Franchising Your Small Business - the Fly Speck Part Four

When deciding if your business is ripe for franchising, you must ask yourself if you will be albe to evaluate your franchisee's level of performance easily and secondly, if you can gauge their level of effort. Level of performance should be easy: quite simply, the major metric will be sales and sales will be directly related to the effort franchisee's are putting in to the business - advertising, operations, cleanliness, etc.

Top Ten Industries for Franchising

1. Fast Food
2. Restaurants
3. Automotive Products
4. Maintenance and Cleaning
5. Building and Remodeling
6. Specialty Retail
7. Specialty Food
8. Health and Fitness
9. Child Development
10. Lodging

"For franchising to be advantageous, two conditions must be met. First, a chain of outlets must be superior to independent businesses seeking to serve customer needs (perhaps because standardized procedures and the system brand name give the chanin an advantage). Second, the chain must be better organized through ownership by independent opertators rather than by employed mnagers." - Shane

One advantage to a franchise is that you can beat adverse selection - the process in company hiring in which the less qualified or motivated land salaried managment positions merely because they put themselves in front of the crowd based on the increased pay they will receive in the new position. Franshising can mitigate this scenario somewhat - a person who buys a burger franchise has a vested stake in the business performance and they better be a good operations manager for their own sake. Typically, (in theory) an individual is not going to put up a large some of money to purchase a system they are poor at operating.

Defeating the Shirk

Typically, salried employees will start to "lean" and not "clean" in a situation in which they know their effort will not be rewarded. This is called shirking, one of the reasons government is very inefficient. According to Shane, "one study showed that the mean level of sales at franchised restaurants was 82 percent higher than the mean level of sales at nonfranchised restaurants." No shirking here.

Franchising - A Good to Way to Grow a Company

If you want to grow your business, franchising can provide you a route without having to provide intensive capital. Between 1980 and 2004, Subway grew from 150 to 19,239 outlets - a growth rate of 12,260. In addition, the franchisee's will provide the capital for growth. "Franchisees provide franchisors with up-front fees every time the franchisor adds an additional (franchised) outlet." - Shane. The cost of setting up the location and initial inventory is paid for by the franchisee - franchisees pay for the growth.

In an example provided by Shane, instead of needing $50,000,000 in capital to open 100 $50,000 outlets, you merely have to find 100 franchisees.