Business Advise
“Ask an Expert” Business Advice Column by Steve Strauss
Sponsored By:
“Franchisors”
May 2005
Q: I think I would like to franchise my business. Is this generally a good idea, and if so, how do I go about doing that?
Jim
A: There are definitely pros and cons to franchising a successful business. While the regulatory hoops you will have to jump though are not insignificant, the potential payoff can be huge.
The first question to answer is whether your business success can be easily duplicated by someone else. That is, if your success is based on your personal contacts or knowledge or charisma or whatever, your business would not likely lend itself to a franchise model as one key to franchise success is the ability to reduce your business success to an easy to learn, and follow, system.
Think McDonalds: That multi-billion dollar business is mostly run by teenage kids. That’s both remarkable, and a clue.
So if your business model can in fact be taught to someone else, then the advantages of franchising are numerous:
- You use OPM (Other People’s Money) to fuel your business growth.
- There is the potential to grow rapidly, and if you do, getting bought out or going public are distinct possibilities.
- You will have a dedicated, motivated management team given that they will largely be made up of entrepreneurs.
- You increase your economy of scale since the larger you grow, the less you will have to pay for goods and the more money you can make.
- You will have multiple profit centers: Franchise fees and royalties, fees for additional services rendered to franchisees, property rental and equipment sales, and so on.
There are downsides:
- You will lose some control of your business as your franchisees will demand a larger say in how the business proceeds.
- You will share the profits.
- You may not succeed. The failure rate for new franchises is significant.
- You will spend the early years focused mainly on sales of new franchises in order to establish the viability of your system and create revenue.
- And Number One, you will be sued. Franchisees who do not make money often resort to litigation.
If you conclude that you would in fact like to explore the possibility of franchising your business, there are several steps to take:
If you have not already, you better register your trade and service marks with the United States patent and Trademark Office (www.uspto.gov.) Pong was the first ever video game, but soon gave way to rivals because the name “Pong” was not trademarked in time. Once you become a franchisor, one of your most valuable assets will be your trademark, a la McDonald’s.
Next, you will want to open several more locations of your business to be run by your managers. This test-run will help you figure out what your system will need to teach potential franchisees, what locations work best, how to systematize success, and so forth.
Once you have your business model down, you will want to reduce it to a teachable system that includes everything a franchisee would need to know: Selling, advertising, accounting, legalities, and so on. In conjunction with this you will need to create an excellent training process that teaches your procedures and system. Ongoing training procedures must be created as well. As you will only be as successful as your franchisees, training is key.
Next, you will need a UFOC – a Uniform Franchising Offering Circular. Mandated by federal law, this prospectus explains to potential franchisees everything they need to know to make an informed decision about the franchise purchase. The UFOC must be given to prospective franchisees upon the first meeting or at least 10 days prior to the signing of the franchise contract.
Finally, you will need a franchise marketing plan in order to sell the franchise opportunity to possible franchisees. This will include a sales staff (preferably), videos, and brochures.
As you can imagine, becoming a franchisor is an expensive proposition. It can cost anywhere from $50,000 to a million dollars. You will need an experienced attorney, CPA, and franchise consultant to get started. Good luck.
Today’s tip: Ultimately, the success of your franchise will depend upon whether potential franchisees want to join your team. So what are they looking for?
- A franchisor with experience and know-how;
- A great brand;
- A chance for healthy profit;
- A successful, easy to understand formula for success;
- Ongoing support and training, and
- A sense of teamwork, as opposed to a dictatorial franchisor.
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