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 United
States
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.
