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Planning Ahead

Advice for the franchisor of the future

Every month at the iFranchise Group, we receive several hundred inquiries from companies who think they "have the next McDonald's." And while most of these inquiries have successful businesses, only a handful will have what it takes to make it as a successful franchisor.

So what sets these few apart from the rest? And, if you are just starting a business with the hopes of franchising, what do you need to do to get there?

Start with Your Most Valuable Asset

The single biggest mistake we see when it comes to new franchisors is the failure to protect their trademark. When a potential franchisee looks to purchase a franchise, a large part of that value proposition is the brand. And the bigger the company, the more important the brand becomes. Yet many companies often overlook this vital and inexpensive first step. The end result: These companies may spend tens or even hundreds of thousands of dollars promoting a brand they cannot protect or even keep. When these companies decide to franchise, the choices are limited and often difficult: change the name, buy it from the trademark owner or go home.

To avoid these problems, your first step should be to develop a name that can be protected with a federal trademark. In the excitement of creating a new business, this can be a tedious process--especially when you find the name you loved so much initially is already registered. But without this step, you are simply throwing your advertising money away--and throwing a monkey wrench into your future franchise plans.

You may also find that the process of coming up with a great name can be harder than it looks. Names that are generic or descriptive are difficult or impossible to protect. You can start this process by searching the U.S. government's trademark database (TESS) at www.uspto.gov. With more than 3 million registered, filed or dead trademarks, finding a name that is unique and protectable may be frustrating. As a part of this process, of course, you'll want to ensure that an appropriate top-level domain is available on the internet as well.

Once you have several names you like and believe you may be able to protect, it's important to engage the services of an experienced trademark attorney who can complete the registration process often for as little as a couple of thousand dollars--assuming, of course, the trademark is not contested.

The process of obtaining a trademark can take several years to complete--so you should start the process as soon as possible. That said, it is worth noting that you do not need to have a federally registered trademark to franchise. Your rights to that trademark vest on the date you file your trademark application. With this in mind, many of our clients begin franchising once this process is underway but before it is completed.

Next, The "Value Proposition"

To be a successful franchisor, you must first sell franchises. And to do this, you must create a business that people will want to buy, own and operate.

Called a variety of things--from marketability to sex appeal--a franchise should have some quality that makes it appealing to the potential buyer. Sometimes value proposition is created by marketing campaigns, sometimes by the look of an operation and sometimes by rapid growth of the market. It can be created based on the nature of the work involved (like the flexibility offered by a homebased business), the taste of a recipe at a restaurant or by pure return on investment. Often, it's created by the nature of the prospective franchisee (like the appeal an optical franchise has to an optician or a sales franchise to a salesperson). But regardless of how you create it, you must develop a business that people want to purchase.

To have an adequate value proposition, a business must also be unique--or at least well differentiated from its major franchised competitors. This can come in the form of a differentiated product or service, a reduced investment cost, a unique marketing strategy or different target markets. Think about hamburger chains. When McDonald's started franchising, it differentiated itself from its existing competitors through the concept of "fast food." As the years followed, numerous "me-too" competitors tried to compete with McDonald's--unsuccessfully. It wasn't until Burger King came along with a differentiated product that was cooked to order ("Have it your way!") that a real competitor was born. Years later, Wendy's saw two competitors whose marketing was largely oriented toward children, and was able to penetrate that market by appealing to older consumers through differentiated marketing ("the Old Fashioned Hamburger"). More recently, double drive-thru operations like Checkers have successfully competed against the majors by offering franchises that require a substantially lower investment level. The bottom line: You have to be different--and better in some fashion--in order to succeed.

Success is Not Enough

The next factor you need to take into account is the unique financial characteristics of franchised businesses in general. A franchised business must, of course, be profitable. Even if you are not going to franchise, profitability must be a top priority. But if you are going to be successful as a franchisor, the business model itself must have even more profitability. The relative amount of a franchise's profitability must be higher, because a franchise must allow enough profit for the franchisee to earn an adequate return on their investment even after deducting its royalties and fees.

Profitability, of course, is relative. It must be measured against the capital invested to provide a meaningful number. In this way, the franchise investment can be measured against other investments of comparable risk that compete for the franchisee's dollar. To be competitive in today's franchise marketplace, the iFranchise Group looks for the franchisee to achieve a Return on Investment (ROI) of at least 15 to 20 percent by the second to third year of operation. This return must be calculated after deducting a market-rate salary for the owner-operator franchisee.

All other things being equal, the future franchisor will want to focus on lower startup costs. The lower the startup costs for a future franchisee, the more franchise prospects will be financially qualified when the company does start to franchise. At the same time, by focusing on the denominator of the ROI, the franchisor can have the greatest impact on franchisee returns. Future franchisors with physical operations should generally avoid expensive materials and custom design work, and instead spend more money with a designer who knows how to create unit operations that will be duplicable at a low cost and with readily available materials. That said, you must also bear in mind that your physical unit will act as a "showroom" for franchise prospects.

The Cloning Factor

The final, and perhaps most critical element for the future franchisor, involves the ability to duplicate the success you achieve in your first business. If a business only succeeds because of your unique skill set, a one-of-a-kind location or another factor that is impossible to replicate, it is unlikely that you will ever be able to franchise it.

Assuming that the business can be cloned, you must focus on making the cloning process as simple as possible. Start by documenting everything--the factors that went into your site selection process, unit build-out requirements, key suppliers, advertising--because everything you do to get into business needs to be duplicated by your franchisees in the future. Develop systems and forms that help you track your own internal performance. And know your numbers--including every key driver of unit profitability. All this information is essential when transferring your formula for success to your future franchisee.

The bottom line is that the best franchisors have the strongest value propositions. Just as your job as an entrepreneur is to create value for your customers, your job as a franchisor will be to create value for your franchisees. And while some of that value will come from the support you provide as a franchisor, much of it is designed into the franchise from day one.


Mark Siebert is the "Franchising Your Business" coach at Entrepreneur.com and the founder and CEO of iFranchise Group Inc., a consulting company that helps businesses assess their franchising potential and develop and improve existing franchise systems.

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