Franchising

[DetailsCleaningService]

I'm a very new business owner where I'm at in town and my long term goal is to franchise my business. I just need some more information on it though like
1. What does it take to franchise?
2. Should I get a small business loan or investors?
3. What are common problems franchise owners face?
4. Where should I start?!

[Wozcreative]

1. What does it take to franchise?
I don't know too much, but I do know for a fact that you will need to:
A) Put together a business plan
B) Supply concrete data on yearly, seasonally, weekly, daily statistics on revenue of your current business
C) Be in business that has shown 5+ years of profit
D) Branding Manual Guidelines
E) Breakdown of cost for employees, rent etc.
F) Breakdown of what you will offer as the owner of the franchise and how much you are going to charge
G) Breakdown of what the franchisee will be supplied by you for their monthly/yearly fees
H) Any specific insurance info they will need to get
I) Rules about opening up business in your area.. or how small they can start (yes you will need to do that if you plan on having many franchisees.. join.. you don't want one person to bomb and ruin it for you)
J) You will have to have a rule of how much money someone needs to start their own business before you allow it
K) Have a lawyer look over all the paperwork and supply any legal documents you will need

2. Should I get a small business loan or investors?
Depends on your financial standing. Get a financial advisor.

3. What are common problems franchise owners face?
A) Trying to franchise too early
B) Not realizing their first business worked because of location only
C) Taking on a franchisee and having them bomb their brand
D) Not having a concrete brand mannual with marketing material that has specific rules that need to be followed for continuity (extremely important)

4. Where should I start?!
Talk to other franchise owners. Network. Attend franchise info sessions. Watch videos, read books. Talk to lawyer and business financial advisors.

[Business Attorney]

If your long-term goal is to franchise your business, your short-term goal must be to develop a profitable business based on a system that can be duplicated. Until you have that, you are putting the cart before the horse. Don't waste your time thinking about the detailed steps and procedures to franchise the business at this point. First things first.

[Paul]

I’ve “franchised” businesses myself and have helped others. So here are a few comments.

Don’t be afraid to franchise. Many small businesses have followed that path. Obviously you do need a successful business model you can duplicate.

Assuming all the “business” aspects are in place, successful model, etc. the actual steps to becoming a franchise are very standard and not nearly as difficult as you may think. It just seems overwhelming.

The actual process to franchise is mostly a matter of paperwork. Basically you need the main document FDD, or Franchise Disclosure Document and a franchise agreement. The FDD is a lengthy document in a particular format that discloses all aspects of the franchise offering. It’s long and tedious but pretty much boilerplate. A franchise attorney can help with that.

There’s no real approval you have to get from the federal government, you just have to conform to the FDD format.

You mostly just have to deal with state regulations. Some have virtually no oversight or approval process while some do require submission for approval. Again, an attorney can help with this. If you are in Nebraska I don’t think they have extra regulations, just a filing fee. So, technically speaking with just those two documents you are a “franchisor”.

So. Don’t be afraid of the process.

The hard part is the marketing of the franchises. They don’t come knocking at your door. It’s a highly competitive business completely separate from your core business. But that’s a separate subject.

In the mean time you can start preparing to franchise. What is most important, and the hardest part, is to develop a comprehensive Franchise Manual. This is basically a step by step operations manual for franchisees. It should be very detailed, IE: scrub a tile floor with this cleaner, clean walls a particular way, use specific kinds of equipment etc etc. Everything from what equipment is needed, how to operate the equipment, advertising, marketing and on and on. That’s really what franchisees pay for; you must deliver a turnkey business.

As for investors or loans, it’s not likely an institution will fund a franchisor but there are investors who will support it IF they are convinced that it can be successful.

Good luck,
Paul

[Steve B]

Paul - I'm glad to hear from someone with experience on this. Is it true that you really must have duplicated your model in more than 2 or 3 locations before you could realistically expect to get your first paying franchisee?

[Paul]

Not necessarily, many companies have started franchising from just from one location. But of course the more locations you have before you franchise, the more confidence a prospective franchisee will have.

In starting and building a franchise company it’s really about marketing of the franchise opportunity.
Most franchise models are not unique. They are mostly typical local businesses like restaurants and cleaning services etc. Subway with over 30,000 franchisees (I think at last count) is just a basic sandwich shop.

My point is you don’t need anything special to franchise, just a basic model of almost any business.

Most people think of the big players in franchising, McDonald, Dunkin Donuts etc. The odds of that kind of success happening are slim to none However, There are hundreds of smaller regional franchises that do quite well, 20 , 50 , 100 franchisees can make for a very successful business.

What you DO need is the ability to market to and close new franchisees. This is the hard part and it’s just hardcore down and dirty marketing and sales. This is completely separate from the business model, it’s a business all its own. This is the core of franchising, it's not the few legal requirements you have to navigate.

[DetailsCleaningService]

Thanks for the help. Based on what I've gathered I think it would be best to wait and work on my business model.

[Steve B]

That's good information Paul. I might want to talk to you in more detail at some point. I currently sell my business model to others - but I specifically don't make it a franchise for a couple reasons. One is that I don't have every procedure documented in as much detail as would be needed. The other is that I don't want to take the chance of someone else ruining my company name by not performing to my standards. Instead, I charge a one-time consulting fee, then I show them everything I learned so they can benefit from it. They must choose their own name - so everything is seperate. However, down the road I might want to go the franchise route so I can get residual income.

[Paul]

Steve,

You are 50% there. Depending on the state you are in it could be just a matter of a few pieces of paper. If you are already selling your business model you have already overcome the marketing obstacle, to at least some extent.

Depending on your business there is also licensing and there may be other revenue potential such as "manufacturer or supplier" rebates to you if franchisees use particular products.

Many don't realize that is often a large part of a franchisors revenue. Even though the franchisee doesn't buy the product directly from the franchisor, often the supplier of the products will pay a fee or percentage to the franchisor for all sales to the franchisee. As part of that agreement the suppliers committ to advantageous pricing to the franchisee. It's a revenue stream for the franchisor, a cost savings for the franchisee and a large "contract" for the supplier.
This is standard in the restaurant franchise world.

Not sure if any of that would relate to your business. What is your business if you don't mind sharing?

Thanks,
Paul

[Steve B]

We install electronic dog fences.

[Paul]

Steve,

That business should be fairly easy to franchise or license.

For whatever it’s worth a few thoughts come to mind.

Licensing is much less expensive and easier than franchising and may be very suitable. Basically they use your name/logo and buy the products from you (maybe private label). Even though licensing doesn’t give you total control it gives you enough to make sure they operate according to some reasonable criteria. Your recourse is simply to revoke the use of the name.

Revenue could be

• Initial license fee
• Initial training fee
• Ongoing license fee (monthly flat fee)
• Sale of products

As a Licensor you may be able to set up some form of centralized marketing/advertising where you then distribute leads and earn additional commission.

The trick to licensing is to not control too much because then it will be considered a franchise. Franchise requires legal documents that can be costly while licensing should require only one basic license agreement.