Can Your Business Be Franchised?
In their book Franchise Bible: How to Buy a Franchise or Franchise Your Own Business, authors Erwin J. Keup and Peter E. Keup detail both the basics and the finer points of this popular means of expanding a business. In this edited excerpt, the authors describe how to determine if your business would benefit from franchising.
Can your business be franchised? If you have a successful business that is susceptible to a regional or national system of marketing and you don't want to share control or risk the personality conflicts that come with bringing in investors, then franchising may be your best course of action. To help you determine if your business could be franchised, review some of the qualifiers and considerations described below.
First, evaluate yourself as a potential franchisor. Someone who might successfully operate a business that is susceptible to franchising may not be cut out to be a franchisor. Remember that franchising is more than the business of selling services or products. In addition, you will be an educator, trainer, psychologist, minister, and perpetual hand-holder to your franchisees. You will also be a fee collector, extracting an initial fee for the franchisee to begin business and then collecting royalties for the life of the franchise.
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Always remember to allow your individual franchisees the flexibility to manage their own businesses and always treat them as independent business owners, not employees. It is important you carefully set forth the guidelines of this independent contractor relationship in the initial contract, the disclosure document, and all communications to franchisees.
Don't consider franchising your business unless you have a known, local market for your product or service. Marketability is determined by need, and need is determined by competition.
For example, if you are running a hamburger stand, your chances of finding a market for your franchise and a market for your franchisees are relatively small in today's business community.
However, if you have a unique way of running a hamburger stand, it is entirely possible to franchise it. Take the Wendy's operation, which gained steam by introducing in-line burger preparation, rather than the traditional method of preparing hamburgers and setting them on a warming tray until someone places an order. Wendy's catered to consumers who wanted to see their hamburgers made to order right before their eyes.
Demand is the crucial force here. It is just as important as uniqueness. Your unique product or service must be desired not only by the people who wish to buy franchises from you, but also by the people who will buy products or services from the franchisees.
If your product or service is relatively new and not extensively offered by anyone else but is in demand, you first must determine where your products or services would sell, based on needs similar to those of your present customers. For example, a new type of thermal underwear wouldn't go over well with Palm Springs, Calif., residents, but a successful gas-saving device might take hold anywhere in the world.
If your product or service isn't relatively new, you can retain market research firms to prepare reports on the types of consumers in various regions, or do your own research at a library reference department and by searching on the Internet. Interview existing franchisors and franchisees for their insights.
Government agencies can also provide demographic information and market research data. The U.S. Department of Commerce, Bureau of Economic Analysis, and the U.S. Department of Labor, Bureau of Labor Statistics have conducted extensive studies on the regional consumer habits. Search for "consumer habits" on these government websites.
If your product or service is unique or in demand, capture this uniqueness through the use of a trademark, for a product, or service mark, for services, so that the public associates your product with a particular trademark. Apply for a registered mark as soon as possible, before the first franchise agreement is negotiated and consummated. Determine that no other entity has already secured the registered rights of your particular trademark or service mark. You can do so for less than $600 by contacting one of many trademark search firms.
Before you launch your franchising plan, prepare a thorough business plan so you can look at the financial outlay each new outlet will require to get up and running; then compare that with the revenue you can expect to receive from fees, royalties, and sales. Include costs that are specific to franchising, such as overhead costs such as salaries and benefits for yourself and head office employees, trainers and sales staff; as well as rent, office equipment, car allowances, and travel. Include the cost of finding franchisees -- ads, traveling to franchise shows, preparing brochures and videos, and entertaining. Add a healthy allowance for startup and ongoing legal, accounting, and advertising fees.
Be overly conservative on the timing and income you expect from your franchise outlets. You will have determined the mixture of franchise fees, royalties, and product sales that will bring you income from your franchisees. Pad your expectations of when these revenues will flow back to you, instead of basing your predictions on how your business worked in the past.
This article is an excerpt from Franchise Bible: How to Buy a Franchise or Franchise Your Own Business available from Entrepreneur Press.
The late Erwin J. Keup, author of the prior six editions of the Franchise Bible, was an attorney specializing in franchise law, franchise consulting, and general corporate law. His son, Peter Keup, is an attorney based in Columbia, S.C., and on the adjunct faculty, College of Educational Leadership and Policy Program, University of South Carolina. They are the co-authors of Franchise Bible, Seventh Edition, published by Entrepreneur Press in 2012.