Act 188 of 1954 (“Act 188”) is a statute that many townships use to finance many improvements using special assessments ranging from lak...Read More
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If you run a successful restaurant, have a snappy logo, possess high brand recognition, serve great food, train your staff to provide exemplary service, and have a concept that is unique, you have undoubtedly had customers inquire about purchasing a franchise from you. Franchising is a way to use other people’s (your franchisees’) capital to expand your concept. Before you jump off the ledge to franchising your concept however, consider these top ten questions.
1. Is your business capable of being franchised?
In order to have a successful franchise company, you need to have a unique business model. This model should be replicable, have broad market appeal, a clear understanding of your business’ demographics and market, and consistent financial performance that can be easily duplicated.
2. Does your restaurant demonstrate consistent returns?
Profitability is a determining factor in the success or failure of a franchise. Potential franchisees are interested in putting their money in a venture that offers a reasonable expectation of good returns. Your business model must demonstrate returns that are attractive to franchisees and will sustain the payment of fees to the franchisor, like royalty and advertising fees.
3. Do you have easily-implemented systems?
Successfully franchised businesses have fine-tuned their operational procedures and documented them through easily-implemented operations manuals. You must have your operations developed and documented so that it is easier for a franchisee to buy the concept and system from you rather than develop the same concept themselves.
4. Do you know your business and its market so that it is easily duplicated?
You are successful at your location with you running it. But what makes your business successful? Do you know who your customers are as a demographic group? Will your business be successful in other geographic markets? You need to know the factors that must be present for your business to be easily duplicated in different locations and geographic markets.
5. Have you opened multiple locations?
Before you decide to franchise, you should open more than one location of your business yourself. The lessons you learn will give you a better understanding of the challenges you and future franchisees will encounter when you begin selling franchises.
6. Can you support your franchisees?
Franchisees buy the concept and business system from you because the system has value and it is easier and more efficient to buy the system from you than to develop it themselves. You need to be able to train your franchisees to operate your business. You must have a developed training program for your franchisees, their management and employees. You must also have the infra-structure in place to support your franchisees on a go-forward basis. After all, the franchisees will be paying you royalties for your concept and expect support. You need successful (and happy) franchisees!
7. Do you have a marketing and advertising plan?
Your franchisees will be paying you a percentage of their gross sales to support an advertising fund. Although the franchisees will have to market and advertise their own business, they are paying you to develop a system marketing and advertising plan. You need to have a plan in place for the various stages of the franchisor development. Of course, as a start-up franchisor, contributions to an advertising fund by a small number of franchisees will not produce much revenue. However, the franchisees will expect some return for that investment, whether it is prototype brochures, ad slicks, table tent promotions, radio or television ads, or the like.
8. Do you have the necessary legal requirements in place?
Among other things, you need registered trademarks and a franchise disclosure document. Franchising is regulated by the Federal Trade Commission (FTC) and several different states. You need a qualified franchise counsel who can help you with the necessary legal documents. The FTC Franchise Rule requires that a franchisor provide to a prospective franchise a Franchise Disclosure Document that contains a disclosure statement, much like a securities prospectus, that discloses to the prospective franchisee all of the risks associated with purchasing a franchise from you, as well as all of the agreements you expect a franchisee to sign.
9. Are you really ready to relinquish CONTROL?
If you develop your own units with your own money, you can control exactly which direction your business will go. However, when you franchise, the franchisee is ultimately making the decisions about the franchisee’s business (of course, within the perimeters of your operations manuals and franchise agreements). Remember, that it is the franchisee’s money that is in the game and the franchisee controls her unit and to varying degrees runs it her way.
10. Are you ready to SELL?
Once you make the decision to franchise, you must always be marketing the sale of franchises. You must make franchise sales because you will need the initial franchise fee revenue from each franchise sale to support the infrastructure that you have set up to support your franchise network until you have enough franchise royalty revenue to support your franchisor operations. You must have an effective franchise marketing program with excellent franchise sales people.
These top ten questions are definitely not within the realms of Letterman’s, but considering these questions well in advance of your decision to franchise will make it more likely that your system will have success from your very first franchise sale.
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At Fahey Schultz Burzych Rhodes PLC, we’ve been helping municipalities, franchised businesses, employers, and more with their legal needs since 2008. We’d love to learn how we can help you, too.