How To Franchise Your Business

The Importance of a System

A good franchise concept has to be teachable. That means it has to be something you can explain to other people and that they can be expected to grasp readily. To accomplish that, your franchisable business should be thoroughly systemized and its operations documented so it can be copied by others. In addition, it must be a business that can be run in a noncentralized way.

If your business is run on the basis of knowledge that exists only in your head and requires your personal involvement every step of the way, you'll have trouble franchising it. Successful franchisors create detailed operating manuals that set standards and describe procedures for every facet of the business. They also create training programs for franchise owners, managers and employees.

Repeatibility is an essential component of a franchisable business. That means your business must be one that can be replicated over and over in many places by many people. If it can only work in one location--a business offering tours of the Grand Canyon, for instance--it's not repeatable and not franchisable. The same is true if the business can only be run successfully by one person.

Obviously, incorporating all these features into your business is going to take time and energy. In fact, franchising is a very different business from whatever business you're in now. Instead of the customers you're used to dealing with, once you franchise, your customers will be your franchisees. Franchisees invest time and money in your concept, and they can be demanding when it comes to training and support. Make sure you have the time and inclination to support multiple franchisees before you commit to franchising.

Navigating Regulatory Roadblocks

There are many regulatory and legal hoops you have to jump through before you can sell franchises. The federal government has rules, and many states also have specific requirements that must be met for you to sell franchises. These rules often require you to register with the state or federal authorities before selling franchises, as well as meet certain standards as to the way the franchise is set up. Once you're underway, some states stay involved with the relationship between you and your franchisees, controlling or limiting the way franchises can be transferred or renewed, territorial rights can be distributed, and franchisees can be terminated.

The Uniform Franchise Offering Circular (UFOC) is a regulatory document describing your franchise opportunity that prospective franchisees have to receive before they pay any money, sign any papers or, in some cases, even meet with you. If you give a franchisee any details about his or her prospects for making money from a franchise you're offering, those claims have to be made in writing according to certain guidelines.

There are a lot of regulatory hurdles to be cleared in franchising. They're primarily designed to protect franchisees. But if your franchisees become dissatisfied and attempt to do things you don't want them to, the franchise agreement and accompanying regulations can work to your advantage as well.

The Finances of Franchising

The final requirement of a franchisable concept is that it must produce an adequate profit. This is a more significant concern than with many other businesses because of the extra costs franchisees must bear. These extra costs come in the form of the upfront franchise fees that are paid to you, the franchisor, as well as the royalties franchises must pay to you in the form of an ongoing percentage of sales.

So the profit-making power of the business has to be sufficient to allow franchisees to pay you a royalty while still leaving enough income for the franchisee. Don't forget that the franchisee has likely had to invest significant amounts to get started. So the business must, in addition to providing the franchisee with income, yield an adequate return for the franchisee's investment.

You're also going to have to pony up significant cash to get the franchise up and running. You have to pay attorneys to create your UFOC document. More attorney fees will be required to get the franchise registered. You'll need accountants to prepare audited financials. Additional costs come from creating marketing materials and running advertising to promote the franchise to prospective franchisees. Don't forget the training staff, manuals and other systems you'll need to run the franchise.

All told, you could easily be looking at a quarter of a million dollars or more to create a workable franchise system, in addition to the everyday costs of running your business in the meantime. While the upfront fees franchisees pay are designed to help you, the franchisor, recover your development costs rapidly, you need to budget for these investments and be sure you see your way clear to recovering them before you embark on a franchise plan.

Does all that describe you and your business? The fact is, few businesses are likely candidates for franchising. Regardless, there are thousands of franchises out there. Ask yourself what it is that makes you different. If your business passes these tests, go for it. Nothing grows quite like a successful franchise.

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