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The Franchising Way to Grow

Industry leaders and consultants guide entrepreneurs on franchising and share the reasons for doing it. Oy vey, are franchisor wannabes on track for a train wreck, or what?

HERE'S WHY TO FRANCHISE: You can capture market share more rapidly than you could on your own and, by and large, [do it] with other people's money," says Matthew Shay, president and CEO of the Washington (D.C.)-based International Franchise Assn. At the same time, you can keep your overhead, payroll, and marketing costs in check. In a tight lending climate, instead of seeking growth capital from banks or investors, you'll be searching for individuals with cash to become franchisees. Those might be downsized executives searching for job stability or retirees wanting an alternative to the stock market.

HERE'S WHAT CONCEPTS WORK BEST FRANCHISING: If you're still struggling to make your flagship work, either financially or operationally, that's a good indication that you're not ready, says Lane Fisher, a senior partner with Fisher Zucker, a Philadelphia law firm.

"Some businesses are just too complex to franchise," says Fisher. Any business that requires a specialized skill or creative talent—say, a restaurant with a complicated menu or a boutique clothing store—isn't ideal.

HERE'S ALL YOU NEED TO BREAK EVEN FRANCHISING: You typically need to sell at least 10 units to break even, though the number will vary depending on how much you spend setting up the franchise and how much you earn in royalties, he says.

HERE'S THE BIGGEST REASON SMALL BUSINESS PEOPLE DON'T FRANCHISE: But the biggest hurdle for franchisors isn't the cost or the hassle. It's this: "Every time you put a franchisee in business, you give them your logo, your brand, and every detail about your operations," says Shay. "Some entrepreneurs just don't ever want to lose control."

HERE'S THE BIGGEST REASON FRANCHISE CHAINS FAIL: "The No. 1 cause of the demise of chains is lack of consistency," says Heidi Neck, an associate professor of entrepreneurship at Babson College.

Given the above reasons and the obstacles given, I'm amazed there's only 3,000 plus franchise systems in the country. It's another great article by BusinessWeek. I just wish the industry had better management know-how in speaking on the complexities of franchise systems. Because if this is the industry's best and brightest, then start-up franchisors collectively are on track for a rendevous with a train wreck.

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About Darnelle White

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A doctor of businesses by day. A writer and insomniac by night.