Everything Franchising
Types of Franchise ConceptsA Primer on Franchising and a Few Relevant Concepts –
By Nick Neonakis
How to interpret this: I believe there are four major categories of businesses and they tend to share similar characteristics irrespective of what they provide. If you can understand the characteristics and how they fit into what criteria are important to you – you can then analyze different types of businesses within a quadrant for best practices and what makes the most sense to you.
Broadly speaking there are 2 types – brick and mortar or storefront businesses and service businesses
BRICK AND MORTAR BUSINESSES
Most of the national franchisors in this category are well known because you’ve probably driven by or shopped at one…
Quadrant A
Simple Retail Business
“People need it and come to you”
Examples: McDonalds, Burger King, Subway, Supercuts, Great Clips, HR Block, Jackson Hewitt, Liberty Tax, Snap Fitness, LA Fitness
- Any business that is transactional in nature
- Customers come, buy something and leave
- The thing they buy is from a pre-determined menu
- Simple employee model – think 18-year-old kids learning over a few shifts
- Range of typical costs (startup fees, build out, marketing $, working capital, fixtures, etc.) from about $50,000 – $2,000,000+
- Kiosk business on the low end – McDonalds on the higher end
- Lots of options in the $150,000 – $300,000 Range
- Average facility is 1,200-2,000 square ft in a strip mall – think Subway
- Marketing is REACTIVE – people come to us b/c they know the brand and they need the product/service
- We should be looking for Brand recognition here – think of Subway versus Greg’s subs – people will probably go to Subway
- Location is very important because most of our clients come to us and then come in
Quadrant B
Sophisticated Retail Business
“You provide a skilled service that people need”
Examples: Meineke, Midas, AAMCO, MAACO, Hand & Stone, Massage Envy, Fast Signs, SignArama, Medical Weight Loss Clinics, Urgent Care franchises
- Any business where you semi-customize inventory and need trained people to do the work. The employees may need licensing or schooling / certificates (think of the difference between a guy who can change a transmission at AAMCO and the kid at Subway…)
- Facilities are probably stand alone or in a higher end plaza (think of where a Meineke or an Urgent Care business is located and what they look like)
- Range of costs can vary greatly but there are lots of options in the $300,000 – $500,000 range. You need to be careful of site selection and build out costs
- Average facility is probably 3,000-5,000 sq ft
- Marketing is both reactive and proactive (you can target customers in certain areas)
- Barriers to entry are higher than simple retail so these businesses tend to stick around longer and have fewer competitors
- You look for Brand Recognition as well as marketing, supply chain and operational capabilities here because most people aren’t doctors or mechanics – you need the franchisor to help with finding, training and managing these people. Also, if we’re dependent upon getting parts – we need an efficient supply chain already in place or else we can’t service customers.
Pros
- These are scalable and replicable
- i.e. if you open 1 Subway, you can open another. If you can run 2 then you can probably run 10
- Financing tends to be straightforward – banks lend and they tend to like to lend to companies they have heard of
Cons
- These can be expensive to open and operate. Fixed costs can be high.
- We need people – people cause problems. There is an inverse correlation between how much you pay someone and the level of problems they can cause (not always but it sure seems that way sometimes)
Service Businesses
You don’t know they exist until you need them.
Quadrant D
Business to Business (B2B)
“Make your back office someone’s front office” Jack Welch
Examples: JaniPro, JaniKing, Vanguard cleaning, Express Personnel, ArcPoint Drug Testing, Pride Staff, ATC Medical
- Anything that a business needs, there’s probably a franchise to provide it
- You operate from an office and meet with business owners to sell your services to them
- Typically, these owners tend to have white collar management backgrounds, are comfortable in professional settings and selling to a board room
- Costs can range dramatically but there are many options in the $150,000 – $250,000 range
- You’ll need a few employees to start, some equipment, office fixtures, etc. – a professional appearance or else a larger business probably won’t work for you
- Sales cycles tend to be longer and the accounts that are landed tend to be larger. Maintaining relationships is important – think of it like this, if you get a bad burger at McDonalds you’ll probably go back but if you provide a bad service to a business – they’ll probably use someone else in the future
- Marketing and national accounts, pre-existing relationships with large businesses can be important
Quadrant C
Business to Consumer (B2C)
“You go to see them at their home”
Examples: Elder care or child care – ComfortKeepers, Comforcare, Brightstar, Home Instead, Right at Home, Tutoring, Nanny / day care; Property Services – Roto Rooter, Certa Pro Painters, Mr. Electric, Serv Pro, Paul Davis, California Closets, Budget Blinds
- Any business where you semi-customize inventory and need trained people to do the work. The employees may need licensing or schooling / certificates (think of the difference between a guy who can change a transmission at AAMCO and the kid at Subway…)
- Any business where you provide services to a residential consumer usually at their home. You (or your employees) go to them
- Range of costs can vary greatly but there are lots of options in the $300,000 – $500,000 range. You need to be careful of site selection and build out costs
- You don’t need a storefront – these can be run from a home office, a corporate office or a light industrial space
- As you scale up the business, you keep adding people to provide the services, so these tend to be efficient on the costs i.e. when you can’t keep up with demand you hire someone and so on
- You are looking at the franchisor’s marketing model to drive business to you – what makes the phone ring?
- The model tends to be “this is what we do, this is how we do it, this is where the people that need it live, this is how we connect with them”
- Brand recognition is important but the demand for services and the ability to reach consumers is equally important
- The owner tends to have good selling and interpersonal skills because you’ll be explaining to people why they should choose your business
- Costs are in the $75,000 – $150,000 range. This can increase depending on the level of equipment and personnel you start out with
A Bridge between Quadrant D & C – B2B2C
There are many businesses that have a foot in both quadrants. They do work with consumers but can set up relationships with other businesses to have them refer clients to each other. Think of the realtor who recommends a remodeler to the person who’s house she’s selling. That’s a business-to-business referral, where the end user is a consumer.
Pros
- You can start these up for less capital upfront because you’re providing most of the labor initially
- Scalability is efficient because you put people in as needed
Cons
- You must be good at selling and consulting (or hire someone who is)
- Analyzing demand can be tricky
- Brand recognition can be low
Closing Thoughts
Think about territory and your involvement in a business. You have many levers to pull in how you define your ideal type of business, how it will grow and what type of employee structure you can have in place. Certain franchises lend themselves better to certain combinations than others.
Example: You can have a regional development, semi-absentee business in Quadrant A or B but it’s less likely in Quadrant C or D. It’s not that it doesn’t exist – it’s merely that you’ll often see more McDonald’s franchisees owning multiple locations in a specific geography because the distribution platform lends itself well to achieving operating efficiencies across many units. i.e. you can purchase in bulk, have a centralized management infrastructure to oversee several locations and move employees around as required.
Finally, the goal of this primer is to create a framework to help you put various business types into perspective as you think about your goals and ideal business. There’s no business that will 100% fit all the criteria that are important to you but if you can define it, you can measure it and if you measure it – you can manage it!
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