Home > Article > Andrew Adama

But is my business "franchisable?"

Written by : Andrew Adama
2006-10-15
Franchising is a relatively flexible format, and just about any type of business can be franchised, provided it meets some basic characteristics:

It needs to be credible. Does it have experienced management? A track-record over time? Is the concept proven? Has it achieved good local press or public acclaim?

It needs to be unique. Is it adequately differentiated from competitors? Is it marketable as a business opportunity? Does it have a sustainable competitive advantage?

It needs to be teachable. Are the systems in place? Are operating procedures documented? Could someone learn to operate the business in three months or less?

And it needs to provide an adequate return. Not just profitability. In today's high-octane marketplace, if a business cannot generate a 20% return on investment after deducting a royalty (typically between 4% and 8%), it is going to have difficulty keeping franchisees happy.

If your business meets these criteria, then it may be a good candidate for franchising.

The Process of Franchising

When a company makes a decision to franchise, it must first develop a sound plan for expansion. The plan must take into consideration the numerous issues confronting a new franchisor: speed of growth, territorial development, support services, staffing, and fee structure, to name several of the most important. Larger companies need to address more complex issues such as channel conflict, anti-trust, and resource allocation issues. And obviously, this entire plan needs to be subjected to rigorous financial analysis and scrutiny to fine-tune the strategy for growth.

Once this plan is in place, the franchisor needs the proper legal documentation. At a minimum, the franchisor will need a franchise contract, an offering circular (as required under FTC Rule 436), and, depending on where franchises are being sold, state registrations. There are literally hundreds of different business issues that must be addressed in a good franchise agreement, and the decisions made regarding these issues will ultimately dictate the franchisor's success.

Quality control for a new franchisor involves the development of highly developed systems. Generally, this translates into the development of an operations manual. This manual must contain not only the systems used by the business, but also the checklists, policies, procedures, and tactics that will allow these systems to be uniformly enforced. Moreover, these manuals must be careful to avoid the creation of an agency and must also address issues that could create claims of negligence if the franchisor is to maintain an effective shield from consumer liability.

Finally, the new franchisor must develop the ability to market and sell franchises. That requires knowledge of how to attract the prospective buyer and the necessary materials (brochures, mini-brochures, videotapes, etc.) that will help make the sale. Moreover, since the franchise sales process is highly regulated, the franchisor needs to be educated in proper sales, disclosure, and compliance techniques.

Every new franchisor quickly learns that when they turned to franchising they entered a completely different business. Regardless of how the franchisee makes money, the franchisor has two roles in life: selling franchises and servicing franchisees. And of the two, ensuring the success of the franchisee is the most important.

Properly structured, franchising can allow small companies to more effectively compete with much larger competitors. It can also allow large companies to gain the advantages of highly motivated unit management while reducing overhead. As such, franchising is an option that more and more companies should explore.

The key to success in franchising is successful franchisees. Without successful franchisees, no franchise system will last. But if you can put the interests of your franchisee first, those same franchisees might help you become the next McDonald's

Other articles on Columnist franchise
If franchisors are reluctant to negotiate the terms of their franchise agreements, what is the point of having it reviewed by a franchise lawyer before signing? Consider The Following Issues BUYING A READY-MADE BUSINESS IS APPEALING TO MANY MID-LIFE ENTREPRENEURS BY JAMES PASTERNAK