Franchising Your Business

Information Regarding Franchising Your Business

I. Why you should Franchise

You should franchise your business if you want to significantly expand it, that is if you want to grow your business to its optimum size and maximum profitability. Many great fortunes have been built on Franchising. This is done by Franchising a business concept, growing it to a level where it fits the profile for an IPO and then take the company public. The market can value your company at a level much greater than the gross sales and profits of the company can justify. If the market thinks your company has the potential for Great Growth, then the market will value your company and its stock highly and you can become richer than you ever dreamed possible.

II. Profile of a Franchisor

Not all businesses can be franchised but most business concepts can be. A profile for a franchise would be as follows:
a) Unique- New or unique concept that has the potential to expand Nationally and even Internationally.
b) Profitability- the concept must be consistently profitable and the degree of profitability should be predictable.
c) Systematized- all the operating systems of the concept should be very polished and efficient. These systems and procedures should be in manual form.
d) Training- It should be relatively easy to train others in the use of the Systems and Procedures.
e) Excellent margins- The profit margins built into the concept should be great enough that every franchisee who adheres to the system can realize an attractive Return on Investment. This ROI should exceed 20% before taxes.
f) Affordable- If the franchise is very expensive there will be few who can afford it. The ideal franchise investment is under $100,000, because there are hundreds of thousands of Americans who can afford an investment of this size.

III. The advantages of Franchising as a way to grow your Business

a) Capital is always scarce in growing a business. In franchising the capital needed to expand the business is provided by the Franchisee. It is the classic case of using OPM, or other peoples money.
b) Trained, motivated management is part and parcel of franchising. It is difficult to find and keep good experienced managers, who are so necessary to grow a business. With franchisees, you have people who are well trained in the franchise systems and who are also very motivated because their capital is at risk.
c) Efficient- Profitable, Franchise units tend to be better run, therefore more efficient and profitable than company owned units, for the simple reason that the Franchisees capital is at risk and they tend to be very motivated.
d) Rapid Expansion- Today's marketplace changes very quickly, often if you don't move quickly on expanding a concept, someone else will. The window of opportunity will close, and you just miss it. There is no other way to grow as rapidly as franchising allows.
e) Achieve optimum size- maximum profits are realized by getting very large. Because there are few impediments to growth through franchising, it offers the opportunity to have 1000's of units through out the world, and no other business expansion model can offer that.
f) Great buying power- The large number of units allowed by franchising enables the company to buy for the entire system and at great savings to the individual franchisees. This greatly enhances profit margins and gives the franchisees a very strong advantage over all competitors.
g) Securing locations- As a franchising system grows it begins to take on an image in the marketplace of size and success. Landlords like to have well known, successful Franchises in their shopping centers. It's simply much easier to secure great locations as a franchisor than it would be for a non-franchise business.
h) Market Dominance- Because franchises tend to grow rapidly, they tend to locate many units in a given market and essentially squeeze out the competition. A franchise can do extensive advertising in a given market because the cost are spread among many units. This combination of having many high profile locations with large advertising budgets is a competitive advantage that can't be overcome.
i) Development of advertising materials- Most franchisors require that the franchisees pay an ad royalty to the company. These monies are pooled to make top quality advertising materials for the franchisees. Again it's the advantage of spreading cost over a large number of franchisees, so that everyone benefits.
j) Maximum income- Franchises make money in a number of ways such as the following:

) - Franchise fee
) - Franchise royalties
) - Equipment sales
) - Supplies, materials sales
) - Sales of Services
) - Property Rental
) - Rebates from vendors of equipment and supplies.

All these income streams from large numbers of franchisees equals big money.
k) Get super rich- Franchise companies are high profile, grow quickly, and have the potential to get very large. These qualities make Franchise Companies very good candidates for being bought by a large conglomerate and for going public. Either of these two possibilities can yield millions of dollars to the owners of the franchise company.

IV. Alternate ways of growing a Business

a) Company owned units have certain advantages in that you get all the profit from the unit and you obviously have total control. However, there two severe limitations to company owned units:

) It takes too much capital.
) It's very difficult to find and keep good motivated managers.

b) Partnerships- Are very much like marriages, most of the time they just don't work out in the long term.
c) Joint Ventures- Very much like partnerships.
d) Dealers, distributorships, Sales Reps.- These methods of distribution will simply not fit many franchise concepts. These methods offer no control and little real influence over how your products/services are distributed.

V. Negatives of Franchising

a) Sales- All franchise companies are franchise sales driven in the beginning, this means you must have an effective franchise marketing program with very good sales people. Many variables can affect the franchise sales effort such as interest rates, banks willingness to make loans for your franchise, the condition of the national economy, competition, etc. In franchising, if you are not growing, you are dying. You have to have the franchise fee income to stay in business until you have enough franchise royalty income to reach your monthly break-even.
b) Loss of Control- Of course, when you own it then you control it, but in franchising, the franchisee controls his unit and to varying degrees runs it his way. It's here that the operating system comes into play. If you have a polished system which guarantees success if adhered to, then the control issue becomes less important. If the franchisee sticks to your systems, then it's very much as if you are operating the unit yourself. It's here also that the value of a tightly written franchise agreement comes into play. It's best to have a franchise agreement which allows the franchisee little latitude to vary from your system.
c) Managing Growth- This is a nice problem to have but it can be fatal. Franchising, by its very nature is a very fast way to expand a business, because there are few limits which inhibit growth. It's absolutely necessary to be slightly overstaffed at all times, in order that you always have the staff to serve your franchisees. This is the real key to successful franchising. Tremendous effort and resources should be focused on doing all that is possible to help the franchisees be successful.
d) Litigation- The biggest negatives in franchising are the conflicts between the franchisee and franchisor which are almost inevitable and worse still the litigations. As long as your franchisees are making money, everything is fine, but if they lose money, then conflict will arise and if you don't handle the situation well you could end up in court being accused of everything from not providing adequate training to misrepresentation and fraud. If it ends up in court, you will probably lose because our legal system creates a very uneven playing field for the franchisor in legal proceedings. It's the big business against the little guy. You don't want to end up in court. The way to avoid conflict and litigation is to do everything possible to support your franchises and make them successful. They simply must make money, each and every one.

VI. Steps to Franchising your Business

a) Registration- Your first step (if you haven't already done so) should be to register your Tradename and Trademarks with the U.S. Trade mark office. This is done through a Trademark attorney or through a Trademark registration company in Washington, D .C. You should also register your name and marks in all states that you do business in or intend to do business in.
b) Multiple Units- Assuming that you already have an operating unit, the next step would be to open a 2nd, 3rd, and even a 4th operating unit, if capital and time allows. The idea here is that you will learn important things about the types of locations suitable for your business (a location profile). You should also learn more about your systems, procedures, and advertising. Also, you develop more credibility with franchise prospects, because you have a proven track record because you have been successful with 4 units as opposed to just one unit.
c) Systems Development- Develop very specific systems for every aspect of your business from site selection, lease negotiation, training, unit operations, hiring/firing, advertising, accounting, etc. This is what you are really selling as a franchisor. A total business system which ensures success. All the systems must be put in manual form so that they can be taught and referred to on an ongoing basis.
d) Training- A very strong training program must be developed for training the franchisees. This training information comes to a considerable extent from the employee training done at the unit level. The franchisee must be totally indoctrinated in your systems and procedures. Great emphasis must be placed on strict adherence to the system. It is here that the success of the franchise is created. Stick to the system, that is what franchising is all about.
e) UFOC- Develop the Uniform Franchise Offering Circular or UFOC. This is a document which contains a history of the company, background information on the owners and officers of the company, a breakdown of the required investment, financial statements for the last 3 years (audited), the franchise agreement, a listing of existing franchises, litigation history, and other information on the company. The Federal Trade Commission requires that this document be given to a franchise prospect at the first personal meeting or at least ten days prior to the signing of the franchise agreement and the payment of the franchise fee.
f) Ongoing support program- The key to success in franchising lies in making each franchise profitable. It is incumbent upon the franchisor to do all possible to make that happen. There should be ongoing research and development to find new ways to help the franchise become more profitable. A newsletter should go out monthly with news about the company, the franchisees, and information which increases profitability. There should be periodic regional trainings held to reinforce use of the various franchise systems. These should be at no cost to the franchisee. An annual convention should be held at an attractive site like Florida or Hawaii. The convention should be a time for the franchisees to have fun, outstanding franchisees should be recognized with awards, and there should be educational breakout sessions.
g) Franchise Marketing Program- There are two critical parts to being a franchisor;

1st- Selling the franchises in large numbers and,
2nd- Supporting the franchises and ensuring profitability.

But, of course, nothing happens until the franchises are sold. There are many ways to sell franchises and you have to quickly find a marketing system that produces new franchisees at the rate that fits your projections. As part of franchise marketing, you have to create a full color franchise sales brochure and a franchise sales video. In the beginning, you sell the franchises but eventually you must hire a sales staff if you want to get big. Most of the foregoing must be in place before you sell the first franchise, but other things will develop as you grow. Becoming a franchisor can be a rather difficult and expensive process. Cost can run from $50,000 up to over $200,000, depending on variables. You will need help in the form of an accounting firm experienced in franchising, a franchise attorney, and a good franchise consultant. The franchise consultant can actually save you money.

Taking the logical steps to franchising your business will make the difference.

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