October 8, 2016
Let’s start with a pretty obvious statement.
Starting a business from scratch is flat out hard.
Laying out all of the complexities for why it is hard would require a separate essay, so for now let’s agree that it is hard work.
Now think about something.
What do UPS Stores, Panera restaurants, the Kansas City Chiefs and Re/Max offices have in common?
They have all realized their growth by having a proven business model and systems to support the model. These business models and systems have been packaged up and sold to other entrepreneurs.
In the examples above the legal agreement between the parent companies and the entrepreneurs who own the local businesses we see everyday are franchise agreements.
In my previous life I got to see first hand how powerful a business-in-a-box can be for someone who wants to reduce risk when starting a new business. With a roadmap on how to execute every step in the process of building, managing and scaling a business, there’s a big reason franchises make up 3 percent of our country’s GDP in nominal dollars ($552 billion):
Franchising, licensing or subscribing to a proven business system reduces risk for entrepreneurs.
Think about it. Would you rather start from a blank sheet of paper and figure out every single thing that needs to be done or would you rather follow a process that has worked for others?
While I’m a “build it from the ground up” person, franchising or licensing are smart moves for many entrepreneurs. The risk reduction component alone is worth it to many budding entrepreneurs.
What I really want to explore is the “why” behind the founder of a company who decides to package up their model and sell it to others.
This is a fundamental shift in a business model for the founder of the original concept. Maybe they opened a single location, then expanded to a few more locations within their region. They experienced success and started looking at how they could expand rapidly but didn’t want to open more of their own locations. This is typically when they realize that letting others use their brand and systems would be the fastest and most lucrative way to grow.
There are many ways the founding entrepreneur can structure the agreement between themselves and whoever they are selling usage of their systems to. The three prevalent models are:
- Franchises
- Licenses
- Subscriptions
We will dive into each of these models in future posts, but for now know that there is a model for almost every type of business.
Making the decision on which method to choose and then executing on the plan to transition from “location owner” to “platform builder and supporter” is a monumental task.
Diffactory works with four companies a year to help them build the foundation that will be required to make this leap. If you’d like to learn more, please reach out to us.