Is Your Business Franchisable?
An Alternative Method for Business Enterprise Growth
When business owners contemplate expansion and growth of their business enterprise and brand, they must first make a fundamental decision on strategy and method of expansion. Should they expand on their own, utilizing their own time, capital and other resources on a location-by-location basis, or should they leverage the efforts of others who are willing to invest their own time, effort and assets to grow the business brand?
Successful businesses typically have a solid and growing market share as well as strong profitability and brand recognition in their core geographic markets. If an owner can sufficiently capture and efficiently package the business model and underlying business formulas into a franchise model, then franchising might be the best path for expansion.
Franchising allows a business owner to expand into new geographic markets by allowing others to use an owner’s established systems and branding to duplicate the systems and expand the brand into other markets. Setting up a franchise system provides for growth by utilizing capital provided by others to acquire capital assets, operating assets, as well as funding opening and other operational costs for additional storefronts under the business brand. A franchise arrangement also reduces certain risks and liabilities for the owner-turned-franchisor such as those related to loans, leases, employees and vendors, as those become franchisee responsibilities.
Once a business owner has developed a franchise model, finding the right people to sign up as franchisees is the next step. Those are people who are interested in an opportunity to own a business and be their own boss but do not necessarily have the abilities or resources to build a new business completely from scratch and, therefore, wish to join in on a successful and proven business model.
Franchising incentivizes franchisees to become invested in the success of their franchised business because they pay both an up-front initial franchise fee and ongoing royalty fees to the franchisor, and in many cases, invest a significant part of their net worth into the new business. Many owners who turn to franchising find talented individuals who are very committed to making sure their franchise is a success. However, business owners looking into franchising should keep in mind that the success of one or even several pre-franchising owner-operated storefronts is not a sure prediction of success of additional storefronts in a franchise model.
Franchising is not the best solution for every owner considering expansion. An owner relinquishes some control when bringing in others to open and run a business unit as a franchise. While a franchisor retains certain powers over franchisees in the wider scope the operation of the business unit, such as through the implementation of system-wide standards applicable to all franchisees, a franchisor is not permitted to exercise too much control over a franchisee, and certainly not over day-to-day operations of the franchisee’s business.
Business owners must also consider the costs to set up the franchise system and access to capital to cover such costs. While franchising can be a lower-cost means of expansion in the long run after the franchise system is set up, the conversion to a franchise model requires an initial investment by the owner. The owner will need to develop legal documents, such as a federally mandated Franchise Disclosure Document, and a franchise agreement form, as well as other legal and business documents and procedures such as operations manuals, marketing and advertising programs, and training programs prior to offering a franchise business opportunity to prospective franchisees.
Some states impose additional legal requirements and documentation on franchisors before the franchisor can solicit prospect franchisees in that particular state. Also, one of the cornerstones of a franchise system, its intellectual property, must be sufficiently protected, which includes federal registration of the owner’s trademarks.
Business owners need to carefully analyze the underlying reasons for their own business success. In most cases, it is due to both the owner’s day-to-day efforts as well as the model and processes built and implemented in the business. If however, the owner is indispensable to the business, this over-reliance on the owner will be a challenge for moving forward in a franchise system.
The business model must be capable of being a blueprint for replication by others in a franchise system by being sufficiently detailed to provide the roadmap to potential success. A common misconception among owners contemplating expansion via franchising is that they can simply take the current written materials describing and demonstrating their current business model, make a few tweaks, and those revised materials are then ready to be disseminated into a franchise system environment.
Even more common is the miscalculation of how much time and effort is needed by the owner to get what is not currently on paper, i.e. the essential operational or managerial processes that only exist in the business owner’s head, into print format so that others can implement that part of the business model. The successful business owner-to-franchisor conversions are those which can bridge the gap between the pre-franchise written and non-written business model materials in existence, and the written materials needed for a franchise system.
A properly structured franchise system gives business owners an alternative method for business enterprise growth. Converting to a franchise system takes some time, effort and financial resources, but once the franchise system is properly set up, a business owner can focus on finding the right people to utilize their own resources and assets to expand the reach of the owner’s brand into new markets.
Content contributed by Shumaker, Loop & Kendrick, LLP, a full service law firm founded in 1925 with more than 240 attorneys practicing in Charlotte, North Carolina; Columbus, Ohio; Sarasota, Florida; Tampa, Florida; and Toledo, Ohio. Content written by Jack Santaniello, Partner, whose principal areas of practice include corporate, transactional, mergers and acquisitions and franchise and distribution law. For more information, contact him at 704-945-2141 or firstname.lastname@example.org or visit www.slk-law.com.