We’re now going to look at the spectrum of franchising and look at the four different categories that almost all franchise opportunities fit into. This is one of the most important sections of the entire video series, so we’re going to get into each of these four categories in a lot of detail.

These four categories are:

1. Inbound Retail – think anything bricks and mortar.

    

2. Territory Servicing – or no bricks.

    

3. Outbound Business-to-Business or Light Manufacturing.

    

4. Business-to-Business in the Professional Services realm.

    

If you’ve been thinking about starting your own consulting company, this category might be of particular interest to you.

Inbound Retail: Bricks and Mortar

This is what most people think of as franchising because, in essence, this is the visible face of franchising in Canada. These are very good businesses if you have a solid base of management experience. They’re typically business-to-consumer and either product-driven or service-driven. As bricks and mortar, they’re location-based.

Smaller ones can be the kiosk type of format with a few hundred square feet, and the larger ones can go all the way up to the big box with many thousands of square feet.

Let’s segment this a little bit deeper and look at the product-based types of businesses.

Examples of inbound retail product-based businesses are anything in the pet store realm, the dollar stores, the big box retail grocery stores, and—believe it or not—restaurants. Restaurants are a bit of a hybrid though, between the product and the service, because you’ve got both.

Think about what a restaurant business is. A restaurant business is a light manufacturing business with a perishable product, finicky customers, and unreliable staff. I’m not saying that a restaurant is a bad business. There are some very good restaurants with some very strong platforms that support them, but think about all the things that have to get managed.

Now let’s look at the other side of the inbound retail sector, and that’s the service-based businesses. These would be things like fitness studios, anything in the beauty industry—that could be spas, hair care, registered massage therapy, tutoring. So there are a number of different types of businesses here.

Where the product-based businesses we just described are more transactional—meaning when you want something, you get it, and you can get it from anywhere—the service-based businesses are more relational.

Think about it this way: you’re getting regular customers, repeat customers, that are going to be coming into your business in order to receive that service. With service-based businesses, you don’t have the offshoring effect because of the very nature of the business. People are coming to you on a repeat, regular basis to receive that service.

When we think about the investment level, these businesses are often the highest level of investment required to get started. They require physical space that has to be built. There’s also the flooring, the finishes, the shelving, the equipment, the inventory—all that stuff that has to go into the business, and it has to be taken care of before you open the business.

So you’re typically looking at an initial investment level at the low end of $200,000 to $250,000 and often as high as a million. We see investment levels of between $350,000 and $500,000 as quite common for this category.

The source of funds for this category of business is usually 25% to 35% of your own money and 65% to 75% from Canada Small Business Loans or other bank financing. The higher the investment, the more that will go into your funds.

As we start to think of the role of the owners of this business, the first one is: how are you going to get customers? We call this business inbound retail because the location is actually part of the marketing, and the other marketing that you do is going to drive people to your location.

It’s very prudent for the owner to be networking and building other relationships in the community. But one of the things that makes this business so attractive is that there’s little to no outbound prospecting. As I said, people are coming to you.

These businesses require high visibility, so location is going to be a very important component of the success of the business. Often double-A retail or triple-A retail space is going to be required, which drives up the initial and the ongoing operating expenses of this type of business.

As I’ve already touched on, one of the primary roles of the owner of this type of business is managing. First, you’ve got to be managing your staff. Then you’ve got to be managing inventory and managing your facility and managing the customer experience.

When we think about managing marketing, the location is important to drive people in, but you don’t want to just rely on that. It’s important for the owner or one of the key employees to be building relationships in the community and driving more people in through that local awareness.

Make sure that when it comes to managing the marketing, you understand what the franchisor’s expectations around marketing spend are, what the community engagement strategy is from a networking and grassroots effect as well. It doesn’t matter if it’s a big brand like Canadian Tire or Tim Hortons or if it’s a young brand that’s emerging. You have to manage the community engagement strategy, and you have to make sure you connect with your current and future customers.

It’s not unusual for these businesses to have 10 to 20 staff. Bigger operations can go as high as 60 to 80 staff. So there’s a lot of scheduling involved, a lot of recruiting, hiring, coaching—all of the HR functions that are involved.

A lot of these employees are unskilled, entry-level workers. So recruiting, hiring, training, firing—that’s a critical function of the owner of this business. You can begin to see why people leadership and operations management is an important foundation as a transferable skill for this type of business.

Financial management is also an important skill set for this type of business, because this type of business has the most moving parts. That means a lot of attention has to constantly be focused on cash flow, inventory—when it comes in, when it goes out, what the margins are that you’re selling it for. And yes, the franchisor is going to have good structure. The more skills that you come in with, the easier that transition is going to be.

I would suggest to you that the most important thing that the owner of this type of business has to manage is the customer experience. While managing the customer experience applies to all businesses, I believe it’s more important with this type of business because the customer has so many choices to go to.

The brand and the marketing can bring people in, but unless you deliver that awesome customer experience on a consistent basis—and you do that through your staff—then they’re going to find other places to go.

When people initially think about the lifestyle associated with inbound retail businesses, they’re thinking: “Seven days a week, 24 hours a day—I don’t want that type of long hours job.” Well, there are some businesses in the franchise realm where the owner does have to work a lot of hours. But in a well-structured inbound retail business, you’re hiring staff. You have a manager, an assistant manager. You, as the owner—while you’re learning that business—are going to put in a lot of time. But once that business is established, you’re going to have a lot of control over the hours that you want to work.

Be sure to ask the franchisor what their expectations are and make sure they’re in line with yours.

The net margin for inbound retail types of businesses is often between 8% and 12% because there are a lot of operational factors that erode profitability. Exceptional retail operations can be as high as 16%.

When you’re looking at how to scale and grow these businesses—once the business hits a certain performance stride—then it’s very hard to get that business past that level because you’re capturing the market capacity. The only way at that point to scale and grow the business is to get another location.

As these businesses grow through multi-unit ownership, this also creates the opportunity for what we call passive engagement or semi-absentee ownership. In fact, with service-based businesses, sometimes that starts from the very first location.

This is one of the few categories where you see business owners not involved in the day-to-day of their business. Their typical week is about 10 to 15 hours. That happens because they hire a full-time manager who runs the day-to-day aspects of the business. The manager will do the hiring, will do the scheduling, will manage the customer experience—all those things we’ve talked about. And the owner manages the back office. They manage the metrics of the business. What is the performance? What is the tracking? So they’ve got a dashboard. They manage the manager, and they manage the financial aspects.

When it comes to building long-term equity in your business, the inbound retail category is one of the strongest types of businesses in which to do that. You, as the franchise owner, are not the visible face of the business to the customer. You have staff. You have a location. You can sell that business to another party, and the customer doesn’t see that change. A lot of the things stay consistent, so that creates that long-term equity value that can be transferred and sold to a new owner.

So here’s a quick summary for the inbound retail category:

These are very good businesses if you have a solid base of management experience. People like this type of business because the customer comes to them—they don’t have to go out and prospect and sell. But they do have to manage the money, they have to manage the staff, they have to manage the facility, and they have to manage the marketing.

So that concludes our description of inbound retail businesses.

Outbound Business-to-Business: Light Manufacturing

The next category we’re going to talk about is outbound businesses that are light manufacturing with a business-to-business focus. These businesses are also location-based, and it’s usually a blend of product and service.

We say light manufacturing because they buy raw materials, manufacture them in-house, and deliver them to the customer. Location sizes for this type of business are often the 1,500 ft² to 5,000 ft² size.

Examples of this type of business are sign businesses, print businesses, things like the UPS Store, full-service automotive where they have a fleet component—they’re going out and soliciting the market for fleet businesses. So those types of businesses.

These businesses require a medium level of investment. The very low end is $125,000. The moderate end is $250,000 to $300,000, and it could go as high as $500,000 for a big center.

The source of funds for this type of business is usually in the 35% to 45% range of your own money and 55% to 65% from the Canada Small Business Loans Program, other bank financing, or the BDC.

When you think about how to get customers, this is why we call it outbound retail. Yes, there are going to be customers coming into your location—that’s the inbound part. But there’s also going to be a component where the owner or one of the owner’s staff is going to be required to go out and engage the market. So outbound selling, prospecting, networking—all of that.

Because of this outbound sales aspect, these businesses aren’t as site-dependent. You’ll also be investing in local marketing. You might even hire salespeople.

When you look at managing the customer relationships, while it is a subset of sales, it’s important to emphasize that these businesses are very, very relational. They rely on having regular and ongoing interaction with a solid base of repeat customers. So an ongoing part of this business is to service that existing account base.

When you look at managing staff for this type of business, this type of business typically has a much smaller staff—usually two to five people with specialized skills. These people are more costly to employ, but because they’re more invested in their own careers, they’re far less transient than the casual labor that’s associated with inbound retail.

And because of the technical nature of the work that the staff are going to be doing, the owner has to be comfortable leading and managing people who know more than them. Because a lot of the work is going to be customized and based on the needs of each unique customer, a lot of the management of this type of business is project-based. So there’s a lot of project management involved.

In addition to project management, the financial management required for this type of business is going to be higher—especially because you have the added complexities of managing accounts receivable and accounts payable.

What makes these businesses attractive to a lot of people is the lifestyle hours. These businesses often function Monday to Friday, business-to-business hours. That means you have your weekends and evenings off unless you want to work them.

And because you have a smaller staff and a smaller operation base with less expensive retail locations, these businesses often have a much higher profit margin—often in the 20% to 25% range.

When you think about scalability for these types of businesses, they’re very scalable—and often without having to get an additional location. This is how it might work: as you build your customer base and increase production, you can add a second staff shift to your production equipment. You can also add salespeople to drive growth without having to buy more facilities.

While the lifestyle hours are strong for these businesses—Monday to Friday, business-to-business hours—these businesses do require a full-time commitment by the owner, at least for the first couple of years while you get that business built. As you build your customer base and your team, you get more and more control over your weekly lifestyle hours.

As we referenced in the franchise model section of this video series, this is the type of business that can evolve from owner-manager to executive-owner. Occasionally, exceptional franchises will build a large team and hire a general manager to run the business and, in essence, create a passive engagement scenario. But please understand that that’s rare for this type of business category.

When it comes to building equity, these businesses are also good at building equity and resale value—especially where the owner builds a sales team.

Here’s a quick summary for outbound business-to-business light manufacturing:

These businesses are very good if you have strong project management experience, strong communication and planning skills, and good networking skills. These businesses rely more on relationship-building than on marketing. So people are attracted to this business because it has a good base of repeat business from existing customers.

People attracted to this business also like that they can build and manage a small team of people with specialized skills. Staff are easier to find because of the traditional workweek hours.

Outbound Business-to-Business: Professional Services

The next category of business we’re going to talk about is outbound business-to-business professional services.

These types of franchise businesses focus almost exclusively on serving other businesses. Because these businesses serve those businesses at your customer’s place of business, there’s rarely a need for a location. These businesses are often home-based.

Examples of this type of business are business coaching, sales training, internet marketing, financial and expense consulting—again, businesses serving other businesses.

The investment required for this type of business is often the lowest across all franchising—often between $50,000 and $90,000—because there is no requirement to invest in equipment or a location. Instead, the initial investment covers the franchise fee, initial training, and your initial marketing and working capital.

Because there is no equipment to invest in or location to build, the source of funds for this type of business is 75% to 100% of your own money. It’s usually covered by your own savings, home equity lines of credit, or the Business Development Corporation (BDC).

When you think about how to get customers for this type of business, these businesses require regular and ongoing networking, prospecting, and selling. Very little business is driven by way of marketing. So this is why we describe this as low visibility—the customer doesn’t find you; instead, you have to find the customer.

The roles of the owner for this type of business are prospecting, selling, and relationship-building. Prospecting and selling are ongoing core responsibilities throughout the life of this business. Fulfillment or service delivery is a core function of the owner of this business as well.

When it comes to managing staff with this type of business, there are some franchises that enable you to add associates or additional people. But in a lot of cases, these are full-time owner-operator businesses, where you’re involved in the business for the life of the business.

When it comes to the lifestyle and the weekly hours required for these businesses, this type of business has a tremendous amount of flexibility. Almost all of your work is done during business hours. Again—evenings and weekends off. And you have the greatest amount of control in your schedule regarding when you’re going to be interacting with and engaging your clients.

The profit margins for this type of business are among the highest in franchising, and that can be as high as 70% to 80%, because you have so few expenses.

When you think about how to scale and grow this business, you’re growing the business and building your customer base until you get to the point of work that supports your desired lifestyle. Past that, there’s minimal scalability unless you buy a franchise that has the ability to add associates.

When it comes to building equity, these types of businesses rarely have the capacity to build a large equity value. Instead, you’re driving value through the life of the business. You can make a lot of money annually—you have to plan to save that and build equity and savings that way.

Here’s the summary for outbound business-to-business professional services:

These businesses are very appealing if you have strong sales and relationship-building experience. People like this type of business because of the ability to help companies improve and run more effectively. People also like the wide range of freedom and flexibility that they have in running this type of business.

This concludes the section on outbound business-to-business professional services.

Territory Servicing: No Bricks

We’re next going to cover territory servicing, or “no bricks.” These businesses can be business-to-business focused or business-to-consumer focused, and with a number of franchises, there’s a combination or a blend of both business-to-business and business-to-consumer.

They can run from a home office or from a small industrial office. Instead of buying a location, you’re buying a large market area that you and your staff will service.

Examples of these types of businesses are residential cleaning services, home improvement, in-home tutoring, elder care, and other businesses along those lines.

Because these businesses are not location-based, the investment levels are often much more manageable. We see a range of $125,000 to $250,000, with the biggest variable being the size of the territory that you buy or the number of territories you buy.

The source of funds for these types of businesses is often 75% to 90% of your own money, because there’s a minimum amount of equipment and/or location for you to build. Home equity lines of credit are the most common source of financing, or other term loans—as long as you are able to provide security for the bank. BDC will also provide funding for working capital for these types of businesses.

When you look at how to get customers for these types of businesses, these businesses are almost as popular as inbound retail types of businesses—because the customer is coming to you. This is what we call a high-visibility business—not by way of location, but by way of constant and steady marketing to create awareness for your business.

Your marketing effort brings the customer to you by creating awareness and triggering that initial inquiry.

The roles of the owner in this type of business are networking, marketing, and selling. Investing in, managing, and marketing is a core and ongoing responsibility throughout the life of the business.

When it comes to staff management, there’s a fairly wide variable here. Think of this as: you’re creating a staffing agency for service providers.

In some cases, like the elder care business or the cleaning services, you’ll have to build a team of 15 to 20—even 40 staff. While in other businesses, it might be a small staff of specialized technicians. Home improvement—things like that—could be three to five staff.

Hand-in-hand with that range and size of staff is also the range in the level of skilled or unskilled workers. The greater the staff requirement, the greater the skill set you’ll need in terms of hiring, coaching, managing, and other HR functions.

This category requires strong scheduling management and project management. Each job will be unique, so the right resources and scheduling have to be marshaled.

As we look at financial management for this type of business, this category is very unique in that most customers pay upfront—for example, elder care or cleaning services—or 50% upfront and 50% on delivery, in the case of home improvement.

So managing revenue forecasting and expense management are the aspects of financial management you’ll want to make sure to understand here.

As you look at the lifestyle for this type of business and the structure of your weekly hours, these businesses can cover the full spectrum.

In the case of residential cleaning, you have Monday to Friday daytime hours. There is very little requirement for evening or weekend work.

In businesses like elder care, there’s going to be a 24/7 commitment. You’re going to have a requirement to have people ready at any time throughout the entire week. A lot of the work can be done during the day, and because of the team-building aspect of these types of businesses, franchises usually hire an assistant manager. And as they build the team, then a manager. So they enjoy very strong lifestyle flexibility.

The net profit margin for these types of businesses is often in the 30% to 40% range, and that’s because there’s a very manageable relationship between your revenues and your expenses. Your biggest expense will be labor, which you sell at a premium value.

This labor cost is variable, as it’s related to the volume of your customer base. And as a result of that, it gives you incredibly tight cost management and optimum profitability.

When you look at how to grow and scale these types of businesses, these businesses can scale very well. You typically grow by investing more in marketing, which drives an increase in customers. And as you add those customers, you add more staff—again, variability.

For the vast majority of franchise options, full-time ownership for the first several years of the business is a core requirement for this category. Once you have a solid team built, then you might decide to hire a manager, and then a general manager, and create that lifestyle flexibility and even that executive-owner opportunity.

When it comes to building equity, these businesses enjoy one of the stronger opportunities to build equity—because of the regular, repeat purchasing nature from your customer base. Also, with the bigger team that you build, you become less and less the visible face of the customer—and that builds a stronger equity base and higher sale value.

Here’s a summary for territory servicing, no bricks businesses:

These businesses are very appealing if you have strong staffing and operations management experience and you want to grow something sizable. People like this type of business because of their ability to lead a team, the ability to build a strong customer base of repeat purchasers, and the ability to build long-term strong equity value.

Final Wrap-Up and Exercise

So this concludes our overview of the territory servicing, no bricks category.

Now that you have a much better understanding of each of the four categories of franchise ownership, I’m going to provide you with an exercise to help you start to identify where you might be best suited.

For the next three weeks, for every business that you go into—whether it’s a gas station, a fitness studio, a grocery store, a department store, a restaurant—it doesn’t matter. I want you to look at each of those businesses from the role of the owner perspective and not the customer perspective.

In other words, if you were running this business, you want to be asking yourself as you look around: What would you have to do to run the business successfully?

And while doing that, start to make mental—and ideally notes on paper—about:

• What are the things that you would be really good at doing and really enjoy doing?

   

• The types of work that you just like—it’s okay.

   

• And the types of work that you would absolutely dislike doing or would want to avoid doing.

   

Doing this for a three-week period should identify some really clear patterns and some really strong awareness—and thus should give you greater insight and awareness as it relates to the pain-gain exercise that we shared earlier in this series.