If you're considering franchising your business, know that the process of becoming a franchisor is usually long and involves considerable cost.
Just because you qualify to sell franchises doesn't mean you will find buyers.
Becoming a successful new franchisor entails making many thoughtful decisions early on that will affect your business for years to come. There's also a lot of legal paperwork to wade through to make sure your business complies with federal and state laws that regulate the franchise industry.
Here's our guide to the important steps you'll need to take along the road to becoming a new franchisor.
Step One: Evaluate if Your Business is Ready
The first question to ask is whether your business is suited to being franchised. Beyond having a track record of sales and profitability at the existing business, there's several factors to weigh.
Consider your concept.
Most good franchise concepts, he says, offer something familiar, but with some unique twist to it. A good example is Florida-based Pizza Fusion which offers a familiar product--pizza--but with all-organic ingredients, delivered in hybrid-electric cars.
The concept has to appeal both to end consumers and to prospective franchisees. There should be an expectation that more units will create economies of scale and increase profits. Additionally, the business needs to be something you can systematize and replicate, not something that needs your personal touch to be successful.
"Ask youself, is the concept salable?" he says. "Can you clone it? Does it provide good returns?
Check your financials.
Most successful franchises take a business that's already profitable and try to replicate that success in other locales. Cleveland-based franchise consultant Joel Libava says he likes to see companies with at least a couple of profitable units
Gather market research.
Don't rely on your gut feeling that your business would be a smash hit across the country. Gather market research to confirm there is widespread consumer demand beyond your home city for what your franchise business would offer, and room in the marketplace for a new competitor.
Prepare for change.
Becoming a franchisor means you'll be engaged in entirely different activities than you were as a business owner. You'll primarily be selling franchises and supporting franchisees now, instead of selling pizza or fixing toilets.
"Ask yourself if you're comfortable having a role as a teacher and salesperson, selling and supporting franchisees," Siebert says, "as opposed to going out there and doing it yourself."
In addition, franchising your business will require that you relinquish some of the control you've had over how your concept is executed.
"Franchisees won't do it exactly the way you would, even if they do it well," says IFA president Matthew Shay. "If you are so married to your concept that you won't let anyone else touch it, then franchising may not be right for you."
Evaluate other alternatives.
Before you plunge into franchising, you may want to consider other options, Siebert says. Depending on your situation slower growth, finding debt financing or taking on partners are all alternatives that may prove better ways to move forward.
It also can cost $100,000 or more, so ask yourself if your company has the financial resources. Remember that while franchising allows you to grow fast, it also means giving up most of the franchise units' future profits.
Step Two: Learn the Legal Requirements
In order to legally sell franchises anywhere in the
, your business must complete and
successfully register a Franchise
Disclosure Document with
the Federal Trade Commission .
In the FDD, you'll be asked to provide a wide range of information about your
business, including audited financial statements, an operating manual for
franchisees, and descriptions of the management team's business experience. United
Beyond the federal FDD requirements, some states have their own rules for selling franchises within their borders. California and Illinois are generally regarded as having the most daunting registration process, says Libava. If you want to sell in one of these states, you'll need to meet their requirements as well, at additional cost.
It took the bargain-fashion-accessory company a full year and cost more than $100,000 to qualify in 45 of the 50 states, she reports.
"It took longer than we thought, and was very intense in terms of all the things you have to cover," she says.
To advise and assist in this process hiring an experienced franchise consultant or franchise attorney. Often, a new company will be set up to act as the franchisor. Find an expert who can make sure you're doing every required step correctly.
Step Three: Make Important Decisions About Your Model
As you prepare your legal paperwork, you'll need to make many decisions about how you'll operate as a franchisor. Key points include:
· The franchise fee and royalty percentage
· The term of your franchise agreement
· The size territory you will award each franchisee
· What geographic area you are willing to offer franchises within
· The type and length of training program you will offer
· Whether franchisees must buy products or equipment from your company
· The business experience and net worth franchisees need
· How you will market the franchises
· Whether you want an owner-operator for each unit or area/master franchisees who will develop multiple units
Be careful to note whether geographic variables such as weather or local laws may affect franchisees' success. Territory size is important too, as too-large territories may have to be bought back later at a premium so they can be split up, notes IFA's Shay..
Inadequate training can leave your franchisees ill-equipped to implement your system successfully..
Step Four: Create Needed Paperwork and Register as a Franchisor
Once you've made the important decisions that shape how your franchise will operate, you're ready to complete your legal paperwork. When you submit it, be prepared for authorities to critique the document and possibly demand additional disclosures before they approve your application.
While the FTC essentially just files your FDD away, you'll need to wait state approval, May take months.
Step Five: Make Key Hires
As you prepare to become a franchisor, you'll usually need to add several staff members who will focus solely on helping franchisees.
Step Six: Sell Franchises
Now that you're in business as a franchisor, one of your most pressing activities will be to find franchisees and convince them to buy your concept To help stimulate interest, one company offers a $1,000 referral fee to anyone who sends the company a new franchisee.
Step Seven: Support Franchisees
As a franchisor, you'll have gone through a lot to reach this point. But here - at the point where you begin supporting your franchisee network - is where a chain ultimately succeeds or fails. Your training programs and other support efforts will create quality control making sure the brand provides a uniform experience no matter which unit customers visit. With the Internet, this has increasingly come to mean providing ongoing online learning modules for franchisees to use.
"If you're a restaurant operator and employ 20 people in a unit," he notes, "you have thousands of new employees going through the system every year. Without ongoing training, it's pretty easy to institutionalize wrong behaviors."
At the same time, you'll need to start marketing the growing chain to drive sales to franchisees. Many new franchisors underestimate how much this marketing and support effort will cost. Marketing encompasses everything from radio or print ads to uniforms, logos, fliers, and logo art on company vans.
"Trust that you're going to need a lot of money for marketing," he says.