics
One of the common misconceptions new franchisors sometimes have about franchising is that they’ll be able to sit back and make money while the franchise operates in the background. The reality of successfully growing a franchise, however, is much different.
“People are in franchises for freedom, for all these types of things, more time with family, but it's still a business and it still has to has to make sense,” Dowling says.
When it comes to evaluating new brands, Dowling says the team of experts at Raintree looks for specific traits in franchise systems before working with them – including making sure profits are strong across the entire franchise system.
“Typically, one of the stages in our evaluation processes is we ask to review the P&L (profit and loss statements) of corporate locations and the franchisees. And I get pretty nervous if I don't see at least a 15% net in the bottom line across the board – and right now, we really love to see 20% plus. If you’ve got that, we know that you’re sitting on something that has enormous potential,” Dowling says.
7. Adopt a Growth Mindset
Having the right mindset as a franchisor is critical when it comes to winning at franchising. In addition to being willing to invest time, money and effort into the business, franchisors should also be willing to accept accountability for both the successes and failures of their brand.
“The brand that's going to win can be determined by the leadership team and the founder – their commitment to franchising, and more than anything else, learning franchising and adapting,” Internicola says.
Dowling echoes Internicola’s perspective, adding that franchisors that are willing to evaluate their brands with honesty seem to find success through assessment and improvement.
“I just find that brands that have done that work – that internal evaluation of where the success comes from. And part of that evaluation is kind of doing an informal type of analysis – they're looking at their competitors, they understand their landscape, and they understand how, potentially, their customers find their model better,” Dowling says.
8. Work with Seasoned Experts
Having a great brand isn’t enough to achieve success in the world of franchising. As a franchisor, you also need to make sure you’re working with the right people – after all, your business is only as good as your team.
To make sure your corporate team and franchisees are all positioned for success, it’s important to hire and work with seasoned franchise experts early on to make sure your business is legally compliant and adhering to industry standards.
“What we see is, once brands reach a certain stage of maturity, they're starting to hire seasoned franchise folks in operations. Certainly things like financial coaching for franchisees – that's when a lot of brands will start to understand the need for really strong fiscal management, coaching, understanding their own numbers, understanding how they might be able to improve them, so they can coach the franchisees the same. And I think that that realization happens too late for too many brands,” Dowling says.
9. Use Multiple Marketing Channels to Recruit Franchisees
Good marketing and a strong digital presence are critical for success when it comes to franchising. In addition to developing a consistent social media presence and communicating with prospective franchisees through email campaigns and branded content, Dowling advises franchisors to build a website with solid SEO content to capture leads. He also encourages franchisors to utilize video – a format that can appeal to the emotions of prospective buyers more effectively than other methods of digital communication.
“When it's an emotional decision and you’re able to tell the story of how [your] brand helps owners change lives, improve lives, you can absolutely create a stronger offering by just taking the time to be thoughtful about making content that appeals to a franchise buyer and helping them understand how this particular franchise opportunity can solve the problem that they have. Whether that's wanting more money, wanting more time, or a legacy. Certainly I've noticed that the bigger brands don't do that very well – not at all, actually. There's a giant opportunity there,” Dowling says.
Beyond the benefits video can offer for recruiting prospective franchisees, Internicola believes the process of creating a video can also lead to advantages.
“Once you put together a video, you realize we have to sit down a little more and do a deeper dive – which gets to [the] point earlier of a SWOT analysis. And then maybe even a deeper dive of speaking to customers and really diving into what ultimately becomes what your brand is about, or your brand story. So I think the video forces so many other positive things,” Internicola says.
For emerging franchisors, making sure a brand’s digital messaging communicates the advantages of joining the franchise system is also critical – especially when it comes to helping prospective buyers recognize how becoming a franchisee could change their life.
“When a franchisee candidate comes to your website, two major questions are going to be: what do you do? And can I do it?’ And it's an important job to show them [they] can do this, and this is how we help you do it,” Internicola says.
10. Cultivate Relationships with Franchise Brokers
Another common mistake new franchisors make is failing to cultivate authentic relationships with franchise brokers over the long term – something that can potentially impact future sales opportunities as the brand matures.
“It's a war of attention. You have to have a program in place where every single day, you're doing something to ensure that the brokers know, mostly, you're still there in franchising. Secondly, every day is a new opportunity to educate them on one small part of the brand, whether that's one of the selling points, the model, how the model works, customers, what a support team looks like – there's a million things that they want to know,” Dowling says.
While that program doesn’t need to be strenuous, Dowling says franchisors should make regular efforts to reach out to brokers over the long term. This can include targeted email campaigns, connecting with brokers on LinkedIn, or even just picking up the phone to have an old-fashioned conversation and educate a broker about your brand.
“The power of the phone, I think, is overlooked,” Dowling says.
11. Appreciate the Deeper Meaning of Being a Franchisor
Finally, new franchisors should avoid getting caught up in the endless pursuit of success – a mistake Dowling has often seen franchisors make throughout their careers.
“Don't get caught up in the hysteria of deals awarded and paychecks and becoming the biggest and baddest. Of course, that has to be there, but what you do is really special,” Dowling says.
Instead, Dowling advises franchisors to take time to enjoy and celebrate their successes while recognizing the impact their work has had on the lives of people around them.
“Most franchisors I talk to are looking for legacy. When you dig in, you're trying to get in their psychology, they're looking for legacy. What's more important – a big check from a PE (private equity) company or whatever it means at the end of a successful national run? Or, on your deathbed, are you going to remember specific faces of franchisees that tell you at their conference, ‘You changed my life’?” Dowling asks.
To learn more about Raintree, visit https://www.raintreegrowth.com.
To find out more about the services offered by The Internicola Law Firm, including legal and development solutions for franchisors and franchisees, call us at (718) 979-8688 or fill out our contact form.
