Opening Stores on Somebody Else’s Dime
Franchising your business requires finding a tricky balance. You must offer a service worth paying for. You have to charge the right amount for it. You have to provide enough value to your customers (your franchisors, not the end-users) so that they are better off opening one of your stores than opening one of their own. And you have to do it without spending more than you take in.
Things You Ask For
Primarily, you ask for money. Franchises charge an up-front franchise fee and ongoing royalties.
The Franchise Fee
The franchise fee is a per-unit or per-market fee paid for the rights to develop in that area. You might sell the rights to Wisconsin to one person but might divide Michigan up between 5 different franchisees. The rates vary, but they should take into consideration a couple of things.
One is the value of the package you’re offering. Including $10,000 worth of inventory creates a finite minimum for your fee. If your software cost $50,000 to develop, you might feel the need to charge at least $2,500 per franchise sold until you pay for it.
Planned growth rate is the second factor. You might charge $5,000 when the whole country is wide open and raise your rates to $10,000 after you’ve covered a large area and finally to $20,000 per store when you’ve entered most major markets.
You can reduce rates for multiple licenses. You might price your rights less for subsequent stores. The fee might be $20,000 for a single store, $30,000 for two stores and $10,000 each for 3 or more stores.
Lastly, franchise rates should be relative to the initial capital expenses. If somebody is considering opening an independent store and could open a single store for $40,000 or open one of your stores for $40,000 in inventory plus $45,000 in franchise fees, you’ll have a hard time selling franchises unless you can somehow demonstrate huge sales potential (which is tricky, because the FTC regulates what you can and can’t say about your sales).
Ongoing rates vary, also. Some rates are as low as 2%, while others are exceed 10%. Similar factors apply to setting rates: perceived value vs. cost. If you invest more labor and effort in making your franchises successful than you earn in royalties, you’re going to fail. You have to offer enough value–profitably enough—-to keep selling franchises or to maintain the infrastructure you have.
You could ask for the royalties as a fixed rate or a more complicated rate structure if you wished. I think most franchise systems—including game stores—are best served by a fixed percentage.
You have to have some way to ensure that franchisees are compliant with your policies. Each one might hate it, but the others appreciate it. That’s you or a hired liaison. You have to monitor
- compliance with policies
- payment of royalties due
Values You Might Provide
A franchise isn’t a one-way service, with you collecting free money from your franchisees. You have to provide enough value to the franchisees that they don’t abandon your system for richer pastures in the world of independent ownership. You have to consider what you possess that you can offer to share.
Your brand includes several factors, including your store’s physical presentation, the interior image, your services offered, and larger issues, like marketing position. Consider these two nearly identical game stores.
Bill’s Game Store carries rpgs, minis, ccgs, and board games. His fixtures are pegboard, his shelving units are homemade, and his signage is “what’s on sale at Office Depot”. He thinks his floor plan is perfect, so he never changes it. His storefront is “the cheapest rent”, which resulted in a traffic count of 5,000 or less.
William’s Prestige Games carries the same inventory. It uses a few pieces of slatwall for certain product lines, with Lozier shelving units for most of the store. His signage follows a uniform design style, with departments being identified by colored plasticard signs hanging from the drop ceiling or fixed to the walls above the shelves. William’s employees rotate merchandise regularly according to Planograms, they’re expected to follow. Finally, the store faces the road and over 30,000 drivers per day.
Bill’s employees wear concert t-shirts and tattoos. At William’s, they wear bright uniform shirts and aren’t allowed to display tattoos. In BGS, when a light goes out, Bill replaces it when he can. At WPG, the manager on duty is obligated to replace it within 24 hours, in compliance with his Operations Manual (even if it’s William working). William’s place is clean. Bill’s, not so much.
One of these stores attracts potential franchisees. The other does not. Even if their sales were similar (although it’s not really likely, is it?), William’s Prestige Games would be more likely to sell a franchise.
So, checklist of benefits to provide so far
- image standards for employees and cleanliness
- written procedures and policies
- cohesive and attractive visual brand elements—signs, uniforms, store layout
Now for the harder stuff.
If you just order what Alliance has to offer, you won’t have a unique selection. Anybody can get that stuff. You have to seek out products available outside of Alliance and usually outside of other distributors. Other products include
- products you buy directly from smaller publishers
- products you buy through mass-market channels
- products you publish or produce yourself
Ideally, you’ll establish your own distribution system. If you’re going to offer unique products, you can buy/produce those in-house and then distribute them from your warehouse. When franchises order from you, you get to keep the distributor’s share, too, for extra profit. Buying at distributor cost allows your corporate stores (if any) to earn a larger share per item, too.
Setting up internal distribution cools any relationship you have with your distributor, so setting this up isn’t something to do automatically.
A single system that handles sales, customer tracking, ordering, and royalty sales reporting would be nice. Selling one to each franchisee would be a bonus.
Having a prepared list of established procedures for every task in the company is the heart of the franchise system. If a new hire can come in, read a page of instruction or participate in a 15-minute lesson and perform nearly any task in the company, then you have a system worthy of a franchise. If you run your business by the seat of your pants and lack the ability to teach other people to mimic your success, you would fare poorly as a franchisor.
Some procedures appropriate for a game store could include
- Inventory receiving
- tournament formats and procedures (advertising, registration, reporting, structure, floor rules, etc.)
- demo and upsell scripts
- managing rewards club (recruiting, record-keeping, providing benefits, etc.)
- opening and closing procedures (turning on sign, cleaning, fronting & filling merchandise, etc.)
- buying policies and procedures (products bought, condition, method of payment, etc.)
- minimum paperwork or record-keeping procedures (sales, discounts, purchases, etc.)
- safety and security procedures (deposit frequency, cash drawer maximums, use of a time-delay safe, etc.)
You’re expected to provide these systems in the form of an Operations Manual, which requires lots and lots of writing.
This “offer” is a must-have. It’s an integral part of the franchisor-franchisee relationship.
Nothing encourages franchise sales like walloping EBITDA. The more successful your single store or chain of corporate stores, the easier it becomes to sell franchises. Work first to make your store the best it can be.
What’s the Catch?
If the above hasn’t clued you in, offering franchises is expensive to initiate and maintain.
Franchising is federally regulated and regulated further in most states. You have to maintain an FDD, or Franchise Disclosure Document, and keep the Federal Trade Commission updated regarding significant changes to the document.
Each FDD printed kills a tree. The documents are massive in the case of a large company, and the minimum requirements make even startups hefty. They involve lawyers, and the combination of specialized franchise lawyers and War-and-Peace-sized documents can cost more than a full wall of Warhammer 40k.
Managing a game store is a tough job. Add on top of that evaluating prospective franchisees to make sure they’re good candidates, monitoring their progress, visiting their locations—some of them possibly distant—and you have a work overload. You can hire somebody to manage the game store or manage the franchising, but either position will cost much more than minimum wage.
The benefits you provide usually come with a cost. Your own POS program has an obvious cost—the development of that application—but they might come with not-so-obvious costs, like support for the system, upgrades, and additions demanded by changes in the marketplace.
If you have franchisees outside of your state, add travel to the list of expenses. If your state’s big enough, travel within the state might be a factor, too.
If you’re wise, you’ll increase your insurance coverage—a lot. Franchisees who fail might sue you. Franchisees who disagree with your policies might sue you. Customers who slip and fall in a franchise location might sue you. Vendors stiffed by a franchisee…you get the idea.
How To Do It
Start now. Develop systems. Write things down. Establish your brand and a local reputation. Set aside at least $50,000. Plan to start in your own state if possible—crossing state lines complicates things because of different regulations. Know your P&L inside and out; know where your company is stronger than others so that you can demonstrate that strength to potential franchisees.
Choosing to franchise is one growth option for a successful store, but it’s not the only one. It’s a complicated subject best discussed with an attorney who specializes in franchising. The whole shebang is way more complicated than I can do anything other than outline here.