What is Franchising?
Franchising is a way of distributing products and services. It provides for aggressive growth while allocating risks and spreading the expansion costs. A franchisor typically provides the franchisee with training and on-going support for opening and operating a business that utilizes the franchisor's business systems and trademark(s) or service mark(s), i.e. names and logo(s). A franchisee typically supplies the start-up capital and manages the day-to-day operation. The franchisee will usually pay an initial franchise fee and on-going royalties for the right to use the franchisor's marks and business systems, and ongoing support.
Under federal law, a franchise is defined by three elements:
1. The franchisor has given the right to a franchisee to distribute goods and services under franchisor's trademark, service mark or other commercial symbol.
2. The franchisor has significant control over or provides significant assistance to the franchisee's method of operation. Examples include: location approval, requirements of site design, training programs, operational manuals, designated hours of operation.
3. Franchisee is required to pay at least $500 before or within 6 months of opening for business.
Assuming your business fits this definition, you must comply with the Federal Trade Commission Franchise Rule, which regulates the offering of a franchise business opportunity. Generally speaking, this Rule requires that a prospective franchisee be provided with specific information about the franchisor, provided in a specific document called a Franchise Disclosure Document or FDD. This document will disclose pertinent information regarding your company to a prospective franchisee and also includes all form franchise agreements used by the franchisor.
Certain states have their own franchise regulations. In order to sell franchises in these state, you not only have to comply with the federal guidelines, but you also have to comply with the state guidelines.
What kinds of businesses can be franchised?
According to a PricewaterhouseCoopers study titled "The Economic Impact of Franchised Businesses," franchising encompasses approximately 75 industries. One out of every 12 business is a franchised business. A new franchised business opens every eight minutes in the US alone.
Just about any type of business can be franchised — whether selling products or services, from a storefront or from home, at retail or wholesale, or anything in between.
Is your business right for franchising?
To be successful, a franchisor must sell franchises, and its franchisees must sell the products or services. The franchised business, therefore, must be successful on each level. It must be attractive and compelling to prospective franchisees considering buying into a franchise system, and it must be profitable on the consumer level.
Factors to consider
Do you have a concept and prototype that can be replicated?
Is your prototype sufficiently profitable to provide your franchisee with an adequate return on their investment, after paying royalties?
Will your concept work in other markets?
Can you provide value to your franchisees after you have assisted them in opening and trained them in your systems, such as value pricing or new product development?
Can your business be broken down into systems that can be easily taught and learned?
Does your business require an unusual skill set to be successful?
Will your present business survive if you spend a substantial amount of time and energy starting a franchise company?
The fundamental elements of a successful franchise company:
Concept/Prototype - A profitable business concept, evidenced by a replicatable and profitable operating unit.
Operational Systems - Systemized standards for operations. These systems are typically articulated in your operation manuals and must be designed in a way that they can be transferred or taught to franchisees.
Brand Identity - The business must have features and characteristics that distinguish it from the competition. This is done through trademarks and service marks, interior and exterior design, décor, trade-dress, and marketing programs.
Management Team - You must have a management team in place that can meet your company's obligations under the franchise agreement in support of your franchisees. This team must be capable of supporting franchisees in areas such as site selection, operational support, and marketing support.
Franchise Law Compliance - As indicated earlier, you must insure compliance with all federal and state franchise laws. To this end, you must have a Franchise Disclosure Document to deliver to franchisee prospects, and you will need to register this document in certain states.
Adequate Capital - Starting a franchise requires adequate capital. The amount depends on your business and expansion goals, in addition to how much of the work you will do yourself and how much you will outsource.
Business Plan - To outline your franchise growth strategy.
Marketing Plan - To outline your franchise sales strategy.
Steps which can be taken as you consider becoming a franchisor:
1. Make sure your prototype business remains profitable.
2. Federally register your trademark(s).
3. Draft your operations manual.
4. Consider and begin to arrange the management, technology and supply infrastructure necessary to support your franchisees.
5. Raise or set aside adequate start-up capital.
6. Research franchisor competitors in your industry segment.
7. Choose an experienced franchise attorney.