[Quick note: This was originally written for SuccessMagazine.com, before the magazine's ownership changed. While this should be an accurate overview of franchising, it is not legal or professional advice and should not be taken as such.]
- Introduction
- Can My Business Be A Franchise?
- Evaluating Your Company
- Steps to Franchising
- Mistakes to Avoid
- Hot Frachise Industries
Introduction
When most people think franchises, McDonald’s and other mega-chains are the images that come to mind. While these large companies use franchising to successfully grow their business ideas, the reality is: Just about any type of business can be franchised and reap the same benefits that come with expanding their products or services this way.
The International Franchise Association estimates that there are 2,500 active franchisors and 800,000 franchisees in the United States. Within this growing franchise market, there are business models for everything that you can think of. If you have a successful company, franchising is an opportunity to grow your business faster, be more profitable, and compete with much larger competitors.
With the proper structure and careful planning, you can find independent franchisees that can use your blueprint to set up their own businesses. This guide is designed to help you evaluate whether your business has what it takes to be a franchise, and help you get started if you decide it does.
Can My Business Be a Franchise?
Not every business is going to work well as a franchise. If you are considering turning your business into a franchise, make sure you can answer these four questions.
There are numerous reasons to consider franchising. Mark Siebert, CEO of the iFranchise Group, a franchise consulting firm, explains four ways a small business owner can benefit from becoming a franchise:
Inexpensive Growth: Expanding your business is a costly proposition, but franchising lets you team up with an entrepreneur who is willing to invest his or her own capital to purchase or lease the land and building, equipment, etc. Though the initial cost of franchising may be high, some of it will be made back through the franchising and royalty fees, and the overall cost of expansion will be much lower than investing your own time and money in opening new locations.
Speedy Growth: Your franchisees are not just investing money into their business; they are investing time and effort to help your income grow as well as theirs. This duplication of effort allows you to grow your company and your brand more quickly than you could with just your own efforts.
Motivated Managers: Businesspeople who are interested enough in your business to invest in buying and running a franchised branch of your company are more likely to care about the business passionately.
Lower Risk: Franchising reduces the risk of expanding your company. The primary investments of newly opened franchises come from franchisees; their capital, not yours, is at stake. If a franchise location fails, you will lose less than if you had simply opened a new, wholly-owned location.
The downside of franchising your business is your loss of control. While you may be used to making the all the decisions as the sole owner, this will no longer be the case when you cede control to an outsider who will purchase a franchise from you and run it himself. The degree of freedom you lose will depend on the way you structure your franchise agreement.
Evaluating Your Company
Not every business is going to work well as a franchise. If you are considering turning your business into a franchise, here are several questions you should answer first:
- Is your business unique? It’s what stands out about your business that will attract franchisees. If your company produces a product or experience too similar to others in its industry, it is more likely that potential buyers will purchase a franchise from a more established company.
- Is your business model duplicable? The best franchises are ones with procedures that are easy for newcomers to follow. This helps ensure that franchisees will be as successful as your original business. Having a working system already created is one of the main draws of purchasing a franchise.
- What kind of money or backing do you have? While franchising may be less expensive than traditional business growing methods, the process still requires that you have stable funding.
- What kind of return will new franchises provide? Your business will fail as a franchise if it does not earn a return on investment for the franchisee. Franchisees should be able to make an estimated 15-20% return on their capital, plus a salary—all after deducting the franchising fee and royalties they pay you.
Steps to Franchising
If you decide to turn your business into a franchise, going it alone can be a daunting challenge. Therefore it makes good sense to hire two experts who can help: a franchise consultant and an attorney who specializes in franchising.
The consultant you hire will help you examine and evaluate your business to make sure it is appealing to franchisees. For example, in order to franchise, you need to have your company’s procedures down to a very clear system that can be easily duplicated by future franchisees. Though the degree of freedom franchisees have in running their business varies depending on the franchise agreement, many thrive by copying the original business’s successful model. Franchises such as chain restaurants or retail outlets not only operate identically, but look exactly the same.
Your consultant will work on your procedures with you, while providing information on the competition your franchise will face. Additionally, the consultant can help you make choices that shape your franchise, based on your answers to the following questions:
- Who are my competitors, and what do they charge?
- What will my franchise cost for franchisees? Is this in the same range as my competitors charge?
- What will my royalty stream be, and how will royalties be set up?
- What kind of training will I provide? How many days will a training session be? Where will training be held?
- Is this a service business or a store?
- If it’s a store, what size will franchises be? Will all stores look the same?
Once you are ready to begin bringing franchisees on board, your next step is to hire an attorney to assist with paperwork and legal requirements. Attorneys who specialize in franchising may charge anywhere from $15-30,000, depending on the size and complexity of your needs.
Your attorney will assist in creating a Uniform Franchise Offering Circular (UFOC), the document that you will be legally required to show all potential franchisees. Since the Federal Trade Commission regulates what information the UFOC must contain, there are strict penalties if any of the information provided is found to be inaccurate or misrepresent your franchise. Therefore, this is NOT a “do-it-yourself” project; only professional assistance will do.
The information presented in the UFOC must accurately represent your franchise agreement. Your attorney will help you assemble the UFOC, which will specify the rights and responsibilities of both the franchisor and franchisee. The specifics will cover how much training the franchisor will provide, the assigned territory for the franchisee, how both parties will market and advertise the franchise, all fees and royalties, and any other protocols and systems that the franchisor has seen fit to put in place for the franchisee.
When these procedures and documents are in place, you can begin to sell franchises. At this point, you may decide to hire a salesperson or team with experience in franchise sales. You may also hire a trainer to assist your franchisees as they get involved in your business.
Mistakes to Avoid
One of the biggest mistakes franchisors make is selling to the wrong franchisee. Many people want to buy businesses but are not qualified to run them. The fees and royalties a failing franchisee will generate are not enough to offset the costs of trying to retrain and service an unsuccessful franchise. Furthermore, most—if not all—potential buyers will call other franchisees to learn more about your company. Failing franchisees will spread negative information and stop future sales.
Selling too many franchises before you can handle them is another pitfall to avoid. Your central office—the infrastructure that keeps the franchise afloat—must be able to provide the training and servicing all franchisees will require. If your franchise grows too quickly, you may find your resources stretched too thin and problems can arise from your franchisees. Be sure that you are prepared for the growth your company will experience.
Hot Franchise Industries
Gary Findley, CEO and cofounder of the Findley Group, which specializes in franchise concept development, tells us where the best opportunities are for franchises these days.
Here’s his top ten list:
- Child Development
What it is: Franchises related to child education and development, from computer classes to sports skills.
Why it’s hot: As schools and education systems become more competitive, more parents are looking for programs to help their children get ahead.
Examples: Math Monkey, Computer Explorers, JumpBunch - Health, Fitness, and Beauty
What it is: Anything having to do with physical well-being, ranging from spas and luxury getaways to gyms and diet support groups.
Why it’s hot: Health and wellness are growing concerns among consumers. Franchises in this sector are in popular demand as more consumers turn to companies that help them stay fit and get real results.
Examples: Curves, Fitness Together, Snap Fitness - Pet Industry
What it is: Pet-related services, ranging from pet “day care” for pet owners who drop off their pets while they are away to pet toy and food suppliers.
Why it’s hot: Pet lovers who travel want to make sure their companions will be comfortable and safe until they get home.
Examples: Camp Bow Wow, DoodyCalls, HollywoodPaws - Senior Care
What it is: In-home services that offer nurses and companions, which aid senior citizens who live at home.
Why it’s hot: A growing number of Baby Boomers are reaching retirement age or caring for aging parents. Many of them will need care providers.
Examples: Synergy Homecare, ComForcare, Home Instead Senior Care - Home Safety
What it is: Home safety, including inspections and security services.
Why it’s hot: Safety and security are growing concerns among homeowners. Many consumers are willing to invest in services to protect their homes.
Examples: Safe & Sound, HomeSafe Inspection, A-Pro - New Food Concepts
What it is: Restaurants that offer unique and delicious foods are always popular—the hottest these days are pizza and sandwiches.
Why it’s hot: While the fast food sector is still going strong, consumers are looking for healthier alternatives and a wider variety in their diets.
Examples: The Counter, Dino’s Gyros Restaurants, New York NY Fresh Deli - Service Businesses
What it is: These franchises can exist in almost any industry. They provide a service, which can range from computer training to sales and marketing to almost anything else, often without requiring the owner to have previous experience in the industry.
Why it’s hot: Every industry will have some sort of service needs to be filled—and these franchises are usually inexpensive to buy and can be run out of your home.
Examples: The Business Alliance, Fast-Teks, College Hunks Hauling Junk - Staffing Services
What it is: Businesses that provide services such as staffing, copying, or graphics for other businesses.
Why it’s hot: According to the Bureau of Labor Statistics, staffing services is one of the quickest-growing industries; other business services let smaller companies outsource their needs for reasonable prices.
Examples: Express Personnel, Signs By Tomorrow, PostNet - Sports and Recreation
What it is: Franchises that specialize in sports, providing customers with the facilities and equipment they need to play.
Why it’s hot: Sports and games are a popular method of keeping fit today. They also support athletic programs and professional sports franchises.
Examples: Velocity Sports Performance, Golf Etc, LA Boxing - Technology
What it is: Businesses ranging from computer peripheral sales and repairs to Internet consultancies.
Why it’s hot: Technology changes quickly. Consumers will need plenty of help in trying to keep up. Businesses that specialize in providing technology support and retail sales make that easier.
Examples: WSI Internet, Wireless Toyz, Cartridge Depot
