Understanding the Risks of Franchising Your Business: A Comprehensive Guide

Learn about the risks of franchising your business and how to mitigate them, what factors to consider before franchising and tips to develop a successful franchise business model.

Tips to Mitigate Risks and Develop a Successful Franchise Business Model

Franchising a business could be the perfect strategy to grow a business rapidly. It’s a business strategy that enables you to leverage your brand’s reputation and business model to expand locations and revenues. But it’s not a strategy without risk.

The better your understanding of these risks, the more effectively you’ll be able to mitigate against them, and the more successful your franchised business is likely to be.

The Benefits and Challenges of Franchising a Business

Before we explore the risks of franchising your business and how to reduce (or eliminate) those risks, it’s worth outlining the benefits and challenges of franchising a business.

When you franchise your business, you should see benefits that include:

  • Increasing revenues – your franchisees will pay initial fees and ongoing royalties. These can provide a steady and growing income stream.

  • Faster growth – get the right franchisees, and their enthusiasm and business acumen can help your business grow faster than it would organically.

  • Reduced risk – though they’re trading under your business name and adhering to your operational processes, the franchisee takes most of the financial risk when investing and operating as a franchisee.

  • Improving brand recognition ─ as the number of locations grows, so, too, does your brand recognition and market share.

Of course, these benefits don’t come without a few challenges. These include:

  • Potentially high costs – franchising a business can be expensive. You’ll need to make sure you have enough working capital to cover the costs of developing a franchise model.

  • A complex regulatory environment – you’ll also need to work within a myriad of federal and state laws that govern franchising and business. You’ll need specific franchising legal advice.

  • Maintaining your brand’s reputation – it will be crucial to ensure that you maintain a consistency of quality across all your franchised locations.

  • Managing franchisees – your franchisees will be entrepreneurial, but you’ll need to ensure they work to your processes and serve their customers consistently in line with your existing business processes and quality expectations.

The Three Main Risks of Franchising Your Business

Digging a little deeper into the challenges of franchising a business, we can explore the risks under three main headings:

Financial Risks

The types of costs you are likely to incur include:

  • Developing a franchise agreement and other legal documents

  • Marketing and advertising to attract franchisees

  • Training and support for franchisees

  • Legal fees for compliance and disputes

These costs will be most impactful in the initial stages of franchising your business. You’ll need to consider all costs and measure them against the potential royalties and franchise fee income to make an accurate assessment of the return on your investment.

Legal Risks

Complying with federal and state laws can be like negotiating a minefield! At each step there is a legal landmine to avoid, including:

  • Violating franchise disclosure laws

  • Failing to provide adequate training and support to franchisees

  • Misrepresenting your brand or business model to franchisees

  • Disputes with franchisees over royalties, fees, or other issues

A comprehensive and watertight franchise agreement is crucial in the management of franchisees, and you’ll need a plan to deal with disputes with franchisees. 

Operational Risks

Finally, the quality of your franchised operations is a critical factor in maintaining and growing your brand’s reputation. Poor service delivery can damage your brand. The operational risks you face include:

  • Managing franchisees who don’t adhere to your standards

  • Balancing your desire for consistency with franchisees’ desire for autonomy

  • Protecting your intellectual property from infringement or misuse

Factors to Consider Before Franchising Your Business

Before you decide to pivot your business with a franchising strategy, there are four main factors to consider.

  1. Are you ready? 

Franchising a business takes time, effort, and resources. You’ll need to commit to all three to develop a successful franchise business – you’ll be working more on your business than in your business, especially in recruiting and supporting franchisees.

  1. Have you conducted market research? 

You’ll need to research various locations and make sure that they are viable for your business. Will a new market deliver the demand for your product or services that you’ll need? What is the competition for your business? Will your products and services be competitive?

  1. Have you developed a strong business model? 

Franchises work because they operate to a business model that is both replicable and scalable, and because their franchisees understand the business model and the brand.

  1. Can you find the right franchisees? 

Onboarding the right franchisees is also crucial to your franchising success. Where will you find potential franchisees with the unique mix of experience, business skills, and financial resources to be successful in your business?

Mitigating the Risks of Franchising a Business

Now we’ve discussed the benefits, challenges, and risks associated with franchising an existing business, it’s time to discuss how you can mitigate such risks. There are four major strategies that will help you here.

  1. Hire experienced franchise consultants

An experienced franchise consultant can help you navigate the franchising minefield. They will have worked with other similar businesses and can provide valuable insight into the pitfalls to avoid, as well as guidance on finding the best franchise attorney. The right franchise consultant will also be a valuable source of potential franchisees.

  1. Conduct due diligence on potential franchisees

You’ll want the best franchisees in your business, so you’ll need to do some legwork in checking candidates’ backgrounds. You’ll also need to brush up on your interviewing skills, and have a method of assessing suitability, skills, and experience.

  1. Provide ongoing training and support

Your business won’t stand still. It will evolve as your products, services, and markets evolve. Therefore, it’s crucial to provide ongoing training to maintain consistency across all franchised locations and marketing and advertising support to ensure optimal leads and sales volumes.

  1. Maintain open communication with franchisees

As your business grows, you’ll take an increasingly overarching role. You’ll need to develop strong relationships with your franchisees to help build your business. You’ll need to listen to innovative ideas, receive feedback, and act on concerns to avoid disputes. Communication and collaboration are keys to your success.

De-Risk Franchising Your Business: The Key Takeaways

A franchising strategy can help you to grow your business, but it is not without risks. You’ll need to be ready to franchise, and, before you do, you’ll need to do your research and due diligence. 

The three main risks to a newly franchised business are financial, legal, and operational. To mitigate these risks, your first step should be to hire an experienced franchise consultant. They will be able to help you negotiate the path to franchising your business, as well as help you to hire a good franchise attorney and find the best franchisee candidates.

Once you have found your franchisees, it’s then about how you run your business and manage franchisees – and this includes providing ongoing training and support and keeping those lines of communication open to build fruitful relationships across your growing business empire.

To learn how we can help you achieve your franchising goals, contact New Ground Consulting today.

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