• Vision
• Skill
• Money
• Ego

Vision encompasses those people who want to grow their business quick, yet lack the resources to do it with company-owned locations. They want to enter new markets and understand that the cost and energy to do so themselves may be too high for them. Franchising thus affords these people the answer, as prospective franchisees invest their own capital in the new locations within their markets.

The skill reason category is broad. People seeking to expand their businesses often do not want to deal with more employees, so franchising is a perfect answer since the employees of the new location work for the franchisee. These people are often also seeking more motivated workers than employees tend to be. Franchisees have more to loose and thus have a vested interest in the business. On the other hand, people seeking to expand their businesses may actually lack the managerial skills that a company with multiple locations requires. Franchising calls for a totally different set of managerial skills. Since franchisees are not employees, franchising requires stronger human relations skills than managerial ones.

Money is always an element in the decision whether or not to franchise. Although franchising is expensive to set up, it saves the cost of opening locations as franchisees use their own capital for this purpose. The economic rewards do not have the same potential of an expansion via company-owned locations. However, franchising does not have the risks nor does it require the time and effort that come with the former method of growth.  Franchising creates an annuity. It can also create wealth; and, it can serve as a profitable exit strategy for small business owners. Franchising does not dilute the owners’ equity nor does it necessarily have to create debt.

Finally, there is ego. Yes, ego plays a big part in the decision to franchise. People who choose to franchise their business usually have the desire to see their creation appear all over the place. The yearning to be recognized for one’s accomplishments as a business leader and the longing to make an impact on many lives are also strong motivations to franchise a business.

What are (or were) your reasons to consider franchising?

Related posts:

1. 7 Reasons to Franchise your Business
2. 5 Tips to Creating an Effective Franchise Operations Manual
3. Who Should NOT Franchise Their Business?

Last month I was interviewed by Paul Segreto on his radio show Franchise Today. During this interview I covered some important topics to consider when franchising a business. This post which I am revisiting expands on the topics I covered during the Franchise Today Interview.

Are you considering franchising your business? If so, start by exploring the questions below. Don’t know where to start?  In this blog you will find many answers so make sure to explore it carefully.  Still lost?  Seek the assistance of experienced consultants, but make sure to check their credentials and talk with their clients before engaging them.

Step 1:  Do Your Homework – Learn about franchising

• Is my business suitable for franchising?
• What does franchising offer me that other methods of expansion don’t?
• Should I consider other growth avenues, or am I restricted to franchising?
• Am I ready to franchise my business? That is, am I ready to assume the responsibilities of a franchisor?
• Do I want to grow a brand new business?
• Am I ready and able to spend the resources needed to franchise my business?
• What value can I provide to franchisees as a franchisor?
• Would I be able to add value to franchisees in an ongoing basis? How?
• What types of problems may I encounter in dealing with my franchisees? Will I be able to respond to them?
• Will I be able to handle growth? What must I do to be able to do it effectively?

Step 2:  Getting Ready – The Financial Projections

• Can my franchisees make a decent living? What will their income and expenses be?
• Is the demand for my products or services going grow in the future?
• What will happen to franchisees during slow economic times? Would they be able to survive?
• What conditions must be present for my franchisees to thrive?
• Will my franchisees make a reasonable return on their investment?
• How will I be compensated for my efforts and investment as the franchisor?
• What expenses will I have to grow the franchise network?

Step 3: The Operations Manual, the Training Program and the Franchise Agreement

• Do I have the systems and procedures in place to make my operations efficient and easy to learn?
• Are these systems recorded in an easy to follow and simple to understand manner? If not, could they be?
• Which systems do I have to create?
• Do I have to automate any portion of my operations? Should I? If so, which one?
• How do I design a winning training program for franchisees? How many days should it last? What should I teach? Who should teach it?
• What topics besides those about running the business do I need to cover?
• Do I need to provide field training? How do I do that?
• How do I choose the best location for training franchisees? What materials should I provide?
• What’s included in a franchise agreement? How will it protect me and how will it protect my franchisees?
• Will my franchise agreement reflect my way of doing business? How much does that really matter?
• Does my franchise agreement provide for multi units? Should it?
• What are regional developer agreements? Do I need one?
• How do I know how much my franchise is worth to a potential franchisee? What about royalties, how much should I charge?
• How do I determine which territory size I assign to franchisees?
• Do I need to comply with any state laws?

Step 4: Recruiting Franchisees

• What should I include in a marketing and franchise recruiting plan?
• How do I generate interest in my franchise offering? How do I get franchisees?
• When can I start marketing the franchise?
• What should I say in my website about offering franchises?
• Do I need a first response brochure?
• How do I collect information from franchise prospects?
• How do I evaluate franchisee prospects?
• How do I conduct the presentation of my franchise opportunity?
• What questions should I ask prospects?
• Are there any questions I should not answer or ask?
• Are there legal constraints around how I present information to prospects?
• Should I use brokers to sell my franchise?

Step 5:   Supporting Franchisees

• How do I help franchisees get started?
• How much do I need to get involved in site selection? What about facility design and outfitting?
• Should I be providing financial assistance?
• Should franchisees buy the equipment and supplies they need from me? What’s the best way to handle these transactions?
• How much guidance do I need to give franchisees so they can open their locations? What about the marketing their locations?
• What services can I provide franchisees and how much should I charge for them?
• Do I include them in my website?

Step 6:   Administrating and Managing the Franchise Business

• What procedures are needed to communicate and manage the relationship with my future franchisees?
• What records do I need to maintain?
• How should I set up franchisee files?
• How do I manage the initial and ongoing training sessions?
• How do I train my staff to communicate with and support franchisees?
• What additional talent do I need to add to my organization and when?
• Where do I go to find people with franchise experience?
• Can I use independent contractors instead of full-time staff? Where can I find them?

Step 7:  Franchisor-Franchisee Relations

• How is the franchise relation different?
• What do I need to do to ensure I have successful relationships with my franchisees?
• How do I get my franchisees involved in the decision making process? Do I have to do that?
• What’s the best method of communicating with franchisees?
• How often should I communicate with them?
• Do I need incentive programs?

The list above is comprehensive but by no means complete; there are many other questions that need to be answered during the process of creating a franchise company. Further, your type of business will have some unique issues to resolve. You do not have to have all the answers before you commence the process, no one does. However, you need to have an understanding of the magnitude of this endevor and the types of issues you’ll have to answer.

There is no question that you have a lot to think about when franchising a company, that’s why the process usually takes between 4 to 6 months to complete and that’s just getting you ready to offer your first franchise. The first three years of the life of your new franchise company will be spent improving your offering and finding better answers to the questions.  Just make sure you find a consultant or coach with the required experience and who cares about you and your business to help your through this process.

Related posts:

1. 3 Reasons Why you should NOT Franchise your Business

 

Many people hold some erroneous beliefs about franchising which can mislead them and create a lot of unnecessary pain.

 Myth 1:   If I franchise my business I will make tons of money.

Yes, there is a good probability that franchising a business will result in significant financial gain. But, unfortunately, this is not always the case, at least not in the beginning. To be successful, a franchise must have a viable and sustainable business format (See earlier Blog entry on Sustainable Franchising). It must also be properly marketed so that the franchise network can grow before substantial gains are received.

A company contemplating expansion via franchising needs to be prepared to make a sizable upfront investment. Depending on the initial franchise fee, this investment can be recouped after selling the first few franchises; but the trick is that to sell those first franchises is not as easy as many people think.  (Refer to the Blog entry about selling the first Franchisesfor more information on this subject.) Time and money must be invested to attract the right candidates before monetary gains can be enjoyed by the franchisor.

Myth 2:  If I franchise my business I won’t have to work as hard as I am working now … I can just retire.

In most cases franchising a company will simply change what the owners do rather than reduce their workload. That is, franchising calls for different work from that previously required to run the business; and, while different, it is still work. Moreover, successful franchising requires a lot of effort especially in the first few years. During this time, the founder is in learning mode which calls for a lot of energy expenditure and a strong resilience. However, once a franchise company has the ability to hire an effective management team, the founder can take it easier. In most cases, with today’s technology, all that is needed to run the franchise company from home, a mountain cabin or the beach, is a way to access the Internet and a reliable telephone line. But it takes time to get there.

Myth 3:  Once I teach a franchisee how to run the business I do not have to do anything else for them. After all, they signed an agreement to pay me royalties for a long time.

Many people considering franchising their business are under the impression that because an agreement exists between them and franchisees they do not need to be concerned with innovation and value added services to franchisees. Yes, the franchise agreement exists for the protection of the franchisor as well as all franchisees. Yet, if franchisors do not continually provide value, they will have disgruntled franchisees that will thwart the growth of the company and some will stop paying royalties and other financial obligations. The franchise agreement gives franchisors the right to enforce the agreement and begin legal action against the delinquent franchisees, but this is a costly enterprise. The most effective franchisor philosophy is to thrive to serve franchisees by creating cost savings as well as new products and services that can augment the profits of franchisees and help them become more efficient.

Myth 4:  All franchisees are highly motivated. They have paid a lot of money to buy the franchise; they are going to do everything they can to make it work.

Another fact that can be shocking to a new franchisor is to realize that not all people making a large investment are automatically highly motivated to succeed. New franchisors tend to project their own values onto their franchisees. It can be an unpleasant discovery to find that many people are not self motivated and to be able to succeed they need high degree of encouragement, detailed instructions and a strong support and accountability system.

Myth 5:  My franchisees should have no problem learning the business and doing all that needs to be done to open it and manage it successfully; after all, I am doing so much for them.

Many new franchisors fail to understand that franchisees are not true entrepreneurs; that they are not like them who had an idea and just made it work. Franchisees see the value of paying the franchisor so they can learn and avoid mistakes; they are more risk averse than the founding franchisor.

Some franchisors simply can’t accept that most franchisees will be overwhelmed with all that needs to be done to start the business. They also tend to forget what it was like for them when they first started. The latter is natural, but it is critical for franchisors to understand that the first 3 to 9 months in the life of franchisees are very difficult. During this time franchisees are truly out of their comfort zones and fear prevents them to be at their best.

Smart Franchisors take it slow and are patient. They break tasks down so franchisees can absorb what needs to be done and implement the franchise system successfully. They remember that if franchisees can’t conquer tasks they will feel like failures which creates more fear and prevents them from getting in the mental state that engenders success.

Related posts:

1. Franchising – Federal (FDD) vs State Registrations
2. 7 Reasons to Franchise your Business
3. Franchising: a Love Affair by Lizette Pirtle

1. Am I willing to change? How much?
2. Am I willing to learn? Am I ready to ask for help?
3. Am I willing to make a sizable investment of money, time and energy?
4. Am I willing to be patient and persevere to enjoy the fruits of my labor?
5. Am I willing to accept a partnership relationship?

Willingness to Change

If you can’t see yourself changing your role from dealing with the day to day tasks required to operate your current business to growing a totally different business, you probably should not consider franchising. Moreover, if you think that you can’t modify your way of behavior from doing everything yourself to learning to delegate, you won’t be very successful as a franchisor. Change not only of circumstances but of you as a person will become part of your reality as a franchisor. Those who succeed, do so because they embrace change at all levels.

Willingness To Learn

If you think you know everything, you are in trouble as a franchisor. Franchising is a daily learning experience. All franchisees are different and we must learn how to communicate with each them effectively. Franchising seems simple on the surface but there are layers of knowledge required to succeed. A successful franchisor never stops exploring and learning.

Willingness To Invest

Franchising a business requires a sizable financial investment. It also requires time and energy. If you do not have one of these elements your chances of success will be limited. In most cases, success will not be attainable if one or more of these elements is missing.

Willingness To Be Patient

Franchising a business and then growing the franchise network takes time. If you feel you got to have immediate results, franchising is not for you. Perseverance is an important key to franchise success.

Willingness To Accept Partners

If you deal with your franchisees as if they were employees, you will never be able to create effective relationships with them. Franchisees are your partners. Your success depends entirely on theirs, and vice versa. If you can only have a dictatorial relationship with your franchisees, sooner or later poor franchise relations will stall your growth.

Amy Nichols, CEO of Dogtopia, said the other day to me: Franchising is not for the weak. She is absolutely right. A strong person is willing to grow and change and is not intimidated by recognizing they don’t know something. They seek help and they are willing to learn. Do you have what it takes?

Related posts:

1. 7 Reasons to Franchise your Business
2. 3 Reasons Why you should NOT Franchise your Business
3. Sustainability of the Franchise Relationship — THE 4 Keys

The most important areas of learning for new franchisors are:

1. Franchise Recruiting
2. Franchisee Training and Support
3. Franchisee Relations and Communications
4. Legal Aspects and Compliance
5. Innovation.

There are traps in each of these areas that new franchisors must learn to avoid.

1.   Franchise Recruiting

• Not having a growth plan. 
• Making earning claims intentionally and unintentionally.
• Thinking that the best franchisees are just like them.
• Selling instead of granting franchises.
• Not developing and following a system for recruiting franchisees.

2.   Franchise Training and Support

• Forgetting all they had to learn and to go through in order to get to where they are today; thus having no patience with franchisees.
• Leaving franchisees to fend for themselves.
• Believing they are good trainers just because they know the subject.
• Not using the OPS Manual as their training text, teaching from notes that never make it to the OPS Manual, and ending up with outdated manuals.

3.  Seeing franchisees’ requests for support as a bother.

• Finding the balance between over and under supporting franchisees.Franchise Relations and Communications. 
• Talking down to franchisees.
• Assuming a position of power.
• Not leading by example.
• Learning that each franchisee has a different communication style and needs and addressing them as people, not as numbers or locations.
• Creating the systems that can enhance communications.

4.   Legal Aspects/Compliance

• Creating a relationship that is all about the legal agreement and not considering the human partnership.
• Making operating decisions that go against the franchise agreement.
• Not been consistent when implementing compliance systems.

5.   Innovation

• Inability to let go of the day to day duties to take care of the future.
• Focusing on what has been and what is, and not understanding the need to keep ahead of the competition.
• Failing to embrace new technology.

Although all of these are important challenges to overcome, in my experience, the most critical one is simply not embracing a beginner’s mind. Because most franchise companies are founded by entrepreneurs, their tendency is to be independent and to figure things out on their own and on the fly. There is usually a sense of pride in this self-determination which has many positives, but also many negatives. When franchisors take the position that they know it all or can figure it out all on their own, they stop learning. When this happens growth stalls, whether you are a start-up, a junior, or a mature franchisor.

Related posts:

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2. Challenges of Selling the First Franchises
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Many small businesses tend to overlook important areas that make franchising easier. Sometimes they make choices that will be costly to modify when they decide to franchise. So, when you start with the end in mind you can save time, money and aggravation.

There are five major areas you should focus on as a business owner who is considering franchising in the future. These are: the business model, branding, equipment, vendors, and operations.

1.   The Business Model

•  What is the value proposition of your business? That is, how does the business generate economic value?
• Is the demand for your products and services sustainable? That is, will demand grow or at least remain constant for the life of the business; or, are the products or services just a fad?
• Will the franchise business be profitable? That is, can you insert a third party and maintain profitability at all levels (your suppliers, you and your franchisees)?
• Can your business be easily taught? That is, can most business people perform the activities; or, do they require extensive technical expertise and experience?
• Does your business lend itself to continuous innovation? That is, will you as a franchisor be able to add value to your franchisees on an ongoing basis; or, is your business model static?

The key here is to tweak your business model so that it has a solid value proposition; it offer products and/or services for which there is an on going and growing demand; it’s profitable at all levels; requires little technical expertise and allows you to innovate on a continuous manner adding value to franchisees throughout the life of the agreement. If you are able to create or modify your business model in such manner, you can then move your efforts to the next biggie: Branding.

 2.   Branding

• Is your business name unique, representative of who are and catchy? The more unique and memorable the name of the business the better.
• Do you have your business name protected? Do not confuse having a website URL or a business license as protection. You need a trademark to protect the name of your business.
• Do you have a good logo? Is it up-to-date? Make sure your logo is unique and professional. Put your ego aside and ask a professional for his or her opinion or engage them to create or modify your logo. Use ONLY ONE version of your logo. The moment you use more than one version you dilute your brand.
• Are you using your protected name everywhere possible? This is a most important step. Make sure your name and logo appear on all printed and online materials:
  • Receipts
  • Invoices
  • Stationery
  • Business Cards
  • Order forms
  • Paper or Styrofoam cups
  • Paper napkins
  • Bags
  • Website
  • Blog
  • Social Media
  • Email signature
  • Vehicle
  • Advertising media
• Does your store or location look the part? Is it professionally designed so it could be easily replicable? You may be able to make minor modifications overtime to create the image you are seeking.
• How is your signage? Does your exterior sign reflect your image; and, is it congruent with your brand? What about interior signs? Do you have any? Are they hand made or professionally produced? Do you have a sign on your vehicle? Can your vehicle be wrapped and does serve as ongoing advertising?

The keys to branding are to choose a descriptive, unique and memorable name that you can protect; make sure you obtain a trademark; have a professionally designed logo that reflects your business image; promote your name, logo and image as much as possible via signage as well as printed or online communications and materials AND stick to only one logo and name, variations dilute all of your other efforts.

3.   Equipment and Store/Office Design

• Is your business equipment the most efficient you can buy? Will you be able to use it for multiple locations? Does it make your life easier? Is it durable? Does it have good service? If the equipment you currently have doesn’t quite produce the results you desire, start looking for other models or brands that can. Contact those suppliers and get relationships established.
• Is the business equipment available all over the US? Will shipping be possible? What will be the cost of getting the equipment to franchisees? Make sure the suppliers you choose can deliver and service all across the areas you foresee having franchisees.
• Is the design of your premises congruent with your branding? Is it easily replicable? Can the design be made modular? Do you have drawings for the design that you can use to create a template for future locations? Is the design too costly? What are other alternatives that may require a lesser investment or time to build?
• Do you have a list of every piece of equipment and fixture needed to operate your business? Make sure your list includes price and contact information of the supplier.

The key here is to be prepared to replicate the look and feel of your business as well as its functionality. Further, it’s important to be able to do such all across the US or where you want to expand.

4.   Vendors

• Will your vendors be able to service all of your franchisees regardless of where they will be located?
• Will your vendors be likely to negotiate volume discounts you can pass on to your franchisees?
• Will your vendors be able to handle a large increase in volume?

The key to vendors is to make sure the ones you have today can become your “partners” as your expand your business in the future. If they can’t do that find other sources that are capable of growing with you.

5.  Operations

• Have you documented the way you do business?
• Do you have checklists for all tasks?
• Do you have detailed job descriptions?
• Do you have written procedures and policies?

You don’t have to have a complete operations manual but it’s wise to record as much as possible to prepare yourself for expansion. Take it slowly; do one task at a time; get staff members to record what they do. Creating checklists is easier and less time consuming than writing out an explanation of a process or procedure.

 Whether or not you franchise your business, paying attention to these five areas will increase its value. It will make it easier for you to train staff and to open future locations. Many of the businesses we work with end up increasing the profits of their own location just by tightening the procedures and the branding. Others reduce their costs by negotiating with vendors and suppliers. Focusing your energies on these five points is certain to improve your bottom line; and, when you get ready to franchise, the process will be quicker and much easier.

Related posts:

1. Are You Ready To Franchise? If Not, What Can You Do Now?
2. Are your Franchise Prospects Thieves?
3. 7 Reasons to Franchise your Business

The answer depends on each company’s objectives, their resources and the personalities and values of the principals. Companies that decide to grow by expanding their own operations retain control, total ownership, and  future revenues. On the other hand, those companies choosing franchising share in the cost of expansion, but have to give up some level of control and ownership, as well as the majority of future revenues.

So why should you want to consider franchising as an option?

Here are 7 reasons why:

1. Someone else, that is the franchisee, provides the required capital for each new location.
2. Your company can grow more quickly by opening franchises than by opening company-owned outlets because capital will not be an issue.
3. Franchisees have an economic as well as a personal interest in ensuring that the new location succeeds. Because of their personal financial investment, franchisees will typically be more motivated than company employees.
4. Franchising allows you to grow without sacrificing control over the business. You may not have minute by minute control, but you have control over how franchisees operate the business; you create and dictate the operating system. If franchisees don’t follow your system, they are in breach of the agreement.
5. The successes of one location spill over to the rest of the franchise network.
6. Your own locations benefit from the economies of scale that arise from the franchise network. These savings make your company owned locations more profitable.
7. You get to nurture other business people, and provide opportunities to others by sharing your experience and knowledge. You create a team and partner up with like minded people who share your values and objectives of growing your brand.

Related posts:

1. 3 Reasons Why you should NOT Franchise your Business
2. Is Franchising a Good Exit Strategy for Small Business Owners?
3. Why Do Businesses Franchise?

The FDD is a lengthy document that describes the company history, the business, the terms, and the associated costs. The FDD contains a copy of the Franchise Agreement as an exhibit.  Customized FDDs and franchise agreements are effective during the recruiting phase and become tools to manage the future franchise relationship.

In addition to ther federal compliance requirements, some states have additional requirements. Complying with state laws can be cumbersome and costly. Following is a list of the states that require registrations and or filings grouped into three categories: Most time consuming and costly, less time consuming and less costly, and easy filing states.

Registration states are those states which require the submission of an application, a copy of the FDD and the payment of an annual fee. The application and FDD are reviewed by state employees upon submission. During the review process questions may arise and the state may require the FDD to be amended prior to approval of the application. The annual registration fees can be as high as $1,100 and  the application process may take up to four months or even longer.

Exemption states differentiate franchising from other Business Opportunities. These states have laws requiring  franchise companies to file an form that exempts them from paying the state’s Business Opportunity Fees. The exemption form must be filed before a franchise company can offer a franchise in an Exemption State. Filing for an exemption is typically a one-time event. However, some states such as Florida have an annual filing requirement. The fees associated with exemption filings are usually quite low, $100 or less.

1.  Most Time Consuming and Costly Registration States

• California
• Illinois
• Maryland
• New York
• Virginia

2.  Less Time Consuming and Less Costly Registration States

• Hawaii
• Indiana
• Michigan
• Minnesota
• North Dakota
• Rhode Island
• South Dakota
• Washington
• Wisconsin

3.  Easy Exemption States

• Connecticut
• Kentucky
• Texas
• Florida
• Nebraska
• Utah

When a franchise company does not have a federal trademark, the states of Georgia, Louisiana, Maine, North Carolina and South Carolina require they register an exemption filing with the state. This is filing is not needed otherwise; that is, a franchise company that has a federal trademark is not required to comply with any filings requirements in the states of GA, LA, NC, ME and SC.

All other states do not require any registration or filings at the state level and are thus termed Non Registration/ Non filing states. In these states compliance with the FDD is sufficient.

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1. Franchise Offerings Using the Internet
2. Franchising: what is it, really?
3. Franchisees, Franchisors: Do You Need a Surety Bond?

The most stingent definition of community development limits its practices to lower economic areas and to certain more charitable practices on which franchising efforts in the US are usually not focused.  Yet, since the late 90s several franchisors have made efforts to become more involved in traditional community development activities.  These activities have taken place mostly through partnerships between franchise companies and Economic Development Coporations. For more information see http://findarticles.com/p/articles/mi_m1365/is_10_29/ai_54636767.

Additionally, the International Franchise Association (IFA) through its Minorities in Franchising Committee has taken significant strides to use franchising as a community development tool. To learn more about the IFA efforts go to http://franchise.org/industrysecondary.aspx?id=40970.

Related posts:

1. Franchising as a Community and Social Development Tool
2. I want to franchise in the future, is there anything I can do now?

Right TIme Kids worked hard during the development of their franchise system to collect the names and contact information of those people who were interested in the franchise opportunity. They became proactive in alerting people that they were working to create a franchise system and this diligent approach paid off.

There are many methods to grow a franchise system. Each method produces slightly different results. When a company decides to franchise they need to decide how fast they want to grow. We assist our clients create the strategic plan that will meet their objectives.

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