Franchising to expand your brand and your business.
By: Jefferson Coulter, Esq.
At some point in time, every business owner considers expanding his business. One way to do so is to franchise; this article examines the benefits, barriers and cures to franchising your company.
In a franchise business model, the owner of a successful business, the franchisor, will allow another person, the franchisee, to open a similar business using the owner’s business model and trademarks, in exchange for payment, usually based on the second business’s income, to the original owner. McDonald’s Restaurants® are a well-known example of an American franchise.
Why Franchise?
The primary barrier to expansion that today’s entrepreneur faces is lack of capital. Franchising allows companies to expand without the risk of debt or the cost of equity. Franchising allows for expansion with minimal capital investment on the part of the franchisor because the franchisees provide the initial investment for each franchised location. In addition, since it’s the franchisee, and not the franchisor, who signs the lease and commits to various service contracts, franchising allows for expansion with virtually no contingent liability, thus greatly reducing a franchisor’s risk.
The second barrier to expansion is finding and retaining good people. Business owners often spend months identifying and training skilled managers only to see them leave or hired away by a competitor. Franchising allows entrepreneurs to overcome many of these problems by substituting a motivated franchisee for an employee. Because the franchisee is both invested in the franchise and in the profits of his or her location, profitability often is greater than in an employee-managed store location. Day-to-day monitoring of employees and operations at individual locations is left to the franchisee, freeing the franchisor from this responsibility. Also, since the franchisor’s income is based on the franchisee’s gross sales rather than profitability, the risks associated with increased employee and operating costs falls on the franchisee, rather than the franchisor.
Franchising is a rapid means of expansion because the franchisee does most of the work in exchange for the proven system of the franchisor. Franchising not only allows the franchisor financial leverage, but also allows him to leverage his resources.
Is Your Business a good candidate for Franchising?
Franchising can be used in a wide variety of businesses, once a few key things have been worked out.
- Goodwill. Does your company have a registered trademark? Good management? A proven concept? Do you have a good reputation in your community? Awards and recognition?
- Return on Investment. Will the business generate enough net profits after deducting operating costs (including the franchise fee) to make sense for a potential franchisee?
- Training. How long will it take to teach someone to learn to operate your business? Do you have documented systems and procedures?
If you said “yes” to these questions, then franchising your business might be right for you.
Business and Legal Requirements—putting it all together.
Planning to Grow: If you decide to franchise, you must establish a realistic plan for growth. Where will your franchise be in 5 years? How many units will you try to open per year? Do you have a good CPA? Marketing materials? A website? Business planning is important before you decide to expand through franchising.
Documentation and Registration: After you have decided to franchise, have worked out your plans, put together your team, and figured out how the margins of each store should work, it’s time to put together the legal documents. You will need a Uniform Franchise Disclosure Document and a Franchise Agreement. Additionally, about half of the states will require a state registration, which may require additional documentation.
System and Operations Manual: Your system will depend on how well you train your franchisees and how well you draft your operations manual. The manual should clearly address all of your systems, policies, and procedures. It should be the franchisees first and only stop for information on running the business and how you will enforce your quality control standards.
Franchising can allow a small business to expand internationally, through leveraging the power of smaller, dedicated entrepreneurs, all while delivering a respectable royalty to the owner. Does your business have the training program, profits and goodwill to make it successful as a franchise? Contact Axios Law Group to hear more about franchise opportunities for your business.
