The following excerpt is from franchise expert Mark Siebert’s book The Multiplier Model. Buy it now.
Once you are ready to grow your business, your next decision will be to choose a format for that growth. You could add some corporate locations, add franchises or partner with a third party in some kind of equity arrangement.
Whatever you decide, your business should be a vehicle through which you can meet your personal and financial goals—it does not have goals of its own. Therefore, in order to choose your growth strategy, you need to look back to your goals.
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It’s okay to be conflicted
Your business may already provide you with the standard of living you have always aspired to. So if your goals are now to spend more time with your family, ask yourself if the time you will spend away from your family, coupled with the financial risk you will incur in expansion, are worth the effort of additional growth. It could, in fact, not be. If that is the case, you may want to focus on your existing business model so you can maintain and harvest its profits.
A destination will help with your expansion
If you do want to expand, determine your destination at some point in the future. If you have partners in the venture, have a heart-to-heart with them. Don’t focus on issues like valuation or what you think you can achieve.
Instead, set a goal that reflects what you would like to get out of the business. Perhaps you would like to sell the business for X amount by Y date, or you would like to earn Z amount every year by working only ten months per year. Whatever the goal, be specific regarding the financial reward you are looking for and the time frame in which you hope to achieve it.
Related: The 9 Provisions Every Franchise Agreement Needs to Have — and What They Mean
Time to model it out
The destination is set, but how will you get there? Now you need to develop a financial model to determine if you can achieve your goals through organic growth. To help with feasibility, consider the amount of capital you have to invest, the amount of risk you are willing to take on (in terms of debt financing or leases executed) and a conservative case for revenue and profitability.
You might want to do some sensitivity analysis to see if you will still be able to meet those goals in a worst-case scenario. Assuming that you can meet your goals through corporate expansion, you could choose to end your analysis right here.
Corporate expansion might not work in all scenarios
While there are other reasons you might opt for franchising, joint venturing or a third-party infusion of capital (largely questions of risk reduction), most people will choose the corporate growth strategy. But if you do not have enough capital, you must look at other options—or alter your underlying assumptions. For example, you could:
- Stretch out the timeline to have a longer runway to achieve your goal.
- Alter your assumptions about risk—perhaps you could invest more of your own money or take on more leverage in the form of debt.
- Reduce the scope of your goal to something that is more attainable, given your risk tolerance and your capital position.
- Alter your assumptions about the underpinnings of your business model, although counting on best-case scenarios is risky.
- Look at alternative sources of equity financing, like an outside partner—although you will then have to alter the scope of your goal to offset dilution.
- Look at third-party distribution channels (such as franchising) to fund your growth with other people’s money.
If corporate growth does not achieve your goal, do a second round of financial modeling from the standpoint of some of your other expansion strategies. Those might include bringing in equity, doing joint ventures at the unit level, licensing the intellectual property, manufacturing and selling products or (my personal preference) franchising.
Related: Tips and Strategies for Using the Balance Sheet as Your Franchise Scorecard
Franchising with a third-party
You should never “decide to franchise.” The reason I tell people not to decide to franchise is because franchising is an emotionally charged word for many. Whether they are deciding to franchise or to avoid franchising, it is often because the word has certain specific connotations for them. So in making a decision on a third-party channel, start by asking three questions about the nature of your contractual relationship with your third party.
- Will they use your name?
- Will they use your systems?
- Will you be compensated for the use of your name and systems?
Be confident in your decision
Once you have made your decisions, hold them up to the light of day, show them to an attorney (or a consultant) and determine what you have created. If it is a franchise, that’s great. If the ideal structure for your business is something else, then that’s great, too. Make the best decision for your business, and then let the lawyers and consultants sort out the paperwork.
Related: Is Franchising Right For You? Ask Yourself These 9 Questions to Find Out.
Get started with The Multiplier Model
Going from small business to successful startup to scalable growth takes more than just good luck. It takes a system. Over the last 34 years, franchising consultant and growth expert Mark Siebert has been sought out by more than 70,000 executives looking to expand their companies. Out of those 70,000, only 5,000 had the right systems in place to go from successful to scalable. In The Multiplier Model, Siebert discusses the factors that determine if an entrepreneur is ready to scale their venture — and the best ways to get started. Read more.
