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How to Start a Franchise

There are many business owners out in the world today that would be considered very successful. They make a respectable income; they have a long line of customers that highly value their products or services. They may even have several stores or outlets. For many of these business owners, they are totally satisfied with this level of accomplishment. And that’s OK.

How To Franchise Your Business -Part-1

How To Franchise Your Business -Part-2

For an ambitious few, however, having a “mom and pop” business, no matter how successful, is just not going to cut it. They want more. They want a lot more business. These enterprising individuals want to create life changing wealth. If this sounds like you, congratulations, you are a rare breed. Very few people can even visualize such a possibility. Fewer yet, are willing to put in the hard work to achieve their dreams. Some give up because they don’t believe they have the necessary capital to expand their business to a national or international scale.

So let’s say that you have this dream of transforming your small business into a company brand that would be recognized by almost everybody in the population at large. Let’s say you have some money, but not anywhere near enough to accomplish this goal. Some would suggest that you go out and borrow the money. But how realistic is this? Lenders usually want collateral. If your plans are as ambitious as I think they are, it is almost guaranteed that you are going to come up short. So if the slow business expansion plan is just not your thing, you’re going to need a method that supplies you with massive amount of leverage. For many, the franchise method of market expansion has been the key to going from being a successful local or regional business into a national or international juggernaut.

So how will the franchise method get you to where you want to go? One major piece of the puzzle that the franchise method provides is working capital. Now don’t get me wrong. You will need to raise a significant amount of capital to create and run your franchise operation. However, what the franchise model gives you is a vehicle that leverages your capital a hundred or a thousand fold. This money is raised from initial franchise fees that are obtained from people that are interested in your franchise opportunity.

There is a common misconception that the primary way that franchisers get rich is by collecting fat checks from initial franchise fees. Now if this is your goal, please don’t even bother creating a franchise. If however, your reason is to rapidly expand your business in order to sell more of your products or services, you are on the right path.

It is important for you to know from the onset that selling franchises and collecting money from the initial franchise fees is a zero-sum game. Once you get down the road in your franchise business you will discover that your costs will be extensive. You will also come to realize that your franchise fees, although significant, will usually generate only marginal profit. The primary role for these fees is to help your franchisees start up and establish their franchise locations.

So now you may be asking yourself, well how will I finally get rich by using the franchise method? Franchise profits, the kind that will provide you a financial windfall, are mainly derived from a growing stream of royalty payments. These payments are an actual percentage of the gross or net income generated at each franchise location.

Royalty fees are not the only way you can generate profits from your franchise business. Many franchises require their franchisees to purchase ingredients, finished products or services from the parent company. The reasons for this are not just for by making larger profits. Oftentimes, the primary motivator is that it helps guarantee that each of your franchise locations will provide a uniform product or service to their customers. It is critical that you maintain the quality of your brand. Otherwise the value of your franchise will diminish over time.

The franchise model provides much more than just giving you the necessary leverage in raising business capital. One interesting fact that points this out is that although ten percent of all businesses are franchise operations, they account for over 50% of all US retail sales.

Why is it that the big franchises like McDonalds, Starbucks, Subway……. why is it that they can crush their competition? How come the cards seem to be always stacked in their favor? The main reason…..is because they have leverage. When you have a lever, it only takes a fraction of the energy required under normal circumstances, to accomplish a task. The longer the lever, the less energy required. These large businesses have such massive scale that they have tremendous leverage is squeezing the absolute lowest wholesale prices from their suppliers. Their scale also gives them group advertising power. Costs from dealing with government regulations is also scaled down tremendously, since it can be spread over their entire franchise system instead of being born by a single business owner. Infusion of capital by the franchisees also allows them to perform ongoing research and product development. This is critical for keeping an edge over their competitors.

I hope this gives you some important insight in the potential benefits of franchising your business. Although there are many positives associated with franchising there are potential negatives. So let’s explore these, so that you can be sure you’re making the right decision to franchise your business.

One of the potential negative consequences of having a franchise business is that you are dealing with independent franchise owners rather than company employees. The key word here is that these business owners will expect a certain degree of independence. I you are someone that wants to micro-manage everything going on in all of your franchise outlets, franchising might not be your best option for expanding your business. However, if your attitude is to exert only enough control to ensure that your franchised product or service will be marketed to the consumer with the same quality that made you a success, then franchising may be a good option.

Although some people would consider franchise owners exerting a certain amount of independence in their business operation a potential negative, I would counter that it has its big pluses too. A franchisee has pride of ownership. They have invested a significant amount of money into their franchise. As a result, it is highly likely that they will be much more motivated than a typical company manager. They will also be much more concerned about controlling overhead costs and the profitability of their business.

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Some franchise owners fail because they don’t have the necessary skill set or personality to run a franchise operation. You may be an expert at selling your product or service but fail miserably when running a franchise operation. A successful franchiser must be a good teacher, and a constant mentor to his franchisees. Success in franchising also requires the franchise owner to treat his franchisees with respect and recognize them as independent business owners. Franchisees will become very dissatisfied if they feel stifled or over-controlled.

Franchise owners also have to have a win-win mindset when dealing with their franchisees. Charging exorbitant royalties or outrageous prices for your products and services can quickly lead to disgruntled franchisees. Under these circumstances, they will often band together and withhold their royalty fees or consider buying their products or services from separate vendors. Usually this leads to expensive litigation and further bad blood between the parent company and the franchisees.

There are a number of considerations that have to be taken into account before you pull the trigger on creating a franchise. The first item is to determine if you business will lend itself to expansion into a regional, national or international market. To determine this, you need to thoroughly research the potential demand for your products or services in the areas you plan to expand into. Keep in mind that your unique product or service must not only be desired by potential customers but also by people who would potentially buy a franchise. A demographic study of your existing customer base can also be used to establish potential territories that have a similar demographic mix that would lend itself to success for future franchisees. Another important item is to investigate your potential competition in the areas that you plan to expand into. If there are well established competitors in a potential territory, it may be very difficult to establish a franchise in this area.

One important prerequisite in establishing a franchise is having a registered trademark if it is a product or a service mark if it is a service. Trademarks and service marks establish your brand and your unique identity. They distinguish the products or services provided by your company from those provided by your competitors. A trademark can be a word, a name, a symbol or a device or a combination of any of these. It must be unique in order to be registrable at the U.S. Patent and Trademark Office. Once your trademark or service mark is secured it needs to be renewed every ten years to maintain it.

Another important step that should be accomplished before proceeding with a franchise is to create a thorough business plan. It is important to note that a franchise company is a completely separate entity from your existing business. There are costs that are unique to franchising such as the costs associated with selling the franchises and the money required to train franchisees. Some of the other costs, such as salaries, rent, office equipment, travel expenses, car allowances, research costs, legal costs, accounting and advertising fees also need to be included in your business plan. In addition, the plan must present a realistic plan of expansion. In the financial section of your business plan you will need to provide a timetable that describes the ramp up of the overall financial outlays required to open the franchises described in your schedule. This section will also have to include a timetable description of the ramp up in revenues that will occur as existing franchises mature and more franchises are added. The description of revenue growth should be described for each income source such as initial franchise fees, royalties, training fees and from sales of ingredients, products or services. A description of the overall growth of revenue and of net income over time also needs to be included.

Another important element that needs to be addressed is training manuals and software for running the franchise. Oftentimes this material can be obtained from modifying existing office manuals that describe the duties and operations of your business. If so, they will also need to be modified to include material that will guide the franchisee through the startup phase of their franchise outlet.

Once you decide to franchise, you will be required by the Federal Trade Commission (FTC) to create a Franchise Disclosure Document (FDD), otherwise known as a Uniform Franchise Offering Circular (UFOC) that describes your franchise offering. In addition, you will also have to produce a “Franchise Agreement”.

Your Franchise Disclosure Document and the Franchise Agreement should ideally be prepared by professionals that are experts in developing franchise businesses. When using professional franchise developers, be prepared to spend between $80,000 to $150,000 to set up your franchise.

There are also companies that offer interactive software programs that can generate all of the necessary documents for setting up your franchise business. Some of them also include on-site mentoring, meetings with a specialized franchise lawyer and a consultation with an accountant. In addition they offer unlimited phone support during the preparation of your franchise business.

If costs are a major issue, another potential way to save money is to use an example of a Franchise Disclosure Document and a Franchise Agreement and customize it to your business. When you do this, or if you use self help software, think of your documents as being a first draft. Please don’t try to do this all on your own. These documents should be reviewed by a professional. Franchise law has many nuances that could make you life sweet or living hell if not fully understood and implemented in these documents.

If you are a successful business owner that is seriously considering creating a franchise business, I urge you to check out NewBusinessCreator.com. This website will give you much more information than what was covered in this presentation. It will also give you the tools and resources needed to create your franchise opportunity.

When you are ready to start selling franchises, I would strongly recommend that you list your franchise business offering on NewBusinessMarket.com. There are thousands of potential franchisees looking for business opportunities on this website.

I hope this information was helpful. If you are looking for business solutions, an excellent website to check out is NewBusinessCreator.com. So ask yourself right now, what is your current business goal? Do you need to create a business plan or find key personnel? Are you an inventor that needs to find ways to protect, sell or license your intellectual property? Is raising business capital your primary concern or are you looking for sales and marketing solutions? Whatever your business goal may be, in most cases you can find a solution in NewBusinessCreator.com.

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