The basics of the franchise
Franchising is a method of disseminating products or services. Franchising consists of a franchisor providing the use of a trademark or trade name and business system and a franchisee paying a franchise fee to become part of the franchise business as well as a royalty on a regular basis. For any franchisor to be successful, the majority of its franchisees must maintain profitable franchise units over the long term. The success of a brand depends on an ongoing partnership between the franchisor and the franchisee.
The greatest attraction of franchising is the opportunity for an individual to be in control of their destiny and secure their future. The franchise model has become an attractive business opportunity for wealthier individuals and investors who buy many units at once; or who purchase the rights to develop a geographic area or “territory” and develop a certain number of units within a specified time frame. These multi-unit owners, area developers, or area representatives often recruit new franchisees and support them within their territory, are part of a growing movement in franchising, and account for approximately 50 percent of all franchised units in the US. USA at present.
“Multi-brand” franchises are also on the rise. These franchisees operate different brands under a single organization, creating efficiencies, economies of scale, and market penetration to increase sales and profitability. The main reasons successful franchisees seek out additional brands are because they have “saturated” their territory for their current brand, or are looking for a corresponding new brand to even out the ups and downs of business or seasonal cycles. Franchisors also combine several different brands under one roof, often offering concessions to current franchisees expanding into a second or third brand. “Co-branding,” in which one franchisee operates two brands from the same location, is another recent trend. Co-branding saves on real estate or leasing costs, allowing for more profit per square foot.
Entrepreneurs often look to franchises for peace of mind. They want to know, with as much certainty as possible, whether the franchisor is presenting the franchise opportunity accurately and realistically and they take the time to do their “due diligence” by talking to current franchisees, reading the Franchise Disclosure Document (FDD) carefully with the help of an experienced franchise attorney and after comparing the brand and industry under consideration to the competition (franchised or not), your chances of making money and building a successful business are better than if you started a business from scratch.
For many aspiring entrepreneurs looking at the franchise business model for the first time, the business proposition may seem absurd. Why would someone pay tens of thousands of dollars before starting and then a percentage discount every month for 10 or 15 years? For those who consider it further, the answer is obvious. They can make more money faster through franchising than on their own; and realize the potential for a higher long-term return on their investment. Legally, franchisees do not “own” the franchise, but rather are granted, or are granted, a license that gives them the right to operate and manage the franchise business. However, franchisees own the assets of their business and, as long as they adhere to the franchise agreement, they have specific rights under state and federal laws. Franchisees can form franchisee associations in which they can participate. They can get involved in corporate decision-making if the franchisor is willing, or band together to oppose decisions they feel are detrimental to their operation and the brand in general.
franchise criteria
Determining if a company can be franchised is not an easy task; however, there are some predictive factors that can be used to assess a company’s readiness for franchising and the likelihood of success as a franchisor.
Consistency
In order to sell franchises, a business must first be reasonable with potential franchisees. This can be discovered in a number of ways: size of the organization, number of units, years of operation, appearance of the prototype unit, promotion, brand familiarity, and strength of management.
Segregation
In addition to credibility, a franchise organization must be sufficiently separated from its competitors. This can come in the form of a unique product or service, a reduced investment cost, a unique marketing tactic, different target markets, or a business model that is different enough from the others.
knowledge transport
An extremely important aspect of a successful franchise is the ability to teach a system to others. In order to franchise, a business must generally be able to systematically educate a potential franchisee in a comparatively short period of time. If a business is so complex that it cannot be taught to a franchise in three months, the company will have franchise problems. Some more multifaceted franchisors make up for this shortcoming by only targeting potential franchisees who are already knowledgeable in their field. A medical franchise aimed only at doctors is a prime example.
Amendment
A prospective franchisor must know how well a model can be modified from one market to another. Some concepts are not easily modified over large geographic areas due to local variations in consumer tastes or preferences. Others are controlled by various state laws. Other models work only because they are in a very unique location. Some work well because of the unique skills or talents of the individual behind the model. Some models only succeed based on years of determination and relationship building.
Prosperous prototype operations
A successful prototype is required to show that the model is proven and is generally integrated into franchisee training. The prototype also functions as a testing ground for new products, new services, marketing techniques, merchandising, and operational efficiencies. The exception to this are companies whose franchises involve the direct sale of a proprietary product or service.
documented systems
All profitable businesses have systems. But to be franchiseable, these routines must be documented in a way that efficiently conveys them to franchisees. In all cases, a franchisor will need to record its policies, procedures, systems, forms, and business routines in a user-friendly, comprehensive written operations manual. Some franchises offer computer-based training modules or computerized, written manuals.
affordability
Affordability reveals a prospective franchisee’s ability to afford the franchise. This condition is both an indication of the prospective franchisee and the actual cost of starting a franchise. A franchise with an initial cost of $50,000 might be affordable for some prospects but not for others. Therefore, it is wise to choose a franchise fee that is reasonable for franchisees and allows franchisors to cover startup costs.
Return of investment
A franchised business must be profitable. At the same time, you must allow for enough profit after a royalty and other ongoing franchise expenses so that franchisees get a sufficient return on their investment of time and money. ROI should be calculated against investment to provide a consistent number. The franchise investment can be compared to other investments of equivalent risk that compete for the franchisee’s dollar. A good franchise system must allow an ROI of at least 20 percent between the second and third year of operations.
Movement and market conditions.
Market movement and conditions are paramount to long-term planning. Is the market growing or consolidating? How will these changes affect your business in the future? What impact will the Internet have? Will the franchisee’s products and services continue to be relevant in the future? What are other franchised and non-franchised competitors doing? How will the competitive environment affect your franchisee’s likelihood of long-term success?
Capital
While franchising is a low-cost means of expanding a business, it requires varying amounts of capital to get started. A franchisor needs the capital and resources to run a franchise program. The assets required to initially begin operating as a franchise program will fluctuate based on the scope of the expansion plan. If a business is looking to sell one or two franchised units, the necessary legal paperwork can be completed for as little as $15,000. However, for franchisors aiming for rapid expansion, start-up costs can be as high as $100,000 or more. Once printing, auditing, marketing, and personnel costs are considered, a franchisor can expect to budget $250,000 or more to achieve its development goals.
relationship obligation
Successful franchisors focus on building long-term relationships with their franchisees that are mutually rewarding. Not all franchise organizations understand the connection between relationships and profit. Strong relationships with franchisees facilitate franchise sales more effectively, make necessary system modifications easier, and encourage franchisees and their managers to provide a reliable level of products and services to their customers.
management force
The most important aspect that contributes to the success of any franchise program is the soundness of its management. The most common contributor to the collapse of start-up franchisors is a lack of staff or a lack of management experience. In addition to taking on new job duties in which the franchisor may have little or no time, the franchisor must demonstrate expertise in fields in which they may have little or no experience. These areas include franchise marketing, lead generation, franchise sales, advertising management, training, and multi-unit operations management. A proper first step in the decision to franchise is an evaluation of the question of whether or not a business concept is truly franchisable.
