How to Franchise
By: Kevin B. Murphy, Franchise Attorney, MBA - Mr. Franchise

Imagine opening 20 new business locations without having to foot the bill for real estate, equipment and development costs or taking on any of the risk. Even more, imagine finding managers to run all those locations, who are just as committed to growing the company as you, and you don’t have to pay them a dime. Finally, imagine that these managers will hire, fire and manage all employees as well as foot the bill for all operating costs and expenses.

Sound far-fetched?   Not if you're planning to enter the franchise industry, one of the fastest ways to grow a small business without breaking the bank. For many companies, franchising a business (or licensing) is a sensible way to achieve rapid, profitable growth without giving up any control or ownership. Going from a single location to a dozen in a couple years, or a hundred in ten years is possible and well-documented because franchise owner-investors put up all investment capital, shoulder all risk and assume all day-to-day operating responsibilities.   

It's expansion, using OPM  - Other People's Money. Also, the franchise company gets paid handsomely for teaching others the secrets of how to operate its business. First, there’s the up-front “membership” or franchise fee of $20,000 to $50,000 paid for using the brand name and operating methods. In addition, there are continuing royalties of 5% to 10% of gross sales for ongoing advice and consultation.

In essence, a franchise development program allows a company to get out of the trenches and become a highly-paid general overseeing its soldiers. Long-term options are also attractive. Build an empire and relax, or let the franchise company be acquired by an increasing number of large companies that look for small, but growing franchise companies. According to the International Franchise Association, 900 new companies have franchised in the last three years.   

ENTERING A NEW BUSINESS  

A company planning to franchise must realize it is entering a new business, offering an entirely different service (training & support) to entirely new customers (business owner-operators). This new business requires different skills, abilities and expertise. In the new business of franchising, it is critical to develop effective evaluation, documentation, mentoring, training and consulting skills. Since these new skills are rarely present within existing personnel, an outside franchise expert is needed to train existing personnel and plan the transition.

The first step involves determining whether or not a business can franchise, and if so, what needs to be developed. Next, strategic franchise planning is necessary to create a "blueprint" for successful expansion efforts. Experience shows that, just like a building, the foundation developed at the beginning will create lasting consequences affecting the relative success (or failure) of the entire venture. Legal (franchise disclosure document, franchise agreements) and operational documents (franchise operations manual, franchise training program) are prepared and drafted and finally a franchise registration process is required in some 14 states, depending on which state(s) the company sells franchises. These phases are discussed below.   

THE FRANCHISE FEASIBILITY PHASE 

An indispensable step before any franchise development program gets underway is an analysis of the concept and business model. Has the concept been sufficiently proven in the marketplace? How profitable are existing prototypes or company-owned outlets?

Franchising will not solve existing problems, it will only intensify them - and usually at a serious cost to franchise investors. Franchising should not be viewed as a method to raise capital, expand a business that has existing problems, or a way to get rich quickly. There must be sufficient profitability in the business model so that royalty and other payments can be made and leave the franchise investor with a sufficient profit.

With a franchise feasibility analysis, a determination can be made about:   (a) whether franchising or licensing expansion ideas should be pursued, postponed or abandoned; and  (b) assuming a positive result in (a), what needs to be fine-tuned or developed from scratch for the franchise program.  

Besides determining if and when the business can franchise, the analysis should also include providing guidance and direction so as much of the groundwork as possible can be done by existing personnel. This has proven to be a very effective approach and significantly reduces franchise development costs. If the feasibility analysis is positive, the other phases discussed below follow.

My twenty-eight years of experience in the franchise industry lets me share a valuable insight about franchise feasibility studies. Too many companies leap into franchising without doing a feasibility study, or if one is done it is performed by a franchise consultant or group that tells everyone good news - they're all "franchise-able." The vast majority of franchise feasibility studies I've done either identify areas that need attention before franchising makes any sense or tell the client to forget about it and pursue other options.

Next - THE FRANCHISE STRATEGIC PLANNING PHASE  

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