Posted: October 6, 2015
Franchising can be an effective method of growing your business and reaching a broad market, for the right type of business at the right time. There have been countless major success stories in franchising over the last 5 or 6 decades. However, there are also many businesses that are not suitable to this method of expansion, and still others which would be prudent to wait for the right timing to enter into the world of franchising. The laws designed to protect franchisees have developed significantly in recent years and as a result, setting up a franchise system is more costly than ever before. However, the initial investment can be well worth it for the right business.
So how do you know whether franchising is right for you? A prospective franchisee is prepared to pay royalties or other fees rather than starting up his own business for a number of reasons: 1) brand or name recognition has already been developed by the franchisor; 2) the franchisor has developed a system for operating the business which has shown itself to be successful in the past; 3) the franchisor can provide training and ongoing support to the franchisee; and 4) the franchisor can provide advertising and marketing support.
Some of the most significant factors to consider in deciding whether to franchise are as follows:
Brand Recognition - Eager business owners who are ready to expand may often do well to be patient and wait until they have developed sufficient consumer awareness of the brand. It is also crucial to take steps to ensure that your trademarks are protected and will be available in other jurisdictions. If you are using a name which is not going to be available in other provinces or countries, it may be a good idea to consider changing the name at the early stages of development of your brand.
Comprehensive System - In order to be franchisable, your business must have developed detailed business operations systems which can be documented in a manner that is easy for a franchisee to follow. These details should be set out in an operations manual, which is kept highly confidential, for use only by those who have purchased franchise rights. The manual should be as detailed as possible. For instance, in a typical fast food franchise system, the manual might contain details with respect to numbers of employees, employee roles, food ordering specifications, detailed supply specifications (such as types of cups, napkins, etc.), recipes, cleaning standards, marketing strategies and other such details.
Competitive Advantage - In order to sell franchise units, you will need to be able to differentiate your business from similar businesses in the marketplace. Product differentiation, unique marketing strategies, different target markets and specialized inventory pricing are some examples of items that might set your business apart. You should also be aware of the current trends and whether the market is being flooded with similar businesses or will face challenges as technology develops.
Training and Support Services - Franchisees will be more successful and will be able to maintain consistency from location to location if you provide detailed training and ongoing support. If your business requires complex training that cannot be completed within a few weeks, it will be much more difficult to find the right franchisees to make it a success.
Demonstrated Success - Most franchisors will have operated several locations on their own before attempting to sell franchise rights to others. Franchisees are looking to reduce their risk in entering into a new business venture (although you must be extremely clear that there is always inherent risk). As a business owner, you will likely understand that success is not achieved without some trial and error, and franchisees are looking for a franchisor that has already gone through much of the trial and error process.
Return on Investment - As a franchisor, you should NOT make any projections as to earnings potential when speaking with prospective franchisees, until you have obtained proper legal advice. However, your success will depend upon the success of your franchisees, and you should ensure that royalties and other costs can be set at an amount which provides the franchisee with the opportunity to make a reasonably good return on his investment, while still ensuring that you are charging enough to support and continue to grow your franchise system. A franchise consultant can be extremely helpful in conducting this analysis.
Management of Franchise System - Prior to venturing into the world of franchising, you will have spent your time focusing on the day-to-day operation of your business. Franchising is a business in and of itself and you will need adequate personnel to handle all of the new roles which it entails, such as franchise marketing, finding the right locations and dealing with lease negotiations, franchise sales, ad fund management, training, compliance with disclosure and legal issues and multi-unit operations management.
Cost - Setting up and maintaining a franchise system is costly. Initial legal fees can range from $15,000 for the most basic system to $50,000 or more for more complex systems. Development costs (development of plans, consultant fees, brochures, operations manuals, etc.) can range from $25,000 to $100,000 or more. Franchise marketing costs and personnel costs should also be considered. It is not unusual for a franchisor to spend $100,000 to $250,000 to get a system in place. You will also have ongoing costs to consider, such as the costs of added personnel to do training and support, sales personnel and legal costs as franchises are sold and disclosure documents require updating.
A lawyer experienced in franchising and a franchise business consultant can be extremely helpful in assisting you to determine whether your business is franchisable and whether the time is right for setting up a franchise system.
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