Doug Schadle, founder of Rhino 7 Franchise Development, offers tips on how to select a successful franchise. Key things to consider are the type of model that will suit the investor, whether the franchise has a fully developed marketing plan and how quickly the franchise will turn a profit. Schadle also recommends hiring a franchise consultant to help new investors navigate through the model, because they will likely face new concepts that they’ve never seen before. For more on this continue reading the following article from The Street.
Franchises, if done right, are extremely lucrative for owners and their franchisees, but both can benefit from tips on how to get started.
According to Doug Schadle, a 20-year franchise industry veteran, the 820,000 opened and operating franchises in the U.S. equate to 18 million jobs and are expected to generate $2.1 trillion in revenue this year.
Even better, only 5% of all franchisees pay more than $500,000 to buy into a business. Most entrepreneurs that get into a business do so for roughly $150,000, according to Schadle, who has worked with such names as Great Clips, Senior Helpers and Doctors Express but launched his franchising career with the hotel brands Days Inn and Ramada, both owned by Wyndham Worldwide(WYN).
Schadle formed Rhino 7 Franchise Development in 1999 to help business owners develop the infrastructure, branding and marketing needed to turn their company into a successful franchised operation. Rhino 7 also works with potential franchisees to find the appropriate franchise model for them.
Franchising in general needs to be executed correctly to work, he says.
Schadle spoke with TheStreet about how to recognize a potentially rewarding franchise idea, as well as offered tips for first-time franchisees:
How do you know when a business is franchisable?
Schadle: [Franchises] typically are strong models because they have to be, primarily because there is a royalty stream and there is forced marketing. These are the first things that need to be implanted into the system, and when you do that then you can see financially where the business can be.
Look at their ramp-up -- how quickly did that business go to profit? Did it take six or seven years? That's a stretch for a franchise system. But did they make money at the end of first year or beginning of the second year? Then it's got potential.
How much marketing was done by the potential business? Did they do some baseline marketing trying to create awareness? If they did very little organized marketing then we can see what organized marketing would do to grow it. Is it a business that needs a full-time sales marketer? Maybe that's the piece that's missing.
Finally, is there an action plan to help franchisees?
The interesting thing about franchising is you can take a brand-new concept that had a good model independently, then spend four to eight months building this infrastructure in true detail and you can start a franchised company that looks like it's already 15 years old in infrastructure.
What are some key suggestions for first-time franchisees?
Schadle: Search out a franchise consultant. Every franchise has a different business model. You need someone to help guide you so you're not looking at something that's way over your head financially.
Anything retail needs to have a very detailed real estate division. Most franchisees are not real estate experts. You want to make sure that the franchisor isn't saying, "Oh yeah, the founder will come out and help you find that."
Look at their marketing. Marketing is everything. People don't use what they don't know exists. If the franchisor hasn't created a very detailed so-called blueprint for you to implement, then you're going to have a tough time getting that out.
That's why people buy Subway [franchises] -- because Subway is everywhere, even though the model is tougher than others. The bad part of Subway and McDonalds(MCD) is they're old and mature. What you're looking for is the next one.
What are some popular trends in the franchise industry?
Schadle: Franchises that are more model driven, [particularly] the semi-absentee model that would allow you to keep your job. We've been on tough times since 2008 ... One of the things that helps people get into business is a semi-absentee model. Those are very sought after. You will be able to pay your bills and whatever it is you want to have for your family while you start the business. In other words, you're not gambling everything.
Hair care is a good model. One of my favorites is Pro Martial Arts Karate Studios. It's low-cost; it can return very good revenue; you can keep your job. That's a semi-absentee model that will allow somebody to develop multiple units. The owner typically doesn't have anything to do with karate and doesn't run the facility. The owner is developer that's going to implement the system and hire trainers. That's a true franchise model.
Another company I like that's a different model is USA Mobile Drug Testing, which creates drug-free work zones [in-house]. That's an executive model that can be done either owner-operated -- by somebody with good sales skills -- or it can be an executive that has salespeople and screeners.
(Schadle's firm has worked with both Pro Martial Arts and USA Mobile Drug Testing, according to the company's website.)
What are some common mistakes made by new franchisees?
Schadle: When people start looking at businesses, they don't understand that a pizza place is going to run completely differently than a karate studio. A pizza shop owner is very active in the business -- there are lots of employees, theft, etc. -- but it's in food, so it's attractive. They have to ask: What is it really going to take to run this franchise?
Yet the biggest mistake is not implementing the marketing system. If I opened a business with a very detailed marketing plan which requires me to go out and promote it in the marketplace, if I didn't do it my business will still open anyway, but the chances of succeeding are much less.
This article was republished with permission from The Street.