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Franchising your business concept is a proven way to achieve rapid growth, but becoming a franchisor is not an automatic ticket to success, especially in today’s rapidly changing marketplace.
In January, for instance, three established franchisors filed for bankruptcy protection: Taco Del Mar Franchising Corp., Uno Restaurant Holdings Corp., and Daphne’s Greek Café. Still, many business owners dream of seeing their brand become a household name. When the right business concept is franchised effectively, it can be a great expansion strategy that doesn’t require a lot of up-front capital as growing through company-owned business locations.
If you’re considering franchising your business, 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 willing buyers to buy-into your concept. Data from the International Franchise Association shows that of the 105 companies that started selling franchises in 2008, more than 40 had not reported the sale of their first unit by the end of 2009.
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.
At the 2015 annual convention of the International Franchise Association a panel of franchise experts featuring Dave Hood (President of The iFranchise Group), Robert Stidham (President of Franchise Dynamics) and Scot Crain (Vice President of Franchise Relations at Franchisor Auntie Anne’s Soft Pretzels) discussed the best practices new franchisors should consider implementing).
The first steps are to determine if your business should franchise. The following outlines a seven step process to help you determine if franchising is the right business model to accurate the growth of your business.
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 your existing company, there’s several factors to weigh here, says Dave Hood, President of the national franchise-consulting firm iFranchise Group.
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 earth friendly consumers and to prospective franchisees that are seeking a business that does good while delivering a quailty product.
You should have an expectation that the more business units you have the economies of scale will lower your costs and increase profits. Additionally, the business needs to be something you can systematize and replicate, not something that needs customization like a personal touch to be successful.
“Ask youself, is the concept salable?” he says. “Can you clone it? Does it provide good returns? Can it deliver even better returns as you grow locations?
Check your Financials.
Most successful franchises take a business that’s already profitable and try to replicate that success in other locales. Robert Stidham, President of Franchise Dynamics the nation’s first full-service franchise sales outsourcing firm, says he likes to see companies with at least a couple of profitable units beyond the first one already in operation before a company tries franchising.
“Is it just one great oil change location and an incredible mechanic?” Stidham asks. “Or did you keep growing?”
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 sole proprietor. You’ll primarily be selling franchises and supporting franchisees now, instead of selling pizza or fixing cars.
“Ask yourself if you’re comfortable having a role as a teacher and salesperson, selling and supporting franchisees,” Crain 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 Stephen Caldeira, CFE. “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, Crain 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, Hood says.
Step Two: Learn the Legal Requirements
In order to legally sell franchises anywhere in the United States, your business must complete and successfully register a Franchise Disclosure Document (FDD) with the Federal Trade Commission . In the FDD, you’ll be asked to provide a wide range of information about your business, including audited financial statements, an operating manual for franchisees, and descriptions of the management team’s business experience.
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 Crain. If you want to sell in one of these states, you’ll need to meet their requirements as well, at additional cost.
Franchisor Cindy Deuser, 51, co-founder of five-year-old franchisor Lillians Shoppes, says the rule binder her home state of Minnesota provided was two inches thick. 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, Crain who leads franchise relations for Auntie Anne’s Soft Pretzels recommends 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
New franchisors don’t realize how much each of these decisions can affect their future profitability, says Stidham.
“If you’re thinking either 5 percent or 6 percent royalty, for instance, the difference doesn’t sound big,” he notes. “But five years later, when you have 100 franchises sold, and they each make $700,000 a year, that’s a $7 million annual mistake. And you’ve signed a 10-year contract.”
Lillians’ Deuser says she and her sister/partner Sue Olmscheid, 45, ran many business-model scenarios with their franchise attorney before settling on their $25,000 franchise fee, 7-1/2 percent royalty and 10-year contract term. They seem to have hit a winning formula–Lillians has grown to 32 shops in its first two years as a franchisor with its unique concept, in which stores are only open a few days a month.
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 Caldeira.
In the case of San Francisco Bay-area solar-panel installation franchisor Solar Universe, the company is selling franchises in concentric circles moving outward from its headquarters, mostly in warm-weather states with high electricity costs and generous state green-energy rebates, says founder Joe Bono, 36. Solar Universe has sold 14 territories since qualifying as a franchisor in January 2008.
Inadequate training can leave your franchisees ill-equipped to implement your system successfully. Solar Universe spent nearly $1 million preparing to franchise, Bono says, including $150,000 to create a state-of-the-art training center for franchisees complete with indoor roofs where they can practice installations.
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. Bono reports Solar Universe waited several months to receive comments back from the state of California on its filing, and it took four months in all to get approved there.
As you prepare to become a franchisor, you’ll usually need to add several staff members who will focus solely on helping franchisees. In the case of Solar Universe, the company sells its franchisees the solar panels they use, so founder Bono says he needed a full-time hire to staff the order desk. The company also hired a trainer and a full-time “franchise advocate” to answer franchisee questions and resolve any problems.
For its part, Lillians Shoppes hired a trainer, a creative director, a marketing assistant and a franchise-process manager who helped get franchisees using company software and systems, says CEO Deuser. Lillians now has a full-time staff of seven. The founding sisters still do all the buying for the growing chain, but Deuser says growth means they are already looking into hiring a second trainer.
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.
According to Crain, there are a host of business planning topics that many new franchisors don’t evaluate thoroughly enough:
- What are the characteristics I need to look for in a prospective franchisee?
- What types of franchises should I award?
- Where should I sell franchises?
- What fees should I charge?
- What gaps exist in the franchisor company that I need to fill?
- How much capital do I need in order to properly launch and support the franchise program?
Lillians is unusual in that the company has sold all its franchises by word of mouth and doesn’t have a sales representative. To help stimulate interest, the company offers a $1,000 referral fee to anyone who sends the company a new franchisee.
At Solar Universe, Bono says they’ve hired two in-house salespeople to handle franchise marketing. The company has also entered into a partnership with the national franchise-consulting chain FranNet, whose consultants may present the company to their prospects. Other common sales techniques include attending franchise fairs or hiring independent franchise marketing firms to help locate investors.
Selling franchises is difficult because of the high risk involved for franchisees, notes Siebert. Your salespeople should know your business well and be able to tell a compelling story about why you’re a worth the investment of their time and money.
Siebert boils down the issue this way: “You’re saying, ‘I want you to give me all your money. Then, quit your job, give up your security and benefits, and go into a business you’ve never been in before. And follow my rules.’ You’ll need to establish a pretty high level of trust.”
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, notes Hood, 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, says Crain. 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 warns.
Highly successful Franchised business concepts do these 10 things:
- Develop a franchise sales plan
- Fully resource a lead generation marketing plan
- Dedicated sales team – there are often challenges to the CEO selling franchises
- Use franchise sales software to track and measure everything
- Focus on awarding franchises to the candidates they really want to work in that type of business
- Willing to ask really difficult questions – invites candidates to do the same
- Look for ‘values, personality and culture fit’ when adding personnel into their organizations
- Doesn’t fear saying ‘NO’!
- Doesn’t ‘live’ on the franchise fee…
- Ensure new franchisee is seeking the right long-term fit with the franchisor!
Special thanks to the Dave Hood (President of The iFranchise Group), Robert Stidham (President of Franchise Dynamics) and Scot Crain (Vice President of Franchise Relations at Franchisor Auntie Anne’s Soft Pretzels) for sharing their best practices for new franchisors with StartupNation and to the International Franchise Association’s invitation to attend their annual convention.