With the opening of another year, you may be considering brand expansion through franchising. While there is no magic formula to tell you if you would be a good franchisor or if your business is a perfect fit for the franchise model, the questions below provide a starting point for your analysis. What underlies each of these questions is the reality that becoming a franchisor is starting a new business – the business of franchising. Simply being an excellent operator of your existing business is not alone enough to make you a successful franchisor. However, it is a great start and with additional strategic efforts you soon may be ready.
- Have I systematized and streamlined my business operations?
As a franchisor, one of the critical things you sell and then provide to franchisees is your refined system of operations. Your franchisees are looking to join your brand (and are willing to pay you royalties) because they want the benefit of your expertise, know-how, systems, and training – essentially you should be able to offer them a “business in a box.” This sets franchisees apart from other entrepreneurs who launch a new brand and have to learn all the hard lessons themselves.
If you are considering franchising, then likely you have one (or many) successful and well-run corporate unit(s). Your job as a franchisor is to distill your best practices and methods of operation into training, manuals, and instructions that franchisees can quickly and effectively deploy. If you want to have a national brand, the systems must be capable of replication in different market settings with all kinds of franchise owners.
- If a franchisee uses my system, will the franchisee be profitable?
The most important factor in a franchisor’s success is how profitable its franchisees are. Profitable franchisees are pleased with their investment, provide great validation for prospective franchises, are more likely to follow franchisor leadership and comply with brand standards, will remain franchisees, and will generate a healthy royalty stream.
Having profitable corporate units does not automatically mean that your franchisees will also be profitable. Franchisees may experience higher initial investment costs than you did. They will invest in the entire system at once whereas you may have added to the business gradually. Even more significantly, franchisees pay a royalty and brand fund fee off the top-line of their revenue that the corporate units have not historically paid. Your systems of operations must be strong enough that franchisees can make money even with these additional costs.
- Have I protected my intellectual property?
As a franchisor, one of your primary roles is to license your trademarks and other intellectual property. Before you franchise, you need to obtain (or at least apply for) a federal trademark registration. The benefit of the registration is that it gives you the priority right to use the trademark across the United States. Without it, businesses outside of the geographic area of your corporate units can lawfully use your trademark for their own purposes. Once your registration is obtained you can prevent new, unauthorized uses of your trademark. This is critical in a digital age. When people search for your brand name, they need to find you first and not an infringer or parallel system.
You can learn more about the basics of trademark registration here. Manning Fulton can help businesses of all sizes obtain these trademark registrations and design an intellectual property protection strategy.
- Is my franchise offering unique?
Consumers are inundated with businesses competing for their attention and dollars. What helps your brand attract and retain customers is to be distinctive from competitors. The easier it is for a customer to point to the distinctiveness of your brand, the better.
Prospective franchisees are a different kind of consumer – they are investors who must decide how to use their money. Your franchise offering will compete against not only from franchises in the same industry (fast food, home services, professional services, etc.) but also against franchises in the same investment class (cost and time to get open, requirements for owner/operators, average unit volumes, etc.).
Some factors that can help your franchise stand out are superior support from the franchisor in the form of training, refined systems of operations, manuals, robust supplier relationships, strategic use of technology, and effective brand marketing. Corporate units (and eventually franchise units) with strong unit level economics are powerfully persuasive. A business model that has multiple sources of revenue, high margins, and recurring revenue is attractive. The consumer factors are important as well. If your brand has a unique value proposition for customers, it reassures prospective franchisees that there will be continued demand for the brand.
- Do I have the economic resources to invest in franchising?
Launching your franchise will take money. Some of the expenses you need to consider are the costs to protect your trademark, creation of a new entity, audited financial statements, legal fees for creation of the franchise disclosure document and franchise agreement, development of a brand standards manual, and state registration fees. Some franchisors also look to engage franchise consultants to help them design their franchise offering. Franchise sales requires investment in marketing collateral, lead generation, and potentially broker relationships or sales staff.
The return on your investment in franchising comes as you receive initial franchise fees (typically not a source of profit but a way to cover costs) and royalties from successful franchisees (the primary revenue and profit center).
- Do I have the time to invest in franchising?
It takes time to develop a franchise disclosure document. Manning Fulton can help franchisors launch their franchise offering in as little as three months, but that process requires focus, work, and decision making by the founders.
By entering into a franchise agreement, you also commit to a long-term relationship of support for your franchisees. Franchisors typically provide an initial training program, guidance on site selection and design, support with supplier relationships, access to a manual, and on-site launch assistance – all of which is before the franchisee even opens. Thereafter you or your staff need to be available for questions, ongoing training, field visits, and conventions. You need time to invest in continuing to develop the best systems for franchisees to use and to be a leader for the brand.
If your corporate unit operations depend on your personal, day to day supervision to operate successfully, you may not have the time to provide the support that franchisees need.
If you have answered “no” to any of these questions, it does not mean that franchising is not right for your business, but it may mean that you need to establish a stronger foundation first. Continuing to increase the profitability of your corporate units, developing efficient and easily replicated systems, and adding to corporate unit counts are some options for laying that foundation.
If you’ve answered “yes” to most of the questions above, then franchising could be an optimum growth strategy for your business. Don’t miss out on this opportunity to expand your brand, generate recurring revenue, and build a network of successful franchisees. Contact Carlie Smith or Ritchie Taylor at Manning Fulton to help you navigate the franchising process or visit our website at https://www.manningfulton.com/services/franchise-hospitality/ to review our Franchising services.
