Should I Franchise My Business?
What is a Franchise?
The Federal Trade Commission defines “franchise” in a manner allowing it to regulate the entire range of franchise sales. The definition outlines the 3 elements
of a franchise relationship: 1) payment of a fee for obtaining the franchise agreement, 2) permission to operate a business using the franchise’s trademark, and 3) the franchisor providing significant assistance to the franchisee.
Simply put, a franchise is a business in which the owners (franchisors) sell the rights to their business logo, name, and business model to a 3rd party (franchisee).
The franchisee typically pays an initial fee for the rights to the business, training, equipment, etc., as well as annual licensing fees. The franchisee also pays ongoing royalty feels, which is usually a percentage of the gross sales. The franchisee must follow the franchise agreement, which dictates uniforms, signage, pricing, business methods, etc.
Opening another business location takes a lot of resources. You must have the capital required to acquire a new location and hire more workers, as well as the time
to invest in launching and maintaining the new location. By comparison, becoming a franchise can be a great way to expand your business with minimal capital, people, and time. However, becoming a franchise is not optimal for every business. As a shrewd business owner, you must carefully consider the following:
1. Is my current business operating successfully? Not only do I have a successful business model, but does my business have a large enough target market to succeed in other geographic locations?
2. Similarly, is my business sellable? Are people interested in franchising my business? Does my business have proven credibility? Is it unique, with something different to offer?
3. How easy is my business to replicate?
Your business needs to be relatively simple to operate. Could someone learn to operate your business in 3 months or less? Will my business model work in a variety of markets?
4. Can my business provide the franchisee with an adequate return? The franchisee must be able to generate a 15 to 20 percent return on investment after deducting the royalty fee.
5. Am I willing to put in the time necessary to make sure my franchisees are successful? You will need to have training programs, an advertising plan, and provide adequate staff for frequent franchise interaction.
6. Can I afford to franchise? Although franchising is a relatively inexpensive way to expand your business, you still will need money for legal documents, manuals, training programs, marketing materials, as well as a budget for generating franchisee leads.
After you decide to franchise, there are some decisions you need to make regarding the nature of your franchise.
1. Do you want the ability to choose or approve of the location of franchisees?
2. Will each franchisee have a geographic location?
3. Do you plan to pay a salary to a franchisee?
4. What will be the upfront cost associated with your franchise?
5. What will be the calculation to determine the recurring revenue from the franchisee?
6. What will be required of or provided to the franchisees in the following areas:
a. Training (what will be required/provided?)
c. Marketing materials
d. Use of raw materials
e. Quality control of finished product
f. Protection and management of the trademark
g. Additional business ventures
7. How long do you expect the franchise agreement to last? How many renewals?
8. Does the franchisor expect to own any franchises?
9. Will you allow sub-franchising, or allowing a franchisee to franchise?
Franchising your business can be a great way to grow your business, but as you can see, there is a lot to consider when deciding whether to franchise your business. Much time and care should be taken to make this important decision.