From the January 2002 issue of Entrepreneur

Enough about opportunities to buy into someone else's success. Now let's talk the big game. This is a message aimed at those of you out there who are already running a business and have managed to get it humming along in high gear. Now you have options. You can grow your business from cash flow, through IPOs, joint ventures, licensing deals, debt financing, friends, family or franchising. Yes, I said "franchising." If slowly adding links to your chain of successful businesses isn't exactly your idea of fast growth, you can franchise your business. For those uninitiated in the fine art of franchising, that may sound like "Hey, take this winning lottery ticket." But whether you find eventual success as a big-time franchisor has little to do with luck, and it's not that easy. Rather, your ultimate success in franchising depends on your business, your psyche, the steps you take and your perseverance.

Learn all you need to know about franchising in the Franchise Zone.

Some people start businesses with the immediate intention of turning them into franchise systems, but many of you don't give the move any thought until customers start asking questions like "Is this a franchise?" or "This is a great idea-would you be willing to franchise it?" The first time someone asks about franchising, you should consider the comment a compliment-someone has seen the potential in your vision. However, at that point (and after you've written down the person's name and telephone number), you must take stock of what you have to offer people who want to grow with you.

Protect Your Assets
When you franchise your business, you're granting a license to a franchisee to use your proprietary marks, designs, methods and modes of operation. In essence, you're teaching and supporting your franchisees to do business the way you've perfected it through trial and error. So the first question to ask yourself is whether you have something that's worth protecting. If you do, immediately take steps to see whether your trade name is being used elsewhere, and research the nature of the competition.

Start by conducting a full trademark search for your trade name and logo. You can do a preliminary search at www.uspto.gov, but if you're serious, you had better let a pro help. Next, check the whois database (see the link at www.franchisedecision.com) to find out whether the Internet domain name is still available. Then immediately engage an attorney to work on protecting your trademark, and park your domain name to keep others from grabbing it. If you can't protect your intellectual property, you've spoiled the first element of a successful franchise, and further efforts may be tainted. A federal trademark now takes about 18 months to issue, so it's never too early to start.

Check the Competition

Ask whether the world really needs another sub sandwich shop, or why someone would want to gold-plate his or her widgets your way. Your best bet, assuming you don't have huge amounts of cash to throw around, is to find a niche that's not already overwhelmed with franchisors. You may make the best hamburger ever, but-news flash-hamburgers have already been done.

The niche could be a different product, or you could franchise a fairly standard product in smaller markets where the big boys don't bother to go. Either way, if you're extremely fortunate, you might be able to sell a handful of franchises in the first year. That means, if you watch your costs, you might be able to recoup your investment in preparing the manuals, offering circulars, brochures and training programs. You must be ready for the long haul. Although franchise growth can be exponential once you've established yourself, those first 25 franchisees will be the toughest to earn.

Establish a Growth Strategy

Read What to Expect When You're the Franchisor for more information on this growth strategy.

Your first franchisees will likely be within your immediate sphere of influence, so keep franchise brochures on the counter at your stores. But keep in mind, a fast way to kill a new chain is to sell franchises without any cogent plan for growth. New franchisors are often so eager, they're prone to sell a franchise to anyone who's interested. Then, when it comes time to provide support to one unit in New York, one in California and one in South Dakota, the franchisor is forced to exhaust its resources merely doing what it promised.

Accordingly, in the absence of an expansive budget, strong chains grow in concentric circles so brand names gain recognition in specific areas, marketing dollars can be combined for better market penetration and economies of scale are created. Even then, you'll be required to add operations and sales support personnel as you grow, while you keep a very close view of your cash flow.

You have a better chance if you have a record of profitability that stretches back a few years and have made the effort to systematize your operation.

Good Fortune
THE NUMBER of franchises in the Asian fast-food industry nearly doubled in the past year. How does that compare to other food segments?


SOURCE: Entrepreneur's Franchise 500, 2001, 2002

Create a Culture

Inevitably, the single most important factor for a successful franchise chain is happy franchisees making a profit. If your single unit dynamics don't work, even the cutest concept is doomed. Satisfied franchisees will encourage others to join, so do everything in your power to make sure the deal stays sweet.

You have to realize you lead an entire culture. At the same time, the most profitable franchisors are those able to bolster their own economics so long as it's not at the franchisees' expense. In other words, a good franchisor is always looking for "win-win" situations when adding goods and services to the business. For example, if you can negotiate a bulk purchasing contract with a vendor-and retain a percentage of the savings while still providing the franchisee with a great price-that's good business.

Avoid the Pitfalls
Franchising is a highly regulated business covered by federal and various state laws. For the unwary, you can break the law in the amount of time it takes to finish a cup of coffee, merely by sitting down with a potential franchisee and having an earnest discussion about your opportunity. Get legal counsel before beginning your sales effort. Laws make franchising anything but a get-rich-quick scheme.

Lead With Professionalism
In a franchise relationship, the franchisor is counted on to set and enforce high standards. Franchisees want a leader, a teacher and a visionary. The essence of franchising is using other people's money and hard work to grow beyond what everyone can achieve independently. Don't be afraid to hire experienced management to help you achieve that.

Use reputable accountants and a fair-minded lawyer, and stay above reproach. Don't play favorites, as franchisees constantly compare notes. Ultimately, you're running a service organization whose customers are its franchisees.

For Everything Else...
...HOPEFULLY YOU HAVE SOME MONEY SAVED UP. THE BARE ESSENTIALS FOR GETTING A FRANCHISE SYSTEM OFF THE GROUND COST A PRETTY PENNY.
ITEMLOW ESTIMATEHIGH ESTIMATE
Trademark search and review$375$750
Logo design and federal trademark registration$1,000$5,000
UFOC and franchise agreement preparation$10,000$35,000
Operations manual$10,000$75,000
Annual audited financials$1,000$15,000
Corporation information$750$5,000
Web site design/annual hosting$400$25,000
Office equipment$2,000$15,000
Brochures$400$3,000
A great conceptPricelessPriceless

Todd D. Maddocks is a franchise attorney and small-business consultant. For more information, visit www.franchisedecision.com.