Should You Franchise Your Successful Business?

Congratulations! You spent years building your business. You risked your financial security. You poured your heart and soul into it. Now you are beginning to enjoy the rewards; the public recognizes your name. You have your operations down to a system. Your customers are loyal; many ask if you intend to open other locations.

Congratulations! You spent years building your business. You risked your financial security. You poured your heart and soul into it. Now you are beginning to enjoy the rewards; the public recognizes your name. You have your operations down to a system. Your customers are loyal; many ask if you intend to open other locations.

You want to expand, but the problems are clear. You worry about where you would find good managers; you know that no one cares about a business more than its owner. What about time? A new location would require your full attention, and you are already spread thin. Money? You are understandably reluctant to jeopardize your existing business.

Should you consider franchising your business?

Very likely, the answer is “yes.” Franchising has become an extraordinarily popular means of expansion. Take a short drive down any city or suburban street, and you will probably see a half-dozen franchised businesses, most doing very well. Consider these statistics:

  • One out of every 10 businesses in the U.S. is a franchise;
  • There are about 600,000 franchised businesses in the U.S.;
  • A new franchise opens every seven minutes of every business day;
  • More than 50% of all retail sales come from franchised businesses;
  • Franchised businesses ring up more than $1.2 trillion in sales annually; and
  • The explosive growth of the Internet offers you access to prospective franchisees and customers worldwide.

So what exactly is “franchising,” and how can it benefit your business?

Franchising is a way to expand your business by licensing certain rights to a third party. The third party will use those rights to open and operate his or her own business. In exchange, the third party will pay you various fees and grant you the right to control the way he or she operates the business. Most often, the rights you will license are the rights to use your trademark or service mark; your “trade dress,” or the total image of your business; and your “know-how,” or your methods for operating a business. Franchisors generally require their franchisees to use a number of trademarks or service marks. They usually obtain federal registration for their primary marks; indeed, most franchisees expect to obtain the right to use a federally registered mark. Other marks, such as those used in periodic advertising campaigns (e.g., Carvel’s “Surprise Someone Special Tonight” or Blimpie’s “For a Good, Honest Sandwich”) are generally not registered. If you do not have a federally registered trademark, you should apply for one when you decide to franchise. Trademark registration is complicated, but, if performed by an experienced trademark attorney, it is generally inexpensive.

The fees you will collect usually include an initial franchise fee, a monthly royalty and an advertising fee. However, you should also consider less obvious sources of income. For example, your franchisees may purchase private-label products from you, at a price that includes a markup. The supplier of those products may pay you rebates or give you other support, such as a marketing allowance, in exchange for your franchisees’ purchases. You may provide your franchisees with special operating assistance, for an hourly or flat fee. You may lease equipment to your franchisees, for a profit. You may offer your franchisees the right to purchase additional franchises in other territories, in exchange for an “option fee.” Depending on your business, your income from such additional sources may be substantial, and may even surpass your income from royalties.

With respect to the control you exercise, you will usually set standards and specifications for all the significant elements of your business operation, including the products and services your franchisees offer for sale; the size, shape and appearance of the franchisees’ premises; how the franchisees use your trademarks and service marks; how the franchisees advertise and promote the business; the qualifications and training of the franchisees’ employees; and the territories in which your franchisees may operate. You may also control your franchisees’ activities after they exit your franchise system, through the use of covenants not to compete, restrictions on their use of your confidential information, a right of first refusal to purchase their businesses and similar measures. The fees, rights and controls listed above are common to almost all franchise systems; however, the structure of your franchise operation is limited by little more than your ingenuity, business sense and ability to maximize your returns in the marketplace.

HOW CAN FRANCHISING BENEFIT YOUR BUSINESS?

Franchising combines the strength of your business with the motivation and financial resources of individual entrepreneurs. The benefits of franchising your business include the following:

  • Quality Management. Your franchisees will invest their own capital in the franchised business and will have a stake in its future profits. As a result, they will work to lower their costs, promote your brand, and streamline their operations so that they — and through them, you — enjoy higher profits.

  • Faster Expansion. At present, your business’s most significant expenses probably include your real property lease or mortgage payments, equipment expenses, and wage and benefit expenses for your personnel. In a franchise operation, your franchisees bear these expenses at their outlets. Thus, franchising may permit you to apply the cardinal rule of finance: use “other people’s money.”

  • Freedom. Day-to-day management of your franchisees’ outlets and personnel will be their responsibility, not yours. Franchising may give you the freedom to focus on expansion and enhancing your profitability.

  • Increased Brand Name Recognition. You will require your franchisees to spend a percentage of their gross revenues on local advertising. You may also require them to contribute a percentage of their gross revenues to a national or regional advertising fund. These expenditures increase your brand’s name recognition and goodwill while allowing you to use your resources in other productive ways.

  • Increased Buying Power. You may be able to enter into arrangements with suppliers, under which you and your franchisees buy products in bulk from the supplier at a lower cost.

  • Protection from Liability. Subject to certain limitations, if someone is injured at a franchisee’s place of business, your franchisee, rather than you, is more likely to be liable.

SHOULD YOU FRANCHISE YOUR BUSINESS?

Should you explore franchising? To help you decide, consider a few basic questions.

Are You Willing to Change Your Role in the Business?
Franchising is a business that is separate and distinct from the business you currently operate. As the owner of one or more outlets, such as one or two stores or restaurants, you have been deeply involved in the day-to-day operations of the business. You have selected the goods you offer for sale, dealt one-on-one with customers and suppliers, and hired your staff. As a franchisor, your role will change: you will be less involved with the hands-on operation of your outlets, but deeply involved with organizing, leading and staffing your franchise operation. In other words, you may be the best merchant, can you translate those skills into a franchise operation?

To build a franchise operation, you will need to develop a workable franchise business structure, market your franchise offering to prospective franchisees, choose and train your franchisees and manage your ongoing franchise business. If you or your staff have these skills, then your infrastructure may already be well-suited to franchising. If not, don’t despair; the franchise industry is huge, ensuring that you can call on a pool of well-qualified franchise consultants, franchise executives and other professionals with the skills you may need to convert your existing business into a franchise system.

Does Your Industry Lend Itself to Franchising?
Most successful franchises grow from one (or more) of three kinds of industries. The first are so-called “fragmented” industries, or industries where most existing businesses are independent operators. Examples include the hair care industry, where franchises like Supercuts and Great Clips have supplanted the community barber shop; and the lodging industry, where franchises like Microtel Inns and Suites, Holiday Inn and Ramada Inn have supplanted traditional single-site operators. Although a fragmented market may seem saturated, if it would benefit from consolidation under your brand, opportunities may abound.

The second are industries where the market can be created. Examples include emerging technologies, such as high-tech customer-service training companies like Telephone Doctor and computer software training businesses like ExecuTrain. These franchises were conceived when franchisors evaluated changes to the marketplace, found a need and moved to fill it. At the opposite extreme are familiar businesses, such as restaurants; as one example, Hooters took a simple concept — a wings-and-beer restaurant — added a rustic beach theme and the tag line “Delightfully Tacky, Yet Unrefined,” and became a successful franchisor operating in 10 countries.

The third are industries where the “big players” are underserving a significant niche. Examples include Postal Annex, which filled a niche (convenience-oriented occasional shippers) underserved by the United States Postal Service and package shippers like UPS and Federal Express; and Starbucks, which filled a niche (flavored and gourmet coffees) underserved by restaurants and local coffee shops. These franchises are based on familiar goods or services, but deliver superior quality offered differently.

Can You Standardize Delivery of Goods and Services?
Most successful franchises are based on relatively simple concepts that the franchisor has standardized. For example, chefs undergo years of training and apprenticeship. They generally cannot transfer their skills to franchisees as a group within a short enough time to be economically feasible. Thus, a franchise that requires cooks is more likely to succeed than one that requires chefs. Likewise, a franchise that requires a computer software trainer is more likely to succeed than one that requires a software engineer.

However, you may have alternatives, even if your concept is complex or requires extensive training. As one alternative, you may be able to simplify your concept; if you are a chef and want to franchise your high-end restaurant concept, you may find that 80% of your revenues come from 20% of your menu items. Can you omit difficult-to-prepare, less-profitable items? If not, can you sell difficult-to-prepare ingredients in ready-to-cook packages? If you are a software specialist and want to train operators to use complex computer programs, can you train in steps through the use of modules? Can you deliver tutorials online or through CD-ROMs? As another alternative, you may be able to hire people with the skills you need. This most often occurs where your concept requires specialized but standard skills, and where candidates are plentiful; for example, Pearle Vision has successfully franchised its eye care centers by offering franchises to optometrists just beginning their practices.

Simplifying the way you deliver goods and services, and requiring standardized skills, enhances the ability of your franchisees to deliver goods and services in accordance with your requirements. It also expands their talent pool, thereby increasing the value of the franchise to them and helping them expand more quickly.

Can You Cultivate a Pool of Prospective Franchisees?
Most successful franchises draw on a large pool of prospective franchisees. The size of your pool is a function of tangible factors, such as the skills required in your field, the cost to enter the business, the length of time required to complete training, and the business’s income potential. It is also a function of various intangible factors, such as the prestige associated with the business. A large pool of prospective franchisees has significant advantages. For example, you can be more selective in choosing your franchisees than where the pool is small. You can also charge higher fees, exert tighter controls and expand more aggressively.

Some factors that influence the size of your pool of prospective franchisees are outside your control. However, many are not. If your business has a high entry cost, for instance, you may be able to expand your pool of prospective franchisees by financing a part of the initial franchise fee or by deferring royalty payments for the first several months of operation. If the field takes substantial technical training, you may be able to shorten the training period by preparing detailed operations manuals, offering real-time telephone support, or delivering ongoing training seminars, in person or electronically.

WHERE DO YOU GO FROM HERE?

Franchising can be very rewarding, but it is also a complicated and highly regulated business. You should obtain advice from experienced franchise counsel; they can save you significant sums by helping you structure your franchise operation and by protecting you from entanglements with state and federal agencies that regulate franchising.