Some people that are new to exploring franchise opportunities may think that all franchises are some kind of magic or that the gains made by franchise owners are too good to be true.  And yes, it is certainly true that sometimes franchise companies may show their system though a really rosy lens.  Doing business with a franchise should however not be a mystery at all, and this article should help to reduce or eliminate the mystery behind a good franchise system.

A good franchise system starts with a good business model that has had a lot of success over time, and it should be duplicatable in other locations that it can be successful at as well.  It most importantly should offer a product or service that fulfills a customer’s specific need better than any other product or service in that location.  Oftentimes such businesses know that the focus is on making a single dollar and then finding how to get the same kind of customers again and how to duplicate the thing that made that dollar.

To illustrate the point with car dealerships (that are often independent businesses or corporately owned), the cars at those dealerships can have many different combinations of price and value.  The dealerships as a whole however will usually appeal to a particular customer.  As an example, a business executive may go to a new high-end car brand dealership while a custodian that works part-time might get a car at a roadside used independent car dealer that operates by his home.  Much like car dealerships in this example, a good franchise system will know who their customer is and how best to sell to them, and they will be structured around the kind of customer that they want to attract.

When for example, we see a fast-food restaurant that has a western appearance and offers roast beef, we know that it is differentiating itself from a price leader that offers the lowest price on fast food.  I say this because not everyone likes roast beef and not everyone likes a western look to a store, so they may not get the customer volume to have the lowest prices in town.  The restaurant knows who their customers are, and they have designed the restaurant appropriately to attract them from all around and as far as they are willing to drive.

In this example the restaurant also knows how to make a single dollar well in that they have designed different kinds of sandwiches such that they only make a single dollar perhaps at most on each one when the expenses are deducted.  They make the same sandwiches again and again with each being identical to the other when you order a sandwich according to the few choices that the customer has available.  They may have for example eight or ten options because those are as many options that they have available that they are sure that they can make a dollar on each or some fraction of it.  If they offer too many options, waste may occur, and too few options may reduce their customer volume.

Imagine this same principle applied to other industries like retail, senior care, pet care, service brands, and such.  With retail as an example, you may have many different kinds of bar soap with most of it being about the same basic substance, but the options may differ by color, smell, size, and brand.  Each bar soap brand knows exactly what kind of customer that they are trying to attract.  Also, too the bar soap company likely knows how much they get for each bar, they may divide their overhead by the number of bars to find fixed cost per bar, and they may also know their total sales volume.  In short, the manufacturer will know the profit per bar at different sales volume levels, and the retail store will know their profit per pack (or they may have a good idea of it) at different sales volume levels.  The store will have a display and a design that will fit their customer’s needs, and they will merchandise the options accordingly.

As with the example of retail, because they may not know exactly how many sales that they have and what their exact overhead will be until all the data has been collected what they may do is to track profit margins per product or service.  One way to do this is to rank the different products or services with grades like a person gets in school, and this would be the grades of A, B, C, D, and F.  With A being something of little cost with a high gain and F being something that has a high cost with little gain or even a loss.  Typically, the store will have a strategy for making the most net gain and controlling the customer flow as they may highly promote an F-type product with all their might that makes no direct financial gain, and they do this to get the customer in the door in order that they may buy A or B products as these may be some kind of sweet treat that the customer buys to reward themselves for buying something that they really don’t want to buy but need to buy.  For C and D products, these might be the things that go with the F product that the customer came into the door for.  In this example, an F product might be something like hotdogs, while C and D products are buns and ketchup.  The customer also buys a small soft drink and relish, and in this example the soft drink would be an A product and the relish would be a B product.  Overall, the things that the customer really needs but does not want to buy like toilet paper, milk, dish soap, and such are things that the store may take a loss on while candy and soft-drinks at the register are the rewards to the customer that may make the store profitable.

If we had a retail franchise that utilized this model, then it might also have a strategy for how to setup shelf displays for maximizing profitability.  They would likely be well aware that customers mainly only notice the things that are at eye level, so they may merchandize larger value packs of the products on the bottom shelf so that only customers determined to get a deal find them.  They might also merchandise premium brands on the top shelves that are less popular because most customers might be discouraged to shop in the store if they mainly only noticed the price on the premium brands.  If you setup a store without a franchise system showing you how to utilize such strategies, then you may put some products on some shelves without any particular winning strategy with aisles too narrow and not know the reason for your failure.

What makes buying a franchise a lot different from opening your own restaurant, store, and such that you create on your own is that the franchise company has an almost exactly honed knowledge of what makes success and they often have negotiated large volume pricing with vendors.  They know exactly (or as close to it as they can) who the customer is that buys the product, how to get them in the door, and how to produce or sell the product or service in such a way that ideally at least a little bit is made on each one.  If the franchise utilizes a lot of cheap labor like in a cleaning franchise or fast-food franchise, then only a small amount of money is made for the franchise on each unit of product or service produced (sometimes a dollar or less).  By utilizing some kind of employee training and management system that comes from the franchise company, each employee is typically specifically trained to operate in the most efficient way to produce that one unit of product or service.  The franchise if managed optimally will typically have as many employees that do this work until all the customer need is filled in that location.

A good franchise is not simply a building that you buy with a suggestion on what you should sell along with the resources to buy the supplies.  It is also not a huge system developed and designed with lots of rules for how to do businesses with only the hope that somehow customers will exist to buy the products or services.  It is not like getting any old random building and imagining what might work, and then putting your friends and relatives in that place to discover the keys to success.

Since a good franchise system with tens or hundreds of stores typically already knows what success is and how they are successful, they have already spent all the costly time and resources to get as close to perfection as they can.  When you buy a franchise from a good franchise system, you are taking their pattern of success and making it your own pattern of success and only changing it to fit you when they find it appropriate.  Also too, they win through the payment of their royalties when you win, and if you lose, then they lose.

If they are reputable, then they will care a lot about the integrity of their brand and will do everything they can for you to succeed.  When you step up from being an employee minded individual to becoming a business owner, you are taking a share of the profits or losses and are committing your own financial resources and financial future to the success of the business.  When you buy that really great franchise, you are locked into it like buying a house or a car, and so you need to make it a good one that really fits you well.

Keep in mind too that in business there is no guarantee of success and you really can have losses.  Also, note that the common figures often quoted are that one business in every twelve is a franchise in the United States, and over 90% of all the franchises continue to be in business after 7 years of operation while less than 20% of independent businesses remain open after the same 7-year window.  If however, you get a good franchise system, put forth the effort needed, have a good location, stay with the plan, are productive with your time, and do everything necessary for success, then how could you blame yourself if somehow you find yourself in the 10% of franchises that don’t succeed in 7 years?  Owning a business then becomes like going to school in that the people that never try cannot expect success with their studies, but the people that do try and do poorly are typically better than the ones that never attended any school at all.

Buying a franchise can be like buying a car or a house in that you really need to do your homework well.  As I recall, I remember hearing about a guy onetime that bought a new car and had it delivered to his house, but what he did not realize is that it was so new that the manufacturer did not fill the engine with oil.  When he started it up, it ruined the engine before it ever had been driven.  Another guy bought a new car, accidently dropped a rag in the fan, and totaled it.  In a similar way, if you open a pizza franchise for example and the cook undercooks all the pizzas a little bit shortly after it opens, your business may end before it even really has a chance to start even with a good franchise because of the memories that customers would have about the poor taste of the pizza.

Often the better the franchise system, the better the location, the more you prepare, and the more diligently that you follow the franchisor’s pattern of success with all your might, the better the results that you can expect.  Even with the best franchise system, you might not succeed if you are a quitter because quitters seldom succeed in anything.  Also, too if you are a person that is good at making excuses, then you are seldom good at doing anything else.  Overall, even with the best franchise it is no guarantee of success, but typically what you put into it is what you can expect out of it when you buy a good franchise.

Submitted by Franchise Consultant Mathew Mount