To Franchise, Or Not To Franchise
Entrepreneur|Spring 2017 Startups Issue

For many brands hoping to expand, franchising is a great model. But it’s not the only (or always the best) option. We follow two similar entrepreneurs as they choose different paths to growth—one going into franchising and the other into licensing. Here’s how it worked out, and what you need to know.

Jason Daley

STEP 1: FIND THE RIGHT WAY TO EXPAND. Upgrading from a small business to a chain is a big leap. So before choosing how a company will grow, owners should figure out their management style and ultimate goals. “We tell our clients, ‘You really don’t want to make a decision to franchise. You want to make a decision about how to run your business,’” says Mark Siebert, CEO of iFranchise Group, a consulting firm that helps small businesses take that leap. “From a business perspective, there is very little difference between establishing a good franchise program and establishing a good dealer program. The tools and the strategies are largely the same.”

THE FRANCHISOR 

Steve and Alexis Schulze of Newport Beach, Calif., were hard-core home juicers. They didn’t like the processed ingredients, additives, and sweeteners they found at health food stores and juice chains. Their personal experiments led to coconut-water-based drinks they deemed tasty enough to share with the masses, and they launched Nekter Juice Bar in Costa Mesa in October 2010. They figured affordable, locally sourced juices, smoothies, and bowls with no preservatives or refined sugars would do fairly well, and thought they might even be able to open a handful of Nekters in Southern California. The demand exceeded their expectations. “We’ve seen a seismic shift nationwide in the care people take with their mind and their body and what they put in it,” Steve says.

Soon they were expanding to Texas, Arizona, Nevada, and Colorado, all by opening company-owned units. That meant Nekter footed all the costs of building and operating a store and paying its general manager.

Brands that follow this model, like Starbucks or Chipotle, are potentially more profitable down the road, but they’re expensive to get off the ground, often necessitating taking on debt or bringing in outside investors. In 2012, the Schulzes started seriously considering another growth model: franchising. They’d be on the hook to provide operating instructions, trademarks, and ongoing support for individual entrepreneurs building and running one of their stores, but they wouldn’t have to invest any cash. In return they’d receive a monthly royalty.

THE LICENSOR 

Biking to the beach wasn’t a problem for Orange County, Calif., entrepreneur Don DiCostanzo—but getting back home, at the top of a steep hill, was way too tough. So he bought an electric bike. It was a revelation; pedaling it still gave him plenty of exercise, and the motor helped “flatten” the hills. Enthused, he opened an electric bike shop. But then his enthusiasm also flattened: He just didn’t love any of the bikes on the market.

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