Franchising your business is a proven path to rapid growth. Becoming a franchisor is not a natural ticket to success. When the right model is franchised effectively, it can be a great growth strategy that requires less startup capital than growing by opening multiple locations. The process to become a franchisor is usually long and involves a substantial cost. Qualifying to sell franchises does not mean that you will find buyers.
Creating a successful franchise requires making decisions that will affect the business for years to come. There are some specific legal documents that need to be created before starting a franchise, as well as creating operations manuals and training programs. Many states do not require fees to start a franchise. Those states are: Alabama, Alaska, Arizona, Arkansas, Colorado, Delaware, Idaho, Kansas, Massachusetts, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Oregon, Pennsylvania, Tennessee, Vermont, West Virginia and Wyoming. The following states have laws that state that a franchise is exempt if it has a trademark or service mark: Connecticut, Georgia, Louisiana, Maine, North Carolina, and Utah. The following states have laws that state that a franchisee is not required to file an application with the state if it complies with the FTC rule regarding the Franchise Disclosure Document (FDD): Iowa, Kentucky, Ohio, Puerto Rico and the US Virgin Islands. So you could open a franchise in 32 states and two territories with little to no expense beyond creating your FDD, franchise agreement, and operations manuals.
Consider your concept.
Most good franchise models offer something extraordinary but with a distinctive way of providing the product or service. The concept must be attractive to both consumers and potential franchisees. The business should be something that you can standardize and duplicate.
Review your finances.
Franchising is easier if you have at least one very successful operation and better if there are two or more successful locations. Your finances will provide an overview of your operation, providing continued growth and profitability for two or more years.
Gather market research.
Obtain market research to verify that there is widespread consumer or business demand beyond your location for what your franchise business would present and the market’s ability to support a new competitor.
Prepare for the change.
Franchise activities are very different from those of a single business. For the most part, you will be selling franchises and supporting franchisees, rather than doing your normal business duties. Will you be comfortable taking a role as a trainer and salesperson, selling and supporting franchisees? You’ll also give up some of the direction you’ve had on how your concept is implemented. No two franchisees work the business the way you do, even if they do it right.
Evaluate other alternatives.
Not all companies can franchise and there are alternatives to expansion. You might consider seeking debt financing or allowing partners in your business. You might even consider a strategic alliance or joint venture where you combine your business with other businesses that offer similar products or services to your business without duplicating services.
Know the legal requirements
No need to file FDD with ANY federal government agency! In 35 states, a franchisor can “sell” immediately in those states as long as the franchisor provides the franchisor with a current FDD at least 10 business days before any contracts are signed or money is paid. In these states, a franchisor is not required to “present” or provide a copy of the FDD to anyone except the potential buyer.
The other 15 states have additional “franchise sale” requirements. These 15 states have franchise speculation laws that require franchisors to provide pre-sale disclosures to potential buyers. In these states, a franchisor must register in that state by filing the current FDD and meeting additional disclosure requirements. 13 of these state laws treat the sale of a franchise as the sale of a security. These states prohibit the offering or sale of a franchise within their state until an FDD has been filed with a designated state agency. Only 2 of the 15 states do not require a filing at their state FDD offices.
Some states, in an effort to promote commerce in their states, will allow the sale of 1 to 3 franchises under exemption status. There are a variety of other exemptions these states offer that should be considered for both franchisors and franchisees. These 15 states are often called “registration states” or “presentation states.” While state laws often vary, the primary purpose of the state is to protect its citizens from investment scams and to have a remedy if a franchisor violates its state laws. The main goal is to make sure that the franchisor discloses all important information before the franchise sale so that the prospective buyer can make an informed decision.
A franchisor should, and generally does, examine the potential franchisee to determine if it is appropriate; the franchisee must research the potential opportunity. First, a potential franchisee must understand what FDD is and is not. Since the advent of the FDD’s “plain English” rule, it has become much easier for the potential franchisee to better understand what is being sold and what is being bought.
Make important decisions about your model
As you organize your legal documentation, you will need to do many evaluations of how you will function as a franchisor.
• The franchise fee and royalty percentage
• The term of your franchise agreement
• The size of the territory that will be granted to each franchisee.
• What geographic area are you willing to offer to franchises
• The type and duration of the training program you will offer.
• If franchisees must buy products or equipment from your company.
• The business experience and net worth that franchisees need
• How you will market the franchises
If you want one owner-operator for each unit or area master franchisees who will develop multiple units
Many franchisors do not consider how each of these decisions may affect their impending profitability. If you are considering a 5 percent or 6 percent royalty, the difference does not appear to be substantial. But then when you have 100 franchisees and each one makes $ 700,000 a year, that’s a $ 7 million annual error. If you have a ten-year contract, that means $ 70 million in lost revenue.
Make sure you know if geographic variables, such as weather or local laws, can affect franchisees’ accomplishments. The size of the territory is also important. Territories that are very large may need to be purchased later with a bonus before they can be split. Poor training can leave your franchisees ill-equipped to run your system successfully.
Create the necessary documentation and register as a franchisor
The operation of your franchise is that the unregistered states can start as soon as you have all your documents and manuals properly completed, as well as your training materials. In other cases, you will have to wait for state approval.
Hire key employees
Additional key employees will be required to operate properly. Certain franchises will need staff to maintain order lines, technical support staff for software companies, and other staff. You might consider hiring someone to handle the training, as well as a franchise advocate to answer questions from franchisees. Marketing managers, creative people, and operations may also be needed.
One of the most important tasks you face is finding franchisees. To help stimulate interest, you can offer a referral fee to anyone who sends a new franchisee to the business. Other common sales methods include attending franchise trade shows or hiring freelance franchise marketing companies to help find investors. Selling franchises is difficult due to the high risk involved for franchisees. Your salespeople need to know your business well and be able to tell a compelling story about why it is worth your time and money.