Savvy entrepreneurs can attest to the vigor of today’s franchising system. A study from the International Franchise Association indicates these types of businesses will grow at rates exceeding all industries located near franchise clusters nationwide. Franchise establishments on average increase 1 to 2 percent each year.
Essentially, a franchise is an agreement allowing a franchisee the right to market a trademarked business in exchange for fees and/or support from the franchisor. While the most recognized franchises today are in the retail and food service industries, nearly any proven business formula could work inside this concept.
The Best Potential Franchises
As an entrepreneur who’s thinking of growing the company via a franchise arrangement, do not move ahead until you ask yourself the key question: Is my company a good candidate for this mode of expansion?
Those firms that have successfully adopted this model typically share four traits:
- Strong track record: The business is doing well, with sufficient revenues and repeat customers to warrant and survive duplication in many locations and circumstances.
- Broad market potential: The demand for the product or service reaches far beyond the local community.
- Clear message and brand: The business has developed a consistent, reliable corporate identity.
- Teach-ability: The business owner can effectively educate franchisees on the core firm’s concept, products and services.
The three standard types of franchises are the product distribution arrangement, the business format model and the management franchise.
The product distribution franchise is basically a supplier-dealer relationship and does not mandate a standard operating configuration across locations. Soft-drink distributors, automobile dealers and gas stations typically are product distribution franchises.
Besides using the franchisor’s products, services and trademarks, business format franchises also follow corporate protocols, with common marketing plans and operation manuals. Members of this genre include some of the most popular franchise opportunities, such as fast food chains, retail and grocery stores, hotels and motels, and restaurants.
In a management franchise, the franchisee delivers expertise, as well as format/operational policies and procedures. Major hotel brands can use this model.
Why or Why Not Franchise?
Franchising is a great way to grow a business for some entrepreneurs; for others, it may not be the right fit. Before deciding whether to go this route, consider the following:
- Franchises offer franchisors quick business growth primarily funded by franchisees.
- Franchisors earn a certain percentage of each unit’s gross profit.
- A franchise system’s expanded workforce can combine marketing and advertising power, as well as the ability to capitalize on new opportunities.
- Hiring, launch expenses and lease arrangements for the new site are the franchisee’s responsibility.
- Franchisors incur the expense of legal and regulatory fees, which is impractical when a company is suited only to limited expansion.
- Franchisors must invest considerable time and resources in the franchising process before realizing a profit.
- Franchisors must closely monitor all units in their networks.
Because of federal government regulation and individual state requirements, franchising a business involves considerable legal groundwork. This is critical, because following the letter of the law also lays the foundation for strong relationships between franchisors and franchisees.
Experts advise hiring an attorney experienced in franchise law prior to starting the paperwork. Two main documents are pertinent to the franchise process:
- The Franchise Disclosure Document (FDD), formerly known as The Uniform Franchise Offering Circular (UFOC), is a regulatory document with information about the franchisor and the business system, which helps prospective franchisees make informed decisions. Typically, it includes details about the franchising company’s key staff, management experience, bankruptcy and litigation history, initial and ongoing fees, and territory rights.
- The franchise agreement offers specific information about the terms of the relationship between the franchisor and franchisee. While format requirements can vary, it generally spells out the rights and obligations of both parties, such as standards, procedures, training, assistance, advertising, terms and payments. Since it is the legal document that cements the relationship, both the franchisor and the franchisee must sign this contract.
The Franchise Process
Specific details of the franchise process fluctuate from industry to industry and from business to business but commonalities do exist. Here are a few basic steps in expanding your business through franchising:
- Consult with a franchise attorney.
- Write a detailed business plan that includes a business history, current market analysis, company vision and financial projections.
- Register your trademark or service mark to protect against infringement.
- Complete legal documents in a thorough and timely manner.
- Develop a marketing and advertising strategy that establishes a uniform company look and pertains to local and regional franchises.
- Write operating manuals and standardize a training program.
- Establish support for new franchises by maintaining continuous involvement and communication.
- Develop a management team to help open new franchises or offer advice to franchisees about site selection.