A business owner can expand a business in many different ways. Franchising is one of those ways. A franchise business model is a business system where an established company offers the rights to open and operate a new location with its brand name, products, and services. The franchisee (the person who owns the new location) pays royalties to the franchisor (the brand owner) to use their trademarks, logos, recipes, and other proprietary information.
Have you thought about taking your business to the next level by utilizing the franchising model? In this article, you will learn of just a few things you’ll need to do in order to franchise your business.
Does Franchising Make Sense?
Before taking the leap into the franchising world you need to ask yourself if franchising makes sense for your business. Franchising a business sounds like a good way to expand, but it’s not right for all businesses. Your business should be profitable and your business model must be a model that can be duplicated successfully. It should also be a model that can return an adequate return for the franchisee.
If you are a new startup, in most cases, franchising doesn’t work. Due to the fact that franchising a business will require you to supply materials, office supplies, and business plans. New startups are usually not in a position to franchise their business. The focus for many startups is to advance beyond the survival phase.
Do you know how your business operates precisely? As a franchisee, you will require the exact details to get your business running. Although it takes longer, planning will help your business operate smoothly particularly if you decide to franchise it. As a franchisor, you should ensure that you have an operations manual that clearly spells out your detailed policies as well as best practices.
There are many pros and cons of the franchise business model for both the franchisee and franchisor. Make sure to evaluate all of the benefits and risks associated with franchising your business.
Get Legal Advice
If you want to franchise your business you will require some legal advice. There are some important points of franchise law you should familiarize yourself with. You will also need to fill out documents and contracts with the help of an attorney. Some processes like setting prices, creating a franchise agreement as well as determining intellectual property protection can’t be done in the right manner without the help of an experienced attorney.
The Federal Trade Commission requires franchisees to follow the Franchise Rule. The Franchise Rule gives prospective purchasers of franchises the material information they need in order to weigh the risks and benefits of such an investment. The Rule requires franchisors to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise, its officers, and other franchisees.
The disclosure document is called Franchise Disclosure Document. These are the 23 items that must be filled out on the FDD:
- Franchisor
- Business experience
- Public figures
- Litigation
- Bankruptcy
- Initial fees
- Other fees
- Trademarks
- Outlets and franchisee information
- Initial investment
- Restrictions on sources of products and services
- Franchisee obligations
- Restrictions on what the franchisee may sell:
- Financing
- Assistance, advertising, computer systems, and training
- Territory
- Patents, copyrights, and proprietary information
- Restrictions on what the franchisee may sell
- Renewal, termination, transfer, and dispute resolution
- Public figures
- Financial performance representations
- Receipts
- Financial statements
- Contracts:
- Obligation to participate in the actual operation of the franchise business
As you can see, the details of franchising your business are important to the FTC and should also be for you. Take the time necessary with your attorney, board of directors, and accounting team to make sure the details are disclosed correctly.
Develop Your Franchise Model
Most people are familiar with the traditional model of franchising a location. There are many different types of franchise models available. Here are the most common:
Business Format Model-This is the most common type of franchising model. In this type of franchise, a company expands by supplying independent business owners with an established business, including its name and trademark.
Manufacturing-In this model, a franchiser grants a manufacturer the right to produce and sell goods using its name and trademark.
Product Franchising-In this agreement, manufacturers allow retailers to distribute their products and to use their names and trademarks.
Some other important decisions you will need to make are whether your franchise is going to charge a franchise fee or a royalty percentage, the geographical locations of the franchises, and how you will market them.
Choose Your Franchisee Wisely
When choosing franchisees you should be extremely careful. You will find a lot of people with capital and you will have to be very careful again to determine if they are the right kind of people. Check their background to find out if they have the ability to successfully run the business.
These people will be representing you and they have to do so accordingly. Your main reason for franchising your business is to protect and grow it. Come up with an interviewing procedure so that you end up working with only the people that meet the standards you have set.
Grow and Protect your Business
Your brand is your most valuable asset and as a franchisor, you should work hard to grow and protect it as much as possible. You have worked very hard to earn your brand a good reputation. The biggest risk when it comes to franchising is that you give other people the opportunity to represent your brand.
Ensure that you have laid out guidelines that will control the usage of brand assets. Some people may take advantage and use your brand assets inappropriately if you haven’t laid down such guidelines. Nobody should take advantage and use your brand assets inappropriately or without your authority.
To be successful ensure that you monitor pictures, videos and social media outlets regularly and in a detailed manner.
Offer Support to Your Franchisees
You will have to meet your franchisees personally or talk to them every now and then via the phone or online. Do everything you can to motivate them when they have made an achievement. Share with them important information and also make sure that they have a way to communicate with one another.
This article was first published in July 2016 but has been updated and expanded in 2022
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