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The Den Report: Franchising: It’s All About The Numbers

Most Canadians who want to scratch their entrepreneurial itch start by operating franchises because most of the essential requirements to run a business are already completed for them.

By buying a franchise, a budding business person receives a turnkey operation and thus avoids having to create elaborate business plans, find locations, and undertake all the other myriad aspects of building a business.

Because there is such an ensuing demand for franchises in the current entrepreneurial climate, many other would-be Canadians take franchising system a step farther -- they attempt to create the franchise system itself.

But "franchising out," as it's called, is not an easy road, which is why there are many consulting firms offering to show entrepreneurs how to do it. Franchising requires that every business process be documented so as to train franchisees, that products and services are always available and up to par, and, especially, that the businesses have a proven system that will make enough money to justify the franchise fees.

Last night's episode of Dragon's Den illustrated the good and the bad of developing a franchise system.

On the good side was Krista Castellarin and her husband Dwayne of Edmonton, who had started a franchise system called Fabulous Furballs. Cradling a small Chihuahua named Mr. Natcho in her arms, Krista asked for $200,000 for 15 per cent (a valuation of $1.33 million) of her pet products company, spa/pet boutique, and a corollary training institute.

The Dragons appeared skeptical until Krista pointed out that her company had earned $1.3 million in the previous year, had posted a net profit of $390,000, and had franchised out three locations - yielding a margin of around 350 per cent.

"This is a real business," exclaimed Arlene.

Though all the Dragons were interested, Bruce beat them to the punch with an offer that was even better than Krista's ask. He said he'd lend Krista the $200,000 she was asking for, but with the right to convert the loan to 10 per cent of the company.

"There's no need to give up 15 per cent of your company," he explained.

Fabulous Furballs was an example of a great franchising system, but earlier, the Dragons witnessed a potential franchise system that wasn't.

Dougieluv, of Vancouver, wanted $200,000 for 25 per cent of DougieDOG, his gourmet and healthy hot-dog restaurant in Vancouver's entertainment district, but had ambitions to be a chain of hot-dog shops.The restaurant had taken in about $300,000 in its first year, and Dougieluv had lost $10,000.

While they liked the concept and thought the Dougiedogs were delicious, the Dragons didn't find Dougie's numbers all that tasty.

Jim, a franchise expert who had earlier pointed out that a store of DougieDOG's size needed to earn $700,000 a year to break even, estimated that the restaurant would "make Dougie some money, but not enough to franchise it."

That set the tone for the other Dragons.

"Your sales aren't where we can invest (in a franchise)," said Arlene gently, adding, "but as an entrepreneur, you rock."

"Your numbers don't add up for franchising," counseled Bruce.

"It doesn't make any money!" wailed Kevin, who always relish-es the opportunity to be Frank.

For Dougie, it looked like Mustards Last Stand.

Tony Wanless is Certified Management Consultant (CMC) who concentrates on the SME segment. He is a frequent business plan writer, pitch guide, and business plan judge for competitions. His businesses include Knowpreneur Consultants, a provider of Content Marketing strategy and services to SME's, Reinventionist, an innovation consultancy to professionals who form their own independent businesses. He is currently launching tonywanless.com, which provides communication guidance and real-time digital editing services for leaders in the technology, finance and academic sectors.

Tony is also a columnist and blogger for BC Business Magazine and the Financial Post. A former financial journalist and editor, Mr. Wanless has a long history as a communicator, writer and advisor with Venture Capital and angel investors in Canada. He is a frequent business plan writer and pitch guide for technology start-ups and often acts as a mentor and judge in business plan competitions. Follow Tony on Twitter at @reinventionist