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.
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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.