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How To Franchise Your Business

Interested in turning your business into the next Subway or Curves? Find out if your company--and you--are cut out for franchising.
December 1, 2005
URL: http://www.entrepreneur.com/article/81410

If you want to expand your business, which is better--franchising or satellite offices? Like many entrepreneurs, you may be wondering whether your business is well-suited for the franchising mechanism that made global corporations out of companies like Century 21 and McDonald's.

The answer depends on two things: what kind of business you want to have and what kind of business you have now. The kind of business you have now determines whether your business can be franchised. The kind of business you want to have decides whether franchising is the best way to build it.

Why Would You Want to Franchise?
Let's start with what you want out of franchising and your business. If you plan to rapidly expand your concept nationwide, franchising is probably your best bet, says Robert Barbato, director of the Small Business Institute at the Rochester Institute of Technology in Rochester, New York.

Because the franchisee--rather than the franchisor--provides the capital for expansion, a business can grow much larger and faster than if it were funded by bank loans or internally generated funds. "You could probably sell a few hundred franchises in several years, but you probably couldn't open a few hundred company-owned offices that fast," says Barbato.

If, on the other hand, you plan to add only a handful of offices in a few new markets, company-owned satellites are probably a better choice. The heavy legal and regulatory costs involved in creating a franchise make it impractical for limited expansions, Barbato says.

Also, seriously ask yourself whether you want to become a franchisor, which is very different from being in business for yourself. Are you prepared to handle the more extensive staffing demands necessary to support an entire franchise system? And what about the competition? In an industry with many large, well-established franchises, are you prepared to be the new kid on the block?

Even your management style will likely need to be revised. "For example, a person good at selling employment services may not be good at selling franchises," says Barbato. "For one thing, it's a different customer you're going to be selling to now."

A company-owned office, as opposed to a franchise, is run by a manager who is hired by--and can be fired by--you. However, what a company-owned office gains in control it may lose in terms of the extra dedication a franchisee is likely to show as compared to a hired gun.

What Is a Franchisable Business?
The other key consideration in deciding whether or not to go the franchising route is what kind of business you have now. Even if you think franchising is for you, that doesn't mean your business is franchisable, says Geoffrey Stebbins, president of World Franchise Consultants in Southfield, Michigan. No matter how successful your business is, it won't work as a franchise unless it appears to be a good business opportunity.

"People get too caught up in the actual product," says Stebbins. "For example, we're not talking about selling employment services. We are talking about [whether] the employment service appeals to people as a business opportunity."

What makes an appealing business opportunity? The franchise should be based on a concept with pizzazz, says Stebbins, such as a new kind of fast food or a patented technology for repairing automobile finishes. That's because to really be successful, a franchise has to capture the imaginations of would-be business owners. It's much easier to market a franchise with built-in appeal than one that sounds like some humdrum business.

Needless to say, your franchise must produce a superior product or service. Nobody wants to purchase and run a franchise whose success is based on being the lowest-cost producer. That doesn't necessarily mean that all successful franchises cater to the silk-stocking trade, but it does mean that you need some clearly distinguishing, positive characteristics in the marketplace.

If you produce a superior product or service, it also has to be possible for you to control the quality of that product or service. Much of the appeal of a franchise system to consumers lies in the fact that, no matter where they go, if they patronize one of that system's franchises, they'll get the same quality of service and product they would get anywhere else. Unless your product or service is one that lends itself to that kind of standardization, you're going to have trouble franchising your concept.

If you have a good product, a good market and plenty of pizzazz, you need to look for some security. Specifically, you should have--or try to develop--a strong trademark. Most of the best franchises, such as Subway and ServiceMaster, have spent lots of time and money creating strong trademarks that convey a consistent and appropriate message about the product and the franchise. Of course, to be effective, any trademark you have has to be yours and yours alone--meaning it can't be too similar to ones other businesses are using. It also has to be one that is--or could be--registered for federal trademark protection.

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.