Franchising Your Business
“Franchising Your Business”
Franchising can be a good way to expand your company quickly and with relatively low costs. Learn the steps for successfully converting your business to a franchise. This Quick-Read Solution is an abbreviated version of the Business Builder “How to Franchise Your Business.”
Franchise revenues in the U.S. in 2001 were about $625 billion ("Economic Impact of Franchised Businesses," International Franchise Association / PriceWaterhouseCoopers, 2004). Any business that operates from an efficient, proven system may be a candidate to franchise its name and systems to expand its brand image and revenues. Many people today want to start their own businesses and see the advantages of buying into a proven system. To franchise a company involves 13 distinct steps including creating trademarks, developing documents, creating a marketing strategy, and helping franchisees begin operation.
In this Quick-Read you will learn:
- How to determine if your company can be successfully converted to a franchise.
- How to establish the legal requirements to create a franchise.
- How to create the systems necessary to attract franchisees.
- How to ensure franchisees operate the business in accordance with your program.
Although the term "franchise" brings to mind giants, such as McDonald’s and Midas Muffler, the concept today encompasses a larger scope of businesses, including retail and service operations. Any business that operates using a proven, successful, and potentially transferable system is a good candidate for franchising.
Franchising offers the franchiser a variety of advantages.
- Rapid, low-cost market expansion because the franchisee provides most of the capital investment.
- New revenue streams through the one-time franchise fee and a percentage of each unit’s gross profit.
- Improved systems as franchisees identify and report new opportunities.
- More advertising power because of the combined resources of all units.
These disadvantages also must be considered.
- Early lack of cash flow because of low profits during the early operation of franchises.
- Need for close supervision of first franchises to ensure future success and creating a proven track record for others to examine.
- High legal expenses for franchising in multiple states because of different legal requirements.
- Franchise failures often result in expensive legal disputes.
Is your business a good candidate for franchising?
Determining if your business is a strong candidate for franchising requires close marketing research and a strong desire to expand. A good candidate for franchise:
- Offers a good, distinctive product or service.
- Returns good revenues even in bad times.
- Provides a system that can be taught to others easily.
- Involves reasonable startup costs in proportion to the risk required.
Thirteen steps to franchising
Creating a successful model on which to franchise your business involves 13 key steps. Each business will have to adjust these steps to the idiosyncrasies of the particular industry and services involved. Some of the steps require a significant time commitment and can be performed simultaneously.
- Develop a franchise business plan. You will need to adapt your existing business plan to create a separate one that outlines franchising requirements. It should include:
- A review of where you are and how you got there.
- A review of current products and services.
- An analysis of the current market and assumptions about its future, including competition.
- A vision of where the company will be in five years created in one-year increments.
- A description of how your organization will change as your business grows.
- A projection of financial expectations for each of the five years.
- Register your trademark or service mark to protect against infringement as well as to assure that you are not infringing on an existing mark. A trademark search firm can ensure your mark is available, or you can file a trademark application with the U.S. Patent & Trademark Office, which will reveal any conflicts.
- Prepare information for your legal documents. The more information you prepare before retaining and consulting with a franchise attorney, the faster the process will go — and the lower your consulting expenses will be. This preparatory information should include:
- Background information about your business and its primary officers.
- Expected initial and monthly franchise fees and royalties (determined from existing franchises in a similar field to yours).
- Typical maximum and minimum estimated startup fees.
- Promotion and advertisement requirements.
- Obligation to purchase equipment supplies from recommended suppliers. (Be sure your suppliers can handle this additional volume.)
- Retain an experienced franchise attorney. This professional will ensure your business is properly registered and your contracts with franchisees will yield trusting, successful relationships.
- Develop your franchise documents. Your attorney will use the prepared information and your input to create two documents:
- A Uniform Franchise Offering Circular, which provides written disclosures to be presented to a potential franchisee.
- A Franchise Agreement, which defines the terms of the franchise agreement for a specified period of time.
- Establish a consistent look and presentation. A business’s visual appearance is its face to the world, and it must be solidified and uniform. Corporate logos and store decor and layout must be consistent and professional both to attract customers and to reassure potential franchisees that they are investing in a top-quality system.
- Plan your advertising strategy. This should include both local and regional franchises. You can either develop the plan yourself based on experience with your business or hire an agency. Mutual benefits will accrue through volume discounts when all franchisees join with you to maximize your marketing and advertising expenditures.
- Standardize and document your operating procedures. How you do business is one of the keys to your success, along with your distinctive products and services. Standardized operation procedures convince potential franchisees that your approach offers them value they could not receive by starting a competing business on their own.
These procedures serve as your operations manual. Two manuals should be created. One outlines the procedures needed to prepare and deliver the product or service. The second covers staff systems, such as bookkeeping, accounting, advertising and employee hiring.
You’ll find useful tips in the Quick-Read "How to Write an Operations Manual."
- Develop a comprehensive training program. The operations manuals serve as the basis for developing training programs. Experienced individuals in your organization who currently train employees can help create these programs.
- Develop a team to open new franchises. This team will spend one to two weeks on the road opening each new store, providing experienced guidance and stability for the new staff during the store opening.
When the franchise offering first begins, these individuals will need to have other responsibilities in the organization because there won’t be enough to keep them fully occupied. As the number of franchise openings increases, additional teams may be needed, on an occasional and finally full-time basis.
- Market your franchises. A plan to promote the availability of your franchise is needed to alert those looking for franchise opportunities. This plan may be as simple as advertising in trade magazines and attending franchise trade shows with marketing literature, such as brochures. The success of existing franchisees will be one of your greatest marketing tools, so be selective in choosing the first few franchises.
- Help franchisees with site selection. Location is critical to most businesses, so you or your agent must help select the appropriate site. Develop criteria and a site-selection approval form to help the franchisee determine what qualifies as a good location. You may be interested in Quick-Read "Choosing the Right Location for Your Business."
- Support and monitor your franchisees. You must maintain ongoing communication with your franchisees and stay informed of any problems or opportunities. Develop a program focused on continuous improvement that involves them in finding ways to streamline your processes and improve your products and services.
Be judicious but firm when dealing with franchise owners who seek more independence. They are operating your system — one they paid to run — and you have a legal right to insist on a level of quality and implementation of procedures necessary to enhance the good reputation of your overall business and trademark.
REAL-LIFE EXAMPLE [top]
Linda Faircloth, CRS, GRI of Coldwell Banker Triad Realtors in High Point, N.C., considers the value she gained from joining a real-estate franchise operation to be a key reason why she has been named one of the country’s Top Producers by the Women’s Council of Realtors, a division of the National Association of Realtors. "The franchise name gives me great recognition and reliability, which is critical in real estate," she says. "You have to make a personal bond, but you also have to have a basis for that trust to develop, and the Coldwell Banker name gives me that."
The franchise format allows her to retain her original company name as part of the umbrella name. This gives her the best of both worlds by allowing her to build her own "name brand" to supplement the franchise name. "Our area is growing very fast, with an influx of new home buyers," she explains. "They recognize the Coldwell Banker name and are attracted to it. Whereas the people who have been here for awhile recognize my Triad company." The franchise system also generates new business because franchisees in other regions refer their clients to her when the client is relocating and needs information or an agent in the new city. This brings in business she would not reach without the franchise tie.
For a real-estate agency to be accepted as a franchise requires several steps. Following an application, the franchiser examines the market to determine both if there is enough sales activity to warrant a franchise and that there aren’t too many existing franchises already in place. It also asks for information on the agent’s standing with the state board of real-estate agents as well as the company’s business plan and financial statement. (Some require as much as two years’ worth of funding to be available based on the franchise’s own equation for costs to support a business.) With these in place, it performs a background and credit check and verifies sales records before awarding the franchise.
DO IT [top]
- Examine your company’s image in logos, layout, packaging or other appropriate elements to see if it expresses an image that would entice an investor to want to own a franchised outlet.
- Review your existing business plan or create one to determine how easily it can be converted into a franchise plan.
- Register your company’s trademark or service mark if you haven’t already done so.
- Consult with a franchise attorney to learn what specifics you should gather before meeting to create a franchise plan.
- Examine existing franchises in areas similar to your own to learn costs and requirements. Your local public or college library should have catalogs of franchisor descriptions for prospective franchisees to examine.
Franchise Bible: How to Buy a Franchise or Franchise Your Business, 4th edition, by Erwin J. Keup (Oasis, 2000).
Franchising & Licensing: Two Powerful Ways to Grow Your Business in Any Economy, 3rd edition, by Andrew J. Sherman (AMACOM, 2003).
Location, Location, Location: How to Select the Best Site for Your Business by Luigi Salvaneschi and Camille Akin (Oasis, 1996). Especially good on retail locations; Salvaneschi has directed location selection for thousands of McDonalds, Kentucky Fried Chicken, and Blockbuster franchises.
Franchise Cooperative Handbook by Robert L. Perry (International Franchise Association, 1998). Cooperatives are not-for-profit organizations often formed by franchisees to organize for group-discount purchasing and advertising. This book is essential reading for a franchisor who wants to sponsor a coop to encourage uniform product preparation and marketing practices. It may be ordered from the IFA.
International Franchise Association, 1350 New York Avenue, NW, Suite 900, Washington, D.C. 20005. 202/628-8000
How to Franchise Your Business (Edward Lowe Foundation Business Builder, 1996)
Information Regarding Franchising Your Business (FRANinfo, 2000)
"Franchise Site Evaluation Form," by Erwin J. Keup, from Franchise Bible. An excerpt from a book listed above.
Writer: Craig A. Shutt