Understanding the Franchising Process
Do you currently own a successful business that kicks off lots of profit, but the cost of capital prevents you from growing to new locations? If so, you may want to consider creating a franchise operation to help increase your business presence cheaply. To do this, you will need a franchising agreement, and often a state level franchise registration process is required. A franchising agreement can help you rapidly expand your business model into new markets, locally or nationally, and still give you certain managerial controls over your business. Or better still – reap more profits for less at-risk capital. Franchising a business can also greatly leverage your annual profits per dollar of invested capital. Remember, so many startup businesses fail, and they do so because their business model is not viable, either for lack of capital, or insufficient market penetration. If you have taken the time and created a business model that is profitable and sustainable – consider franchising that model to grow your business.
Preparing your business for a franchising future can be a very complex process. A series of contractual agreements will need to be drafted. These agreements will protect your intellectual property, business secrets, and formative requirements imposed on the franchisees, and also explain the royalties you will receive from the franchisees. Often, the model requires pooled purchasing agreements for materials, supplies, and advertising standards.
Over time, the more locations that develop, the more valuable your franchise becomes because of name recognition. Companies like Subway, Pizza Hut, and McDonald’s are just a few successful franchise operations that began on a small scale and then rapidly expanded into multinational entities. If you are interested in taking your business to the next level you will want to call the Strong Law Firm. We have significant experience in helping business clients protect, grow, and succeed.
If you’re wondering what it takes to be a successful franchise you’ll want to consider some of the following questions:
- How profitable is my business? Profit margin is the holy grail of a successful business. You also need to know how much money you are making per dollar of invested capital, because that will be one of the first questions a potential franchisee will ask. Your accountant or your personal accounting software can generate hard-core numbers. Successful franchises must have great numbers.
- What are my core expenditures? You need to develop a clear picture of where you spend money. Who are your vendors and figure out the costs of production.
- Can my business be duplicated? Some business models are so unique that you may not be able to sell your business model to people in other markets. If your business could go almost anywhere then you may be a great candidate for franchising.
- What would it cost to start up a franchise? What will it take to get a new “customer” or franchisee started. Leasing, market studies, and access to capital are crucial elements of this step in the franchise model process. Outline the costs and explain how they may vary based on transportation of source goods, cost of advertising based on market size, and number of locations being considered by a franchisee. If you are unsure of your startup costs, engage an accountant or CPA who can help you.
- How will you ensure the new franchise’s success? As you sell your name and your business model what can you do to ensure that the new business will succeed? How do you ensure a consistent quality of service or product delivery or customer experience to promote your brand? This may include inspecting the establishment or advertising on behalf of the establishment, or training programs for franchisee staff and management. This will vary depending on the business type and how much you as a franchisor want to be involved in the process of delivering the core service or goods.
These types of questions are what potential franchisees will want to know. Figuring out and then documenting each step in the delivery process as to how your franchise program works will make it much more convincing to a potential buyer of a franchise. Depending on the type of business you have you will also want to think about why your business is successful against your market competition. Just as you have to sell goods or services to keep your current business alive you now have to begin thinking of how to sell your business model to other people.