Franchising your business is a proven path to quick growth. Becoming a franchisor is not a natural ticket to success. When the right model is franchised effectively, it can be a great growth strategy that requires less up-front capital than growing through opening multiple locations. The process of becoming a franchisor is usually long and involves substantial cost. Qualifying to sell franchises doesn’t mean you will find buyers.
Creating a successful franchise requires making decisions that will affect the business for many years. There are some specific legal documents which must be created prior to starting a franchise as well as creating operations manuals and training programs. Many states do not require any fees to start a franchise. Those states are: Alabama, Alaska, Arizona, Arkansas, Colorado, Delaware, Idaho, Kansas, Massachusetts, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Oregon, Pennsylvania, Tennessee, Vermont, West Virginia and Wyoming. The following states have laws that state a franchise is exempt if you have a trademark or service mark: Connecticut, Georgia, Louisiana, Maine, North Carolina and Utah. The following states have laws that state a franchise is not required to file with the state if you are in compliance with the FTC rule relating to the Franchise Disclosure Document (FDD): Iowa, Kentucky, Ohio, Puerto Rico, and the US Virgin Islands. Therefore you could open a franchise in 32 states and two territories with little to no expense beyond the creation of your FDD, franchise agreement and operations manuals.
Consider your concept.
Most good franchise models offer something remarkable but with a distinctive way of providing the product or service. The concept has to be attractive both to consumers and to prospective franchisees. The business needs to be something you can standardize and duplicate.
Check your financials.
Franchising is easier if you have at least one very successful operation and better if there are two or more successful locations. Your financials will provide an overview of your operation providing continued growth and profitability over two or more years.
Gather market research.
Obtain market research to substantiate that there is pervasive consumer or business demand beyond your location for what your franchise business would present, and the ability of the marketplace to support a new competitor.
Prepare for change.
Activities of franchising are vastly different than in a single business. For the most part you will be selling franchises and supporting franchisees, instead of performing your normal business tasks. Will you be comfortable having a role as a trainer and salesperson, selling and supporting franchisees? You will also give up some of the direction you have had over how your concept is implemented. No two franchisees will work the business the way you do, even if they do it well.
Evaluate other alternatives.
Not all businesses can be franchised and alternatives to expansion do exist. You could consider finding debt financing or allowing for partners in your business. You might even consider a strategic alliance or joint venture in which you combine your business with other businesses offering similar products or services to your business without duplicating services.
Learn the Legal Requirements
The FDD is not required to be filed with ANY Federal government agency! In 35 states, a franchisor can “sell” right away in those states as so long as the potential franchisee is provided a current FDD by the franchisor at least 10 business days before any contracts are signed or any money is paid. In these states, a franchisor is not required to “file” or provide a copy of the FDD to anyone except the potential buyer.
The other 15 states have additional “franchise sales” requirements. These 15 states have franchise speculation laws that require franchisors to provide pre-sale disclosures to potential purchasers. In these states a franchisor must register with that state by filing the current FDD and assembling additional disclosure requirements. 13 of these state laws consider the sale of a franchise like the sale of a security. These states prohibit the offer or sale of a franchise within their state until a FDD has been filed with a designated state agency. Only 2 of the 15 states do not require a filing in their state offices of the FDD.
Some states, in an effort to promote commerce in their states, will allow the sale of 1 to 3 franchises under the exemption status. There are a variety of other exemptions that are offered by these states that should be considered for both franchisors and franchisees. These 15 states are often referred to as “registration states” or “filing states”. While the state laws often vary, the state’s primary purpose is to protect its citizens from investment scams and to have a remedy if a franchisor violates its state laws. The main objective is to make sure that the franchisor is disclosing all important data before the sale of the franchise so that the prospective buyer can make an informed decision.
A franchisor should and usually does scrutinize the potential franchisee for appropriateness; the franchisee must investigate the potential opportunity. First, a potential franchisee must understand what the FDD is and is not. Since the advent of the FDD “plain English” rule, it is far easier for the potential franchisee to better understand what is being sold and what is being bought.
Make Important Decisions about Your Model
As you arrange your legal paperwork, you will need to make many assessments about how you will operate as a franchisor.
• 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 to franchises
• 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
Many franchisors do not consider how much each of these decisions can affect their impending profitability. If you are considering a 5 percent or 6 percent royalty, the difference doesn’t appear to be substantial. But later, when you have 100 franchisees and they each make $700,000 a year, that’s a $7 million annual mistake. If you have a ten year contract that means $70 million in lost revenues.
Be certain to be aware whether geographic variables such as weather or local laws may affect franchisees’ accomplishments. Territory size is important too. Territories that are very large may have to be bought back later at a bonus so they can be split up. Deficient training can leave your franchisees ill-equipped to execute your system successfully.
Create Needed Paperwork and Register as a Franchisor
Operating your franchise is non-registration states can begin as soon as you have all of your documents and manuals properly completed, as well as your training materials. In other cases you will need to await state approval.
Hire Key Employees
Additional key employees will be required to operate properly. Certain franchises will need staff to maintain order lines, tech support personnel for software companies and other personnel. You could consider hiring someone to handle the training as well as a franchise advocate to answer questions from franchisees. Marketing, creative people, and operations managers might also be needed.
One of the most important tasks you face is finding franchisees. To help stimulate interest, you could offer a referral fee to anyone who sends the company a new franchisee. Other common sales methods include attending franchise fairs or hiring autonomous franchise marketing firms to help find investors. Selling franchises is difficult because of the high risk involved for franchisees. Your salespeople should know your business well and be able to tell a convincing story about why you’re a worth the investment of their time and money.