Ask the Experts: Does Franchising My Business Make Sense?

Last Updated Jun 24, 2011 12:48 PM EDT

By Caitlin Elsaesser
Ask the Experts is an ongoing series, where we feature business owners facing problems they don't know how to solve. Want advice on your own dilemma? Email us: ownersonly(at)bnet(dot)com.
The owner: Connie Grant

The business: Grant started Galaxy Cookies, based in Norwalk, Conn, in 2003. The company features different freshly baked cookies with galaxy themes, such as Toffee Crater Crunch and Cosmic Chocolate Chip. Her sales have been steady since she opened.

Annual revenue: About $150,000

The problem: While Grant has been in business for almost 10 years, she is still working "cookie to cookie," she says. Grant has one employee, and even though she has low overhead (about $5,500 a month), she has not been able to accumulate the capital to expand.
Grant believes that franchising might take her company to the next level. Part of the company's signature is home-delivered cookies; while she sends her product via mail, she believes that franchises could capitalize on a local approach. When the Food Network featured her company in 2004, she received over 100 calls from parties interested in franchising her business -- calls she was unable to follow through on due to lack of financial resources.

Grant admits that her lack of financial organization may be holding her back. A large investor expressed interest in her concept, but when he learned that she might have missed a few business tax returns, he told her to be in touch when she was better organized. Grant ruined her credit when she took out a few business loans for her company, so she is unable to access traditional small business loans.

In order to start franchising and get organized, Grant believes she needs to hire a lawyer and an accountant -- but she does not have the money.

"I feel like I'm stuck in limbo -- with a great idea but without the resources necessary to get me going," she says. "How can I increase my capital? What tips do you have to get my financials in order? How can I start franchising without much money?"

What the experts said:
Mary Goodman, Bottom Line Up Enterprises
Start now, stay current, and then work backwards.
Capturing all of your financial history can seem overwhelming. Instead, focus on the future: Put into place a system that you can use to organize today's and tomorrow's transactions. Software such as QuickBooks, or Excel spreadsheets can be terrifically helpful. It doesn't have to be complex but it does require consistency. It's a whole lot faster and easier to record a week's transactions then a year's worth.

Play to your strengths and outsource the rest
Business accounting can be difficult, especially for an entrepreneur without the time, temperament, or training. Get help! A qualified financial person will help you manage your money so you can focus on your area of expertise. If you can't afford an accountant or a bookkeeper, consider a bookkeeping service. Seek local recommendations from other business owners in your area or use a virtual service such as A Bookkeeper's Corner. A few hours each month should keep you up to date and they can work with your budget to tackle the past.

Consider licensing instead of franchising
Look to set up licensing agreements with interested parties instead of franchising. As you noted, franchising is expensive. It requires compliance with the franchise laws, requires registration of the franchise in the applicable jurisdictions and the preparation of a Disclosure Statement for the non-registration states. On the other hand, licensing is merely a contract between two independent contractors and franchise registration is not required. You will still need an attorney to make sure that you don't inadvertently create a "hidden franchise" (with nasty penalties and consequences) and to draft the agreements. However, the legal costs will be fractional.

Rich Russakoff, Bottom Line Up Enterprises
Get out of debt
Are you still in debt? If so, know what it will take you to get out of debt, as well as a realistic conservative cost to expand. Franchising is a very expensive model to launch as well as maintain. By the time you have created all the necessary documents and met various state requirements you could be talking about several hundreds of thousands of dollars -- and that's just the legal expenses. You'll also need a marketing and sales budget, money to develop training manuals, classrooms, as well as baking facilities, and the costs continue to rise.

Understand what franchising entails.
Apply for franchisee licenses with Dunkin' Donuts, Mrs. Fields, and other baking franchises to see what is involved. Once you become the franchisor, you are no longer in the business of baking cookies, you are in the business of supporting franchisees and continuing to add products to increase market share. You will also need good internal and external financial team as well as a sales team to sell the franchises. Also, go to franchise shows and talk to franchisors and franchisees as well as contact the International Franchise Association in Washington, D.C.

Ask yourself, why do you want to expand and why franchising? Under your current circumstances, I would recommend that you instead reach out to your affluent client base and ask them if they would like to invest in your future. But before you do, do some soul searching and develop a business model (probably not a franchise model) that you can implement which has the best chance of success.

Readers, what's your advice?