Understanding the Basics of Franchising Your Business Is franchising right for you? Unlock your business's potential and learn where to start.
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Do you think your business is unique? Are your friends, family and, more importantly, your customers telling you every day that you should franchise your business? They may be right.
But are you sure you really know what franchising is all about? How does one go about franchising? What does it cost? And do you have the skills necessary to become a successful franchisor? While franchising is not the right strategy for everyone, for some companies the explosive potential that franchising affords is unparalleled in the world of business growth.
How does franchising work?
Generally speaking, franchising means opening additional outlets through the sale of business rights to independent investors (franchisees). A franchisee pays a franchisor an initial franchise fee for the rights to open and operate a business under the franchise trademark and for training in how to operate the business. In some cases, the fee may also cover additional services such as assistance with site selection.
In most systems, after the startup period, franchisees also pay an ongoing periodic royalty fee, averaging from 4% to 10% of sales, for continued support and training in advertising, marketing, sales, operational guidance, financial and human resources consulting and other services.
Perhaps most important from your perspective, as the franchisor, is that a franchisee furnishes all of the capital required to start the business, and assumes all risk for success or failure.
What would traditional expansion entail?
Franchising has many attractive features, particularly when compared with more traditional methods of expansion, such as opening more outlets on your own.
In traditional expansion, you will:
- Own and operate company stores yourself.
- Provide the entire investment for the startup.
- Be responsible for all profits, risks and losses.
- Preserve the values of your business exactly how you see fit.
- Be responsible for continuous capital and time needed.
But if you want to expand more quickly and get ahead of a competitive curve, traditional expansion may not be the best way to expand.
- Issues with capital. If you have only one or two units operating, or your concept is new or unusual, bankers may not be willing to lend you money for aggressive expansion. Lenders need collateral or a history of demonstrated success over time and across markets in order to risk a loan with you. For a young or unproven business, this may be impossible to overcome.
- Issues with running company stores. Does your current organization have sufficient depth to handle the hiring, training and supervision of a number of employees who will be handling your money and your reputation? How will you operate stores at a distance? Opening company stores can be slow and you can't be everywhere at once. You could hire someone to help, but are they loyal to you, or could a competitor poach them?
For all of these reasons, more and more entrepreneurs are finding that franchising is the best way to expand a great business quickly with minimal capital and risk.
Advantages of franchising
Franchising offers a number of advantages worth considering:
- You expand using someone else's (the franchisee's) money.
- Franchisees are responsible for all hiring, leases and unit-opening expenses, reducing your risk.
- Franchises can open quickly, often getting a new concept out ahead of the competition.
- A franchisee assumes the risk of succeeding or failing.
- Franchise owners are highly motivated operators.
What to consider if you will franchise your business?
Before making the decision to franchise, you must first determine whether franchising is a viable strategy for your particular business. Here are some questions to ask yourself, and if you answer yes, franchising may be right for you:
- Is there a wide market for your concept? Many entrepreneurs "just know" they have a hot, new concept and they act on their convictions. But unless you have opened several prototypes in a variety of markets to test those convictions, it is important to ask yourself candidly whether or not your concept will work in other locations under other owners.
- Do you have a point of differentiation? It doesn't have to be something no one has ever seen before, but it must have something about it that is unique and that will attract the public and investors.
- Can the concept be duplicated? You'll need to assess how difficult or easy it will be to train inexperienced franchisees to run an operation like yours. Keep in mind that you will need streamlined processes and determine if your concept can be replicated in other locations.
- Is your concept sellable? Investors must see the value of your offering and be willing to commit to it, or else you won't get franchisees. You might have to offer a program with real advantages for the potential franchise owner to set yourself apart.
Getting started as a franchisor
Developing a franchise program does require an investment of time and funds, but the cost of the services of professional advisors to get you going the right way is often less than the cost of opening one additional company store. Let's take a look at the elements of a good franchise program:
- The prototype. While it's not a legal requirement, it is the best possible illustration that you have something of value to offer. There's nothing like a successful prototype to show your prospects something they can experience and appreciate first-hand. A successful prototype is a real-life example of the possibilities of your business. But beyond a demonstration of the viability of your concept, an original location can also become a live training center for future new franchisees and a testing laboratory for new products, services or techniques.
- Documented systems. A direct offshoot of a functioning prototype is the documentation of how the business operates, which will be the procedural textbook for training new franchisees. A valuable document should cover everything from startup activities to marketing, office procedures and personnel management. Illustrations, tables, and lists help make this kind of information lively and accessible. You may do this yourself, or you can work with consultants and attorneys to ensure you stick to legal requirements and industry standards.
- A protected trademark. A trademark represents the brand. Failure to protect a trademark is a typical mistake made by new franchisors, so the first task is to develop a name that can be protected. Securing a registered trademark is an easy, but tedious, process that can often take a year or more to complete. But while many companies will begin franchising before their trademark is fully registered, you will certainly want to have at least begun the process. You'll want to find an experienced trademark or intellectual property attorney to do the recommended search and application process for you. And until you are awarded the coveted R symbol, you can use the TM symbol to let the world know that you are protecting your mark.
- Marketing materials. You will also need to develop the marketing tools that will help you sell your franchise opportunity. You will want to engage a franchise development consultant who has experience designing the powerful sales tools necessary to put your business in the best possible light. These tools will most likely include a franchise brochure, videos and training on franchise sales techniques.
- A marketing plan. A marketing plan will optimize your franchise advertising budget, and ensure that you will generate enough leads to meet your franchise sales goals. With hundreds of websites and publications targeting franchise prospects, you will need to spend your money wisely and carefully track the results of each medium to see what works for you. And as with many aspects of franchising, it may be smart to work with a professional.
- The Franchise Disclosure Document (FDD). Franchising starts with the development of the FDD, which must be prepared according to strict guidelines. It will outline your offering, your business history and the resumes of your principal officers. It will also report your financial preparation for franchising. The FDD needs to be submitted and approved by the various states that regulate franchising before you ever even speak to anyone about your program. Because of the importance and lasting effects of franchising, you will want to work with an attorney who specializes in franchise law.
- A business plan. It is recommended that new franchisors prepare a detailed business plan with the assistance of a professional franchise consultant. Your plan should include a realistic financial analysis that will test a variety of options for fees, royalties, territory size, organizational structure and growth options before these details are finalized.
Selling your system
Once you have the basics in place, it's time to take your concept to the franchise marketplace. A compelling franchise offering will be able to inspire and excite your target audience. At the minimum, get trained in franchise sales and the legal regulations involved. You should also consider delegating franchise sales to someone with franchise sales experience.
Avoid accidental franchises
It is important to remember that regardless of what someone may wish to call a business relationship – distributorship, joint venture or business opportunity – the Federal Trade Commission will tell you that if it walks like a duck and quacks like a duck, it is a duck, and therefore it is subject to regulation as a franchise. Failure to observe federal and state franchise regulations can subject you to severe fines and even felony convictions. And infractions must be reported in your disclosure documents for 10 years, which can seriously hamper your future franchise sales.
More than one entrepreneur has fallen into the trap of becoming an accidental franchisor and rued the day. So if your plans include expansion in any way through third-party investors, you are strongly advised to engage the services of an attorney experienced in franchise law.
Good luck on your franchising journey!
When you decide to franchise, you will soon realize that you have added a second career to your current one. You are now not only a restaurateur, remodeler or retailer. You are now also a franchise executive, and you have a whole new job description. You take on the responsibility for the care and feeding of your franchisees. They are entitled to your guidance, training, encouragement and a raft of services including things like ongoing advertising support, access to approved suppliers with purchasing discounts and a variety of backroom services.
Franchising isn't for the faint of heart, but it is for confident, knowledgeable business owners who passionately believe in their concepts and want to show others how to duplicate their success. Virtually every franchise system started with just one store or shop. Through dedication, perseverance and professional guidance, many have grown to 10, 100, and 1,000 units – and more! Will you decide to follow their example?
Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.