Assessing whether to franchise

Unless there is continued growth and a harmonious relationship with franchisees, cash flow generated from initial franchise fees will dry up and the franchisor must rely on ongoing income from the current franchise pool to maintain profitability. When franchisee viability is marginal, and the franchisor and franchisee relationship is strained, the income stream from ongoing royalties may come under stress, leaving the franchisor with a modest or even dwindling revenue stream and little prospect of further growth.

In a franchise network, ongoing franchise sales and therefore royalty growth are dependent on the early franchisees achieving profitability quickly with a reasonable degree of satisfaction about their decision to buy their franchise. Future franchise sales are heavily dependent on existing franchisees confirming to potential franchisees that the franchisor has a good system and the choice of that particular franchise is a wise decision.

Fully franchised networks need to deliver the promise of profitability early in each of their franchisees' establishment periods, and grow to a significant number of franchised units before the franchise network can make decent profits (more than $1-2 million per annum) and create a worthwhile magnitude of enterprise value ($5-10 million) to make franchising worthwhile.

Many fully franchised networks are failing to reach critical mass and are not making decent profits or building worthwhile enterprise value from franchising because either the business is unprofitable, or the franchise system on which the franchise is to be based is poorly conceived and developed, or both.

The answer to this question is an emphatic "yes!", but only after the business model is proven. There are several key signposts that can point a business owner in the right direction along the road to profitable franchising.