How to Franchise Your Business

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Digital Library > Building and Inspiring an Organization > Franchising"How to Franchise Your Business"

Any business that operates via a proven, successful, and potentially transferable system is a good candidate for franchising. Take a look at what is involved to decide if franchising would be the best way to protect your unique concept and grow your business. This is an expanded version of the Quick-Read Solution "Franchising Your Business."

WHAT TO EXPECT

No business is too small to avoid or ignore protecting itself from other businesses using its name, product, service or invention, and consequently, reaping the same benefits. There are ways to protect your business from copy cats, and this Business Builder will describe and explain each one: patents, copyrights and trademarks.

Professional assistance with any of the three processes is strongly recommended as the procedures for each are quite detailed and can, prove costly to your business if not followed completely and accurately.

WHAT YOU SHOULD KNOW BEFORE GETTING STARTED [top]

The term "franchise" often brings to mind giants in the fast-food industry such as McDonald's, Burger King and Wendy's. This association, although accurate, is by no means complete. Franchising today involves a much larger scope of businesses. In addition to the more popular fast-food restaurants, successful franchises range from retail businesses such as pet centers and sporting goods stores, to service organizations such as travel agencies and diet centers. Any business that operates via a proven, successful, and potentially transferable system is a good candidate for franchising.

Definition of Franchising

In general, franchising is a market-expansion method wherein a successful business (franchisor) enables independent operators (franchisees) to use its operating system, trademarks or service marks and marketing system to distribute its goods and services in exchange for franchise fees and royalties.

FRANCHISING ADVANTAGES [top]

The following paragraphs describe some the advantages associated with franchising a business:

  • Rapid, low-cost market expansion Since the franchisee provides most of the capital investment, you can rapidly expand your market at minimal cost.
  • Income from royalties In addition to a one time franchise fee, you will receive a percentage of the gross profit for each franchise unit.
  • Franchisee assumes management responsibility The franchisee has the responsibility of managing and operating each unit according to your prescribed system.
  • You retain control of the system As the franchisor, you retain control of how the franchise system operates. This means that you have the right to change the system in the interest of maintaining a consistent and successful method of delivering your goods or services. This control is established as part of the franchise agreements that will be discussed later.
  • Franchisee can help you improve your system. If the franchisee is encouraged to identify and report opportunities for improving the franchised system, then both parties benefit from a continuous improvement effort that will result in a streamlined system and increased profitability.
  • Combined resources result in greater advertising power. Together, the franchisor and franchisee can provide more advertising funds than either could provide alone. This results in mutually beneficial national and local advertising campaigns.

FRANCHISING DISADVANTAGES [top]

The following paragraphs describe some the disadvantages associated with franchising:

  • Early profits could be low. The profits from a new franchisee are typically low for the first year. However, if you've done your homework and you work closely with the franchisee to identify and implement opportunities for improving the operating system and marketing techniques, this situation could be easily overcome.
  • An early failure could be devastating. Your first franchises are the most critical with regard to future success. Most potential franchisees are influenced by the success of existing franchises rather than the success of your company owned stores. They are more interested your ability to sell and support a proven system than in your ability to run your own stores successfully. Because of this, an early franchise failure sends bad a signal to potential franchisees. Overcoming the possibility of early failure may require investing more initial capital and time than you had originally planned.
  • Franchising in multiple states means high legal expenses. Since each state has different laws regarding franchising, the cost of expanding to other states could be initially high due to attorney fees and filing costs. This disadvantage can be overcome by limiting your early franchise stores to a state or a region. As your operations expand, then you can begin to include neighboring states.

IS YOUR BUSINESS FRANCHISABLE? [top]

The following paragraphs describe some the criteria for determining whether a business is a good candidate for franchising. Using these criteria is not intended to be a substitute for good marketing research. It is intended to help you generally assess your business' potential for success in a franchise format. The more of these characteristics that your business meets, the better your chances for success.

  • You offer a good product or service. As with any business, it is very important that you offer a quality product or service.
  • A profitable prototype exists for your business It is important for your business to already be operating successfully with healthy profits. If your system is rough and you are barely surviving now, then franchising will probably not be a very lucrative venture. However, this should not deter you from future franchising plans. If you feel strongly that you have a franchisable concept, then continue to work on improving your system and increasing your profitability.
  • Your business works well in bad times Don't judge the success of your business on good times alone. If you have been in business long enough to survive some the traditional down times for your industry, then chances for franchise success is stronger.
  • People have inquired about buying a franchise When people who are familiar with your business are so impressed with your products or services that they are interested in purchasing a franchise, it is a good indication that you have a franchisable system.
  • The system can easily be taught to others Your system should be simple enough to be taught to the right people without a great deal of training or expense.
  • Estimated startup costs for a franchise are reasonable. The cost of starting a franchise should be proportional to the amount of risk perceived by the potential franchisee. A franchisee will be more willing to risk investing in a new franchise if the price is right.

The following table reviews the above criteria. Use it as a worksheet to help you assess your business' franchisability. If you are not sure how to answer some of the questions, then do some research to help you with your assessment.

CharacteristicYesNoNot SureDo you offer a good product or service?   Does a profitable prototype of your business exist?   Does your business work well in bad times?   Have people inquired about buying a franchise?   Can your business system be easily taught to others?   Are estimated startup costs for a franchise reasonable   

BASIC STEPS TO FRANCHISING YOUR BUSINESS [top]

The following paragraphs outline the basic steps you should follow once you have decided that franchising is a good way to grow your business. Since your business is unique, you should adjust these steps to meet your particular needs. These steps suggest a general order for the activities needed to begin the franchising process. Because the time required to complete some of these steps can be long, you should expect to perform some of them simultaneously.

STEP 1. Develop a franchise business plan.

As with any business venture, planning is a key ingredient to success. If you are already in business, you probably have a plan. Since franchising should be considered a business undertaking that is related to, but still separate from your current business, you should create a separate franchise business plan. We recommend a five-year plan. Your franchises business plan should not only define where you want to be in five years, but how you plan to get there.

We suggest the following information be included in your plan:

  • a review of where you are and how you got here
  • a review of your current product(s) or service(s)
  • an analysis of the current market and assumptions about the future market (include a review of competition)
  • a vision of where you want to be in five years
  • a description of where you plan to be in one year increments as you work to achieve your five-year vision
  • a description of how you want your organization to change as your business grows
  • a projection of your financial expectations for each year of the five-year plan

STEP 2. Register your trademark(s) or service mark(s).

It is important that you register your trademark(s) or service mark(s) if you haven't already done so. This will not only protect your products or services from infringement, it will also assure you that you are not infringing on existing trademarks or service marks. To be sure that no one has already registered a similar trademark or service mark, you should conduct a search. This can be accomplished through a trademark search firm. If you decide not to conduct a search, you can file a trademark application with the U.S. Patent and Trademark Office. Your application will be reviewed and any existing conflicts will be revealed. Once you have determined that you have a unique trademark, you will need to retain a trademark attorney to help you register it with the U.S. Patent Office.

STEP 3. Retain a franchise attorney.

It is important that you retain a franchise attorney to ensure that your franchise business is properly registered. Franchise attorneys specialize in providing the legal guidance you will need as you go forward.

STEP 4. Prepare information for your legal documents.

Before you sit down with a franchise attorney to begin developing the legal documents required for registration, you should do some homework. The more information you have prepared for the attorney, the more expedient the process should be. This could reduce your attorney's fees. There are several good resources that can help you prepare this information. One excellent resource is the Franchise Bible (Erwin J. Keup, Oasis Press, 1991).

There are two primary documents that you and your attorney will prepare. The first is the Uniform Franchise Offering Circular. The Offering Circular provides written disclosures to be presented to a potential franchisee. The second is the Franchise Agreement. The Franchise Agreement is a legal contract that defines the terms of the franchise agreement for a specified period of time.

The kind of information you will need to prepare includes the following:

  • Background information about your business and its primary officers — this information will be included in the Uniform Franchise Offering Circular.
  • Expected franchise fees and royalties — do some research to determine reasonable franchise fees and royalties for your type of business.
  • Typical high and low estimated startup fees — estimate the expected high and low startup fees for a typical franchise. The expenses you need to consider are leasehold improvements, inventory, equipment, signs, furnishings, rent, deposits (rental, telephone, electricity), insurance and working capital.
  • Promotion and advertisement obligations — determine the advertisement obligations that you will expect of your franchisees. Once again, do some research to help you determine this amount.
  • Obligation to purchase equipment supplies from recommended suppliers — consistency reduces process variations. Keeping process variation to a minimum is a critical element of franchise success. It is important that all the franchise owners are using the same equipment and supplies. Contact your suppliers to determine if they are capable of handling the kind of volume required to support your projected franchises. If they can't support you adequately, then alternative suppliers must be included.

STEP 5. Develop your franchise documents.

Work with your franchise attorney to develop the Uniform Franchise Offering Circular and the Franchise Agreement. If you have prepared the information described above in Step 4, then you will reduce the amount of time your attorney needs to put into developing the documents. The following is a typical outline for an Offering Circular. This Offering Circular is for the ABC company.

SECTION 1 ABC and Any PredecessorsSECTION 2 Persons Affiliated With the ABCSECTION 3 LitigationSECTION 4 BankruptcySECTION 5 Franchise Owner's Initial Franchise Fee or Other Initial PaymentSECTION 6 Other FeesSECTION 7 Franchise Owner's Initial InvestmentSECTION 8 Obligations of Franchise Owner to Purchase or Lease from Designated SourcesSECTION 9 Obligations of Franchise Owner to Purchase or Lease in Accordance with Specifications from Approved SuppliersSECTION 10Financing ArrangementsSECTION 11Obligations of ABC, Other Supervision, Assistance, or ServicesSECTION 12Exclusive Area or TerritorySECTION 13Trademarks, Service Marks, Trade Names, Logos, and Commercial SymbolsSECTION 14Patents and CopyrightsSECTION 15Obligation of the Franchise Owner to Participate in the Actual Operation of the Franchise BusinessSECTION 16Restrictions On Goods and Services Offered by Franchise OwnerSECTION 17Renewal, Termination, Repurchase, Modification and Assignment of the Franchise Agreement and Related InformationSECTION 18Arrangements With Public FiguresSECTION 19Actual, Average, Projected, or Forecasted Franchise Owner Sales, Profits, or EarningsSECTION 20Information Regarding Franchises of ABCSECTION 21Financial StatementSECTION 22ContractsSECTION 23Acknowledgment of Receipt by Prospective Franchise Owner

The following is an example of a Franchise Agreement outline for the same company:

SECTION 1 Grant of Franchise and Licensed RightsSECTION 2 Term and RenewalSECTION 3 PaymentsSECTION 4 Services by ABCSECTION 5 Limitations of Franchise and Licensed RightsSECTION 6 Establishment of UnitSECTION 7 Equipment and FurnishingsSECTION 8 OpeningSECTION 9 OperationsSECTION 10ABC Training ProgramSECTION 11Advertising and PromotionsSECTION 12Renovations of Store, Equipment and FurnishingsSECTION 13Hold Harmless: InsuranceSECTION 14Default: TerminationSECTION 15Assignment, Conditions and LimitationsSECTION 16Noncompetition: ConfidentialitySECTION 17NoticesSECTION 18Governing Law and VenueSECTION 19Remedies Cumulative, Waivers and ConsentsSECTION 20SeverabilitySECTION 21Entire AgreementSECTION 22Joint and Several ObligationSECTION 23Counterpart, Section Headings and PronounsSECTION 24AcknowledgmentsSECTION 25Effective Date

STEP 6. Professionalize your identity and establish a consistent look.

Success is often reflected in the visual appearance of your business. If your corporate logo is sloppy, or the design and layout of your stores are inconsistent, then a potential franchisee will be less interested in investing in one of your franchises. If you need to improve your corporate identity and establish a consistent look, now is the time to enlist the help of graphics and architectural design professionals. Start thinking of your franchise as a product that needs to be packaged correctly to compete in a very competitive market.

STEP 7. Plan your advertising strategy.

Plan an advertising strategy for local and regional franchises. You can either develop the plan yourself, or you can hire an advertising agency to help you. You and your franchisees will benefit mutually by combining your advertising efforts.

STEP 8. Standardize and document your operating procedures.

Your method of doing business is one of the keys to your success. It is this method of doing business along with your products or services that franchisees purchase when they agree to develop and operate your franchises. That is why it is critical that you have standardized operating procedures that are well documented. Your documented procedures will become your operations manuals.

We recommend dividing the information into two manuals. The first captures the procedures that you follow to prepare and deliver your product or service. The second manual should cover other operational procedures such as bookkeeping, accounting, advertising, employee hiring, and daily opening and closing. These manuals will serve as a basis for much of the training you will develop in the next step. Hiring a good free-lance technical writer or a reputable technical writing agency to develop these manuals will save you a great deal of time and agony. An excellent resource for recommending free-lance writers or a competent agency is the Society for Technical Communication (STC). The STC is an international association of professionals in the technical communications field. For more information, contact the STC main office at (703) 522-4114.

STEP 9. Develop a comprehensive program to train franchise managers and employees.

After you have developed your operations manual you can use it as a foundation for developing manager and employee training programs. Look within your current organizations for experienced individuals who currently train new employees. If you have trouble finding qualified people, you may want to consider hiring training professionals to help you develop and deliver your training program.

STEP 10. Develop a team for opening new franchise stores.

After you have established a good training program, you will need to develop a plan and establish a team for opening new franchise stores. The team should consist of highly trained and motivated individuals who are willing to spend one to two weeks on the road to opening each new store. This team will provide experienced guidance and stability for the new staff during the often chaotic process of a store opening. In the beginning, these individuals should have other responsibilities in your organization when they are not opening stores. As the number of franchise openings increases and the demands on the opening team increase, you may need to create additional teams.

STEP 11. Develop and implement a detailed plan to market your franchises.

You will need to develop and implement a plan to market your franchises. At first, this plan may be as simple as advertising in trade magazines and attending franchise trade shows. You should develop marketing literature such as brochures to help you with your marketing efforts. Since the success of existing franchises will be one of your greatest marketing tools, you should be very selective about who opens your first few franchises. Your success as a franchisor depends on their success as franchisees.

STEP 12. Help franchisees with site selection.

Location is very important to most businesses. Because of this, you or one of your agents should be heavily involved with selecting good locations for franchise stores. Develop site selection criteria and a site selection approval form to help the franchisee choose a good location.

STEP 13. Support and monitor your franchisees.

It is very important that you maintain a good relationship with your franchise owners at all times. Develop a continuous improvement program that involves them in the ongoing task of streamlining your processes and improving your products or services. Be judicious yet firm when dealing with franchise owners who seek more independence. Remember, it is your system and you have a legal right to insist on a level of quality that is necessary to enhance the good reputation of your business.

The following is a quick review of the 13 basic steps to franchising your business:

  • STEP 1. Develop a Franchise Business Plan.

  • STEP 2. Register your trademark(s) or service mark(s).

  • STEP 3. Retain a franchise attorney.

  • STEP 4. Prepare information for your legal documents.

  • STEP 5. Develop your franchise documents.

  • STEP 6. Professionalize your identity and establish a consistent look.

  • STEP 7. Plan your advertising strategy.

  • STEP 8. Standardize and document your operating procedures.

  • STEP 9. Develop a comprehensive program to train franchise managers and employees.

  • STEP 10. Develop a team for opening new franchise stores.

  • STEP 11. Develop and implement a detailed plan to market your franchises.

  • STEP 12. Help franchisees with site selection.

  • STEP 13. Support and monitor your franchisees.

GLOSSARY OF TERMS [top]

Franchise Agreement — A legal contract that defines the terms of the franchise agreement between the franchisee and the franchisor for a specified period of time.

Franchisee — An independent operator who agrees to pay a franchise fee and royalties to a successful business (franchisor) for the right to use its operating system, trademarks or service marks, and marketing system to distribute its goods and services.

Franchisor — A successful business that agrees to give an independent operator (franchisee) the right to use its operating system, trademarks or service marks, and marketing system to distribute its goods and services in exchange for a franchise fee and royalties.

Service Mark — A name that identifies a service offered to the public.

Trademark — A name that identifies a product offered to the public.

RESOURCES [top]

Other Sources

International Franchise Association

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