Becoming a Franchisor
Franchisor, Franchisee and Franchise Resources

Becoming a Franchisor
November 7, 2003

The Franchising field is highly regulated. Wading through all the regulations and paper work can seem endless. Whether you are considering the purchase of a Franchise opportunity, or you want to Franchise out your current business, AlbertaRose will attempt to help you find the answers you need.

Please bear with me as this topic is new to me and I will be learning with you. The difference will be - convenience for you. You won't have to gather snippets of information from a multitude of websites, as I'll attempt to provide it all here. Well, as much as possible!

Why Franchise?

If you are looking to significantly expand your business to its' maximum size and profitability, you should Franchise your business. Many fortunes have been built or broken on Franchising. Franchise a business concept, grow it to a level where it fits the profile of an IPO (initial public offering), then take your company public. Your company can be valued by the market at a level much greater than gross profits and sales of the company can justify. The market will place a value on your company and its' stock and you could become richer than you ever dreamed IF the market thinks your company has the potential for significant growth.

Advantages of Franchising

• A business needs Capital for growth. In Franchising this Capital is provided by the Franchisee. The concept? using Other People's Money.
• Management: Finding and keeping Good managers, well trained and motivated, is difficult for any business. Franchisees are people who are well trained in the franchising systems and they are very motivated because it's their Capital at risk.
• Efficient & Profitable: Franchised companies tend to be run better simply because it's the Franchisee's Capital that's at stake. Therefore the company will be more efficient and profitable than those businesses that are Company Owned.
• Rapid Growth: The marketplace changes rapidly and if you're not quick enough to expand and implement a new concept, somebody else will, and your business could suffer. Franchising is the only way to supply this rapid change effectively.
• Have you ever heard that saying "The larger the company, the larger it needs to be?" There are very few impediments to growth through franchising. Franchising offers the opportunity to have multiple units (companies) worldwide. No other business model offers that.
• The buying power of a Franchise can't be beat. Purchasing is done for an entire system whereby giving the buyer the advantage of lower costs and higher profits.
• Image: As a franchising system grows so does it's image in the marketplace. Malls and Landlords prefer to have successful well known Franchises as tenants for their shopping centers. Franchisors can secure great locations far better than non-Franchise businesses.
• Dominating the Marketplace: Franchises tend to locate many units in a given market simply because they tend to grow so rapidly. This squeezes the competition out. A Franchise can also advertise extensively because the cost is shared by multiple units. Combine location with a high advertising budget and you've got an advantage that can't be beaten.
• Franchises Maximize Income:
  • Franchise royalties
  • Franchise fee
  • Sales of Service
  • Property Rental
  • Supplies, Materials Sales
  • Equipment Sales
  • Rebates from the Vendors of Equipment and Supplies.
    
    
  All of these streams of income from a large number of Franchisees adds up to big money.
  
  
• Franchise companies grow quickly, are high profile and have the potential for even larger growth. Franchises are very attractive to conglomerates and are very good candidates for going public. The owners of a Franchise Company that contains either of these two possibilities can gross millions of dollars.

Alternate Ways of Growing a Business

1. Company owned units have their advantages. You get all the profit and you have total control over your company. However, there are limitations.
   • It takes a LOT of Capital.
   • It's very difficult to find and keep Good Motivated Managers.
2. Partnerships - Great in the beginning but as a long term association generally do not work.
3. Distributors, Sales Representatives, Dealers - These methods offer no control and little influence over how your products/services are being distributed. These methods do not fit many Franchise concepts.
4. Joint Ventures - Very similar to Partnerships.

Franchising Negatives

1. In the beginning, all Franchise companies are Franchise sales driven. You must have an effective Franchise marketing program with very good sales people. Variables that affect a Franchise sales effort are interest rates, bank loans, national economic condition, competition, etc. If a Franchise is not growing, it's dying. You must have the Franchise Fee income to stay alive until you can generate Franchise Royalty income and reach your monthly break-even.
2. You no longer Control your company. In Franchising the Franchisee controls his unit and in varying degrees, runs it his way. If you have a polished Operating System that guarantees ultimate success if followed, and the Franchisee is sticking to the plan, then control is less important. It's much like you were running the unit yourself. It's best to have a very tightly written Franchise agreement giving the Franchisee very little latitude to vary from your system.
3. A very nice problem to have is Growth Management - but it can also be fatal. It's necessary to be over-staffed at all times so you can service your Franchisees. Every effort and resource should be focused on helping the Franchisees be successful. This is the key to successful Franchising. Dissatisfied Franchisees results in dissatisfied customers.
4. The biggest negatives of Franchising is - yes, you guessed it! - Litigation! Conflicts between the Franchisee and the Franchisor are inevitable. If your Franchisees are making money, everything runs smoothly. But, should they start losing money, then conflicts arise. If it's not handled properly you could end up in court being accused of everything from inadequate training to fraud and misrepresentation. You'll probably lose if it ends up in court because our legal system creates a very uneven playing field for the Franchisor in legal proceedings. It's Big Business against the little guy. You don't want it to go to court. Avoid conflicts and litigation by keeping your Franchisees profitable and solvent. Do everything possible to help them make money - all of them.

Steps Taken to Franchise Your Business

1. Your very fist step is to Register your Tradename and Trademarks with the U.S. Trade Mark office. You can accomplish this through a trademark Attorney or Trademark Registration company in Washington, D.C. You will also have to register your Tradename and Trademarks in every state with which you do business or intend to do business.
2. Assuming you already have a unit (company) operating, the next logical step would be to open another, and another, if capital allows. This is a strategic maneuver. Having multiple units operating will help you learn more about the types of locations suitable for your business (location profile), about your systems, procedures and advertising. Also, you'll attract more Franchise Prospects because you've developed a proven track record (multiple successful units) lending your company credibility.
3. Systems Development: Develop very specific systems for every aspect of your business. This is what you are really selling as a Franchisor, a Total Business System that Guarantees success. Everything from site selection, training, hiring/firing, lease negotiation, unit operations, accounting, advertising, and so on. All systems must be put into Manual form so the systems can be taught and refer to on an ongoing basis.
4. Develop a very strong Training Program for training Franchisees. This training information is obtained to a largely from the employee training done at the unit level. The Franchisee must know your systems and procedures, emphasizing strict adherence to the system. Franchising is all about sticking to the system to ensure success.
5. Develop a UFOC - Uniform Franchise Offering Circular. This document contains the company history, owners and officers backgrounds, required investment breakdown, audited financial statements for the last 3 years, a Franchise Agreement, existing Franchises, Litigation History, and any other Company information. This document must be given to prospective Franchisees upon the first meeting or at least 10 days prior to the signing of the Franchise Agreement and the payment of the Franchise Fee, as Required by The Federal Trade Commission. This is not negotiable.
6. Develop an Ongoing Support Program. Let's face it - if your Franchisees are profitable and happy, you'll be profitable and very happy. So, do all in your power to ensure the Franchisee is profitable. Success is your only option. Ongoing Research and Development in finding new ways to help the Franchise be more profitable is necessary. Newsletter updates about the company, Regional Training classes or courses should be implemented at no cost to the Franchisee. Hold Annual Conventions in desireable locations. Recognize outstanding Franchisees by supplying awards and honorable mention. Schedule educational breakout sessions. A happy Franchisee means a happy customer.
7. Your Franchise Marketing Program: Critical parts to being a Franchisor:
   • Selling Franchises in Large Numbers
   • Supporting the Franchises & Ensuring Profitability
   Obviously, nothing happens until Franchises are sold. In order to produce new Franchisees at a rate that fits your projections, you must quickly find a marketing system. You must create a Franchise Sales Video and full color Franchise Sales Brochures. In the beginning you'll sell the Franchises yourself but eventually you'll have to hire a good sales staff if you want growth.

Becoming a Franchisor is a difficult and expensive venture and can cost anywhere from $50,000 up to $250,000. You'll need an accounting firm that's experienced in Franchising, a Franchise Attorney and a very good Franchise Consultant. A Good Consultant can save you money, so don't cut corners and be sure to use this valuable resource.

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