7 Important Steps to Becoming a New Franchisor
September 23, 2016 1:41 PM
Franchising your business with MBB is a proven route to rapid growth. But becoming a franchisor is not an automatic ticket to success, especially in this challenging economy. Still, many business owners dream of seeing their brand become a household name, with a network of franchisees from coast to coast or around the globe. When the right concept is franchised effectively, it can be a great expansion strategy that doesn’t require as much up-front capital as growing through company-owned units.
If you’re considering franchising your business, know that the process of becoming a franchisor is usually long and involves considerable cost. Just because you qualify to sell franchises doesn’t mean you will find buyers.
Becoming a successful new franchisor entails making many thoughtful decisions early on that will affect your business for years to come. There’s also a lot of legal paperwork to wade through to make sure your business complies with federal and state laws that regulate the franchise industry.
Here is MBB’s guide to the important steps you’ll need to take along the road to becoming a new franchisor.
Step One: Evaluate if Your Business is Ready
The first question MBB will ask is whether your business is suited to being franchised. Beyond having a track record of sales and profitability at the existing business, there’s several factors to weigh here.
Consider your concept.
Most good franchise concepts, MBB feels, offer something familiar, but with some unique twist to it. A good example is Philly based Tony Luke’s, which offers a familiar product–cheesesteaks–but with 100% ribeye steak meat.
The concept has to appeal both to end consumers and to prospective franchisees. There should be an expectation that more units will create economies of scale and increase profits. Additionally, the business needs to be something you can systematize and replicate, not something that needs your personal touch to be successful.
Ask yourself, is the concept salable? Can you clone it? Does it provide good returns?
Check your financials.
Most successful franchises take a business that’s already profitable and try to replicate that success in other locales. MBB likes to see companies with at least a couple of profitable units beyond the first one already in operation before a company tries franchising.
Gather market research.
Don’t rely on your gut feeling that your business would be a smash hit across the country. Gather market research to confirm there is widespread consumer demand beyond your home city for what your franchise business would offer, and room in the marketplace for a new competitor.
Becoming a franchisor means you’ll be engaged in entirely different activities than you were as a business owner. You’ll primarily be selling franchises and supporting franchisees now, instead of selling pizza or fixing toilets.
Ask yourself if you’re comfortable having a role as a teacher and salesperson, selling and supporting franchisees, as opposed to going out there and doing it yourself.
In addition, franchising your business will require that you relinquish some of the control you’ve had over how your concept is executed.
Franchisees won’t do it exactly the way you would, even if they do it well. If you are so married to your concept that you won’t let anyone else touch it, then franchising may not be right for you.
Evaluate other alternatives.
Before you plunge into franchising, you may want to consider other options. Depending on your situation slower growth, finding debt financing or taking on partners are all alternatives that may prove better ways to move forward.
It also can cost $100,000 or more, so ask yourself if your company has the financial resources. Remember that while franchising allows you to grow fast, it also means giving up most of the franchise units’ future profits.
Step Two: Learn the Legal Requirements
In order to legally sell franchises anywhere in the United States, your business must complete and successfully register a Franchise Disclosure Document with the Federal Trade Commission . In the FDD, you’ll be asked to provide a wide range of information about your business, including audited financial statements, an operating manual for franchisees, and descriptions of the management team’s business experience.
Beyond the federal FDD requirements, some states have their own rules for selling franchises within their borders.
MBB can advise and assist in this process. MBB recommends hiring an experienced franchise consultant, like MBB. Often, a new company will be set up to act as the franchisor. MBB can make sure you’re doing every required step correctly.
As you prepare your legal paperwork, you’ll need to make many decisions about how you’ll operate as a franchisor. Key points include:
- The franchise fee and royalty percentage
- The term of your franchise agreement
- The size territory you will award each franchisee
- What geographic area you are willing to offer franchises within
- The type and length of training program you will offer
- Whether franchisees must buy products or equipment from your company
- The business experience and net worth franchisees need
- How you will market the franchises
- Whether you want an owner-operator for each unit or area/master franchisees who will develop multiple units
MBB can assist in all of the above.
New franchisors don’t realize how much each of these decisions can affect their future profitability.
Be careful to note whether geographic variables such as weather or local laws may affect franchisees’ success. Territory size is important too, as too-large territories may have to be bought back later at a premium so they can be split up, notes.
Step Four: Create Needed Paperwork and Register as a Franchisor
Once you’ve made the important decisions that shape how your franchise will operate, you’re ready to complete your legal paperwork. When you submit it, be prepared for authorities to critique the document and possibly demand additional disclosures before they approve your application.
Step Five: Make Key Hires
As you prepare to become a franchisor, you’ll need to add a quality hospitality management company who will focus solely on helping franchisees.
Step Six: Sell Franchises
Now that you’re in business as a franchisor, one of your most pressing activities will be to find franchisees and convince them to buy your concept. MBB has demonstrated effective methods of lead generation.
Selling franchises is difficult because of the high risk involved for franchisees. MBB will know your business well and be able to tell a compelling story about why you’re a worth the investment of their time and money.
As a franchisor, you’ll have gone through a lot to reach this point. But here – at the point where you begin supporting your franchisee network – is where a chain ultimately succeeds or fails. Your training programs and other support efforts will create quality control, making sure the brand provides a uniform experience no matter which unit customers visit. With the Internet, this has increasingly come to mean providing ongoing online learning modules for franchisees to use.
At the same time, you’ll need to start marketing the growing chain to drive sales to franchisees. Many new franchisors underestimate how much this marketing and support effort will cost. Marketing encompasses everything from radio or print ads to uniforms, logos, fliers, and logo art on company vans. MBB has an entire public relations, social media, and graphic design team waiting to assist.
Here are eight tips to help you through the transition:
- Get organized. Think through the process of precisely how your business works. …
- Hire an attorney. …
- Be picky. …
- Build and protect your brand. …
- Choose the right locations. …
- Find a mentor … …
- Know how you want to grow. …
- Support your franchisees.