Chapter 4 Franchise

C R E ATI N G A
FRANCHISEABLE
BU SINESS
V IN C EN T C . C ORT I AS
THREE BROAD AREAS

The business concept and structure
The marketability of the business
The abilities and commitment of the
owner/franchisor
THE BUSINESS CONCEPT AND STRUCTURE

What is the single most overrated
requirement for franchising?
Answer: A Great New Concept
THE BUSINESS CONCEPT AND STRUCTURE

What is the second most overrated
requirement for franchising?
Answer: Answer: A Great Quality Product.
BEST BURGER SURVEY

1.Wendys
2.Burker King
3.McDonalds
4.others
Market Share
12%
28%
19%
41%
Wendys
Burger King
McDonalds
others
If the concept isnt always great

and the product isnt always
fabulous, whats their secret?
Answer: their operating systems.
Thats why 97 percent of all Americans go
into a McDonalds every year and 59
percent every month.
THOSE WHO THRIVE OR EVEN SURVIVE

ARE THE ONES THAT PUT IT ALL TOGETHER:
the concept, a strong pilot unit, marketing,
advertising, operations, pricing,
consistency, profitability, locations, and, in
franchising, selection, training and support
of their franchise owners.
Of course, if you do have a great concept, like Curves, or a

fabulous product, like Starbucks, it cant hurt. In fact, it can
But even then, a

great concept is the frosting on the cake.
help make you wealthy and famous.
First, to be successful in
franchising, you need the cake.
THE PROTOTYPE
Until you have proved that the

business works and can make money,
you are not ready for prime time.
The prototype needs to be lean and
mean, which means that before
franchising you must examine it for
weak spots.
PROFITABILITY
(How profitable?)
The franchisor, after the second year of
operation, can make the same salary he or she
would pay a hired manager of that business,
plus a 15 percent return of the franchisees
invested capital. Not 15 percent of sales, but a
15 percent return of invested capital.
FOR EXAMPLE
If a franchisee would need $200,000 to

open one of your units, and if the
managers salary for that unit if nonfranchised would be $50,000, the
franchisee should earn by the end of the
second year of operation $80,000 before
taxes and debt service. Thats $50,000 in
salary, plus $30,000, which is 15 percent
THE
M A RK ETABILIT Y
OF THE BUSINESS
THE MARKETABILITY OF THE PRODUCT

Educating the market is expensive.
Rolling out your franchise program
nationally or internationally, you should
know what youre getting into.
FACILITIES AND PERSONNEL

One of the keys to successful franchising is
your ability to assist franchisees in finding
locations for their franchises.
In fact, some franchisors do not sell franchises
unless the physical location has been
identified beforehand, as in a shopping mall.
TEACHABILITY
To be franchiseable, your business must
be marketable not only to consumers but
to franchisees.
You must be able to teach a franchise
owner of normal intelligence how to run
the business within four to eight weeks.
Some franchises require longer training
periods.
CREDIBILITY
Another aid to marketability is reputation.

Prospective franchisees are human. They
respond to success stories.
Any favorable publicity, letters or even customer
comments about your business will enhance the
marketability of your franchise.
Bottom line: media endorsement, whether
reported or manufactured, is important and
obtainable.
COST
One would think it goes without saying that
the more expensive the business the smaller
the pool of prospective franchisees. And
yet, that statement is not necessarily true.
More important is the amount of up-front
cash required of the franchisee investor.
FOR EXAMPLE
A franchise that requires the
franchisee to pay up-front the total
cost of a $100,000 business will be,
other things being equal, far less
attractive than the franchise that
requires a franchisee to pay $100,000
down on a business worth
CONSIDER THE TWO SITUATIONS

Franchisee A pays $100,000 down
and gets a business worth that
amount. But the salary will be low
until the buyer can raise sales and
profits and therefore increase the
value of the business. Yet even if the
value doubles, its still worth only
$200,000.
Franchisee B, meanwhile, pays the same

amount down but must take on debt
service. However, the cash flow from a
business worth $1,000,000 will both pay
the franchisee a higher salary and pay off
the debt service. By the time the debt is
paid, the franchisee owns a business
worth $1,000,000 and probably a lot
more.
THE ABILIT Y
AND
COMMITMENT
OF THE OWNER/FRANCHISOR
Do you consider yourself a good

manager? Of course you do. But why?
Is it because you have built your
business single-handedly from the
ground up? Is it because no one in the
business has worked as many hours
as you have? Is it because people
genuinely like you and want to be
Franchising will also test your

organizational skills, including your
ability to create and manage a complex
infrastructure. It may even test them a
lot sooner than you expect.
THE FRANCHISEABILITY TEST
By now you should have some idea as to where

your business stands in the spectrum between
Totally Unfranchiseable and Eminently
Franchiseable. But it may help you to get a
more precise idea of your place along this
spectrum by taking a brief quiz.
Answer each of the following questions, add up
your score and read the results below.

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C R E ATI N G A

THREE BROAD AREAS

THE BUSINESS CONCEPT AND STRUCTURE

THE BUSINESS CONCEPT AND STRUCTURE

BEST BURGER SURVEY

If the concept isnt always great

THOSE WHO THRIVE OR EVEN SURVIVE

Of course, if you do have a great concept, like Curves, or a

But even then, a

help make you wealthy and famous.

Until you have proved that the

If a franchisee would need $200,000 to

THE MARKETABILITY OF THE PRODUCT

FACILITIES AND PERSONNEL

Another aid to marketability is reputation.

CONSIDER THE TWO SITUATIONS

Franchisee B, meanwhile, pays the same

Do you consider yourself a good

Franchising will also test your

THE FRANCHISEABILITY TEST

By now you should have some idea as to where

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