How to Ensure Your Franchised Locations Stay Profitable

After building a business for a while, it’s understandable that you’d turn to selling franchises to generate extra income. After all, you can collect a royalty fee from each franchisee for as long as they own and operate their location. This can amount to some serious cash over time, even if you set your royalties on the low end at about 5%.

While franchising your business absolutely has the potential to generate a larger, long-term profit, it won’t be easy and there are many challenges you’ll need to manage to make it work. The truth of the matter is that franchising your business is a risky move, but if you decide to do so and want to make sure your locations stay profitable, here’s what you need to know.

1. You need a strong legal agreement

The first and most important part of franchising your business is getting a strong legal agreement between you and your franchisees. You can’t do this without a franchise attorney who knows franchise law inside and out. Don’t download agreement templates from the internet and try to use them. Those templates, even if they cost money, are almost always generic and don’t even include important and necessary clauses.

Plus, your franchise will have specific rules that need to be written into the contract in a specific manner that can only be done by a franchise attorney. On the flip side of things, if you end up having to file a lawsuit against one of your franchisees for violating your agreement, you’ll want to know it’s iron-clad so you don’t go into court hoping your contract will hold up under scrutiny. Franchise law is complex, even in states like Massachusetts that don’t require registration.

2. Success comes from amazing systems

Solid systems are the number one reason any franchise becomes successful. It doesn’t matter how great your product is – you need to run a tight ship to be efficient.

Consider two of the top fast food joints in the United States – McDonald’s and In-n-Out Burger. Taste and quality wise, they’re on opposite ends of the spectrum, but they’re both extremely successful. Their success comes from the systems they have in place to run their stores.

Both restaurants operate all locations exactly the same. The policies are the same, food is acquired, stored, handled, prepared, and served the same way at every location. Recipes are exact. There’s no room for creativity and that’s by design. These types of systems keep these businesses profitable year after year.

In-n-Out Burger doesn’t franchise their locations, but their systems have created a solid foundation for that option should they choose to franchise in the future. However, they probably won’t because they know the pitfalls and aren’t willing to take that risk.

If you want your franchises to be successful, you need systems that dictate how everything is done so there is no variance or uncertainty. Consistency is what drives profits.

3. Most franchisees won’t follow your systems

The unfortunate thing about selling franchises is that most franchisees veer off track. It may not happen right away, but give it several months and it’s almost inevitable. Sometimes, you can get them back on track, but other times, they want their freedom and will go rogue.

For many of your franchisees, your business will be an unfamiliar industry and they’ll be working from scratch to figure everything out. Many will skip, ignore, or alter the very systems that make you profitable purely out of ignorance. For instance, they’ll move positions around, eliminate certain positions they feel are wasted labor, and look for ways to cut costs, not knowing they’re actually damaging their profitability in the process.

The result is lost profits for them and you. The less money they make, the less money you make in royalties.

4. Your franchisees need ongoing training and corporate oversight

If you want your franchises to be profitable, you’ll need to provide ongoing training to your franchisees and their teams. If you only train them in the beginning, it won’t be long before they’ll become disconnected from your brand’s culture and purpose, along with protocols for business. Regular training can help keep everyone on the same page, which helps to maintain profitability.

Don’t franchise unless you’re ready

Thinking about franchising your business? Make sure you’re ready first. Selling franchises should be a natural progression after you’ve built a solid brand with a good reputation people know, love, and trust. Your franchises should support your community and provide value in a hungry market. If you need help deciding whether to franchise or not, talking to a business advisor will help.