Running a franchise company is a completely different business than selling products or services directly to consumers.  As a franchisor, you sell the right to use your brand and system (i.e., the franchise) to franchisees who in turn sell products or services to consumers using your brand and system.  Many new franchisors are caught of guard by the change in business model once they take the leap to franchising.  As a successful franchisor, you have to balance the growth of the brand and the overall health of the franchise system with the needs and wants of franchisees—sometimes your objectives and franchisees’ objectives are aligned, and sometimes they are not.  The franchisors that survive and continue to expand are those that understand how to run a franchise system.

You will find a lot of guidance on running a franchise system as a franchisor on this blog and elsewhere on the Internet, as well as through industry associations, including the American Bar Association’s Forum on Franchising and the International Franchise Association.  We would also recommend that startup and emerging franchisors read a new book, Franchise Management For Dummies, co-authored by Michael H. Seid and Joyce Mazero.  Although the book focuses on both franchisors and franchisees, it discusses creating marketing plans and branding and the secrets to continued success and future expansion.

The co-authors answered some questions regarding Franchise Management For Dummies in a Q&A published in Franchising World, a publication of the International Franchise Association.  Mr. Seid made a key observation for any entrepreneur looking to franchise his or her business:

Most important for prospective franchisors is to understand that there are consultants and lawyers that we call franchise packagers. They offer cookie-cutter services — and that is a serious problem. Pick your advisors carefully and talk to their clients to understand their reputations.

Q&A with the Authors of Franchise Management For Dummies, June 05, 2017, Robert Cresanti, International Franchise Association.

In a previous blog post, I talked about picking between a franchise law firm and a consultant.  As noted in Franchise Management For Dummies and on this blog, the franchise relationship between a franchisor and a franchisee is both a business and a legal relationship.  Franchising is governed by complex state and federal laws regarding the offering and selling of franchises and the ongoing relationship with franchisees, including renewal and termination.  Franchise law firms such as Larkin Hoffman are subject to ethical rules which require us to advice clients based on their best interests.  Consultants, while they may be engaging in the unauthorized practice of law, are not subject to these same ethical rules.  The Larkin Hoffman Franchise Team will not recommend franchising a business if we feel that franchising is not the best growth strategy or that the business is not ripe for franchising.

Mr. Seid continues in his Q&A noting that even among franchise law firms, not all franchise law firms are created equal.  Franchising is a niche area of law.  When choosing a franchise law firm, review the credentials and experience of the franchise lawyers and do your research on the reputation and work product of the law firm.  You may want to talk to current clients of the law firm on their experience working with that law firm.

Picking the right partner in structuring your franchise system at the onset is important to ensure your franchise system starts on the right path.  Remember, you will be signing 5 to 20 year franchise agreements with franchisees, so the terms you set in the beginning will govern the franchise relationship between you and your franchisees for the duration of the franchise term.  Choose wisely.

 

Most people who come to us seeking to franchise their business know nothing about franchising and are usually inquiring because a customer asked if they could buy a franchise or because a friend told them they should franchise their business. The first thing I tell each prospect is that franchising is not easy, it is not for everyone and it is not to be undertaken lightly. As a franchisor, your franchisees will be placing great trust in you and it is important that you take the appropriate steps to position yourself and your franchisees for success. The first step is to gain a working knowledge of what it means to franchise your business. If you are new to franchising, I recommend reviewing the material on FranchisorAttorneys.com, reading Franchising For Dummies and talking to other franchisors. This will provide you with a good overview of the business and legal issues involved in franchising.

You should also consider the following five questions in determining whether to franchise your business:

  1. Can the franchisee make a profit in the franchised business? If you have not been profitable over an extended period of time, you really have no business trying to sell your concept to others. If you are new to franchising, you should have at least two years of profitable unit level operations preferably in varied markets.
  2. Assuming profitability, is there enough profit for the franchisee to pay you a royalty and marketing contribution and still be profitable? If you have not already, you should perform financial modeling to determine your bottom line as if you had paid a royalty and marketing contribution to a third party. The margins at the unit level must be large enough that the franchisee can afford to pay you a royalty and marketing contribution and still do well.
  3. Is the business easily replicable? Franchisees must be able to efficiently operate your business concept in their own individual markets. If the success of your business is market or location driven, linked to your personality or another unique characteristic, it will be extremely difficult for franchisees to successfully replicate your business concept in their markets.
  4. Domino’s has its pizza sauce, Burger King its Whopper, McDonald’s the Golden Arches. Do you have a secret sauce? If you have a proprietary product, computer system or other unique item that franchisees cannot otherwise obtain, you will have satisfied what I would consider the biggest hurdle to successful franchising. Absent such an item, you will be hard pressed to keep franchisees in your system for an extended period of time.
  5. Are you first to market or unique to the market? If I had a dollar for every potential franchisor who told me they had no competitors but subsequently determined they were wrong, I would be lying on a beach in the Dominican Republic. Research your market to identify others in your space. If there are others, differentiate your concept from these concepts. If you are late to market, without a significant differentiator it will be very difficult to succeed against more experienced brands.

Before going down the franchising road, carefully consider the questions above. An affirmative answer to each of them does not guarantee franchising success but it should put you on the right path. See our post below, “Preparing Your Business for Franchising,” to understand the steps you should be taking to ready your business for franchising and subscribe to this blog for future installments on this topic. For more information, complete our Franchise Feasibility Test to determine whether you can, or should, franchise your business.  Contact us to learn more about franchising and for a complimentary initial consultation.