The basics of the franchise

The franchise is a method of disseminating products or services. The franchise consists of a franchisor who provides the use of a trademark or trade name and a business system and a franchisee who pays a franchise fee to become part of the franchise business, as well as a royalty on a regular basis. For any franchisor to be successful, the majority of its franchisees must maintain profitable franchise units in the long term. A successful brand depends on an ongoing partnership between the franchisor and the franchisee.

The greatest attraction of franchises is the opportunity for an individual to be in command of their destiny and secure their future. The franchise model has become an attractive business opportunity for wealthier individuals and investors who buy many units at the same time; or who buy the rights to develop a geographic area or “territory” and develop a certain number of units within a specific period of time. These multi-unit owners, area developers, or area representatives often recruit new franchisees and support them within their territory are part of a growing movement in franchising, representing approximately 50 percent of all franchised units in the US. Today.

“Multi-brand” franchises are also on the rise. These franchisees operate different brands under a single organization, creating efficiencies, economies of scale, and market penetration to increase sales and profitability. The main reasons successful franchisees look for additional brands are because they have “saturated” their territory for their current brand, or they are looking for a corresponding new brand to even out the ups and downs of business or seasonal cycles. Franchisors also combine several different brands under one roof and often offer concessions to current franchisees expanding to a second or third brand. “Co-branding,” in which a franchisee operates two brands from the same location, is another recent trend. Co-branding saves on real estate or leasing costs, allowing for more profit per square foot.

Entrepreneurs often look to franchises for peace of mind. They want to know, as safely as possible, if the franchisor is presenting the franchise opportunity accurately and realistically and they take the time to do “due diligence” by talking to current franchisees, reading the Franchise Disclosure Document (FDD) . Carefully with the help of an experienced franchise attorney and after comparing the brand and industry in consideration to the competition (franchisee or not), your chances of making money and building a successful business are better than if you started a business from scratch.

For many aspiring entrepreneurs looking at the franchise business model for the first time, the business proposition may seem absurd. Why would someone pay tens of thousands of dollars before starting, and then a percentage of the cap every month for 10 or 15 years? For those who consider it further, the answer is obvious. They can earn more money faster through franchising than on their own; and they realize the potential for higher long-term returns on their investment. Legally, franchisees do not “own” the franchise, but are granted, or granted, a license that grants them the right to operate and manage the franchise business. However, franchisees own their business assets and, as long as they adhere to the franchise agreement, they have specific rights under state and federal laws. Franchisees can form franchisee associations in which they can participate. They can get involved in corporate decision-making if the franchisor is willing, or come together to oppose decisions that they consider detrimental to their operation and the brand in general.

Franchise criteria

Determining whether a business can be franchised is not an easy task, however, there are some predictive factors that can be used to assess a business’s readiness for franchising and the likelihood that it will be successful as a franchisor.

Consistency

To sell franchises, a business must first be reasonable to prospective franchisees. This can be discovered in several ways: size of the organization, number of units, years of operation, appearance of the prototype unit, promotion, familiarity with the brand and soundness of the management.

Segregation

In addition to credibility, a franchise organization must be sufficiently separate from its competitors. This can come in the form of a unique product or service, a reduced investment cost, a unique marketing tactic, different target markets, or a business model that is sufficiently different from the others.

Knowledge transmission

An extremely important aspect of a successful franchise is the ability to teach a system to others. To obtain a franchise, a business generally must be able to systematically educate a prospective franchisee in a comparatively short period of time. If a business is so complex that it cannot be taught to a franchisee in three months, the business will have a difficult time franchising. Some more multifaceted franchisors make up for this shortcoming by targeting only potential franchisees who already have knowledge in their field. A medical franchise aimed only at doctors is a good example.

Modification

A potential franchisor should know how well a model can be modified from one market to another. Some concepts are not easily modified in large geographic areas due to local variations in consumer tastes or preferences. Others are controlled by various state laws. Other models work only because they are in a single location. Some work well because of the unique skills or talents of the individual behind the model. Some models are only successful if they are based on years of determination and relationship building.

Thriving prototype operations

A successful prototype is required to demonstrate that the model is proven and is generally integrated into franchisee training. The prototype also functions as a testing ground for new products, new services, marketing techniques, merchandising, and operational efficiencies. The exception to this is with companies whose franchises involve the direct sale of a patented product or service.

Documented systems

All profitable companies have systems. But to be franchisable, these routines must be documented in a way that efficiently conveys them to franchisees. In all cases, a franchisor should record its business policies, procedures, systems, forms, and routines in a comprehensive and easy-to-use written operations manual. Some franchises offer computer-based training modules or written and computerized manuals.

Affordability

Affordability reveals the ability of a prospective franchisee to pay for the franchise. This condition is both an indication of the prospective franchisee and the actual cost of starting a franchise. A franchise with a starting cost of $ 50,000 may be affordable for some prospects but not for others. Therefore, it is advisable to choose a franchise fee that is reasonable for the franchisees while allowing the franchisors to cover startup costs.

Return of investment

A franchise business must be profitable. At the same time, you need to allow enough profit after a royalty and other ongoing franchise expenses for franchisees to get a sufficient return on their investment of time and money. The return on investment must be calculated against the investment to provide a consistent number. The franchise investment can be compared to other investments of equivalent risk that compete for the franchisee’s dollar. A good franchise system should allow a return on investment of at least 20 percent between the second and third years of operation.

Market movement and conditions

Market movement and conditions are critical to long-term planning. Is the market growing or consolidating? How will these changes affect your business in the future? What impact will the Internet have? Will the franchisee’s products and services still be relevant in the future? What are other franchised and non-franchised competitors doing? How will the competitive environment affect your franchisee’s likelihood of long-term success?

Capital

While franchising is a low-cost means of expanding a business, it requires a variety of amounts of capital to get started. A franchisor needs the capital and resources to run a franchise program. The assets required to initially begin operating as a franchise program will vary depending on the extent of the expansion plan. If a business is looking to franchise one or two units, the necessary legal documentation can be completed at costs as low as $ 15,000. However, for franchisors aiming for rapid expansion, start-up costs can amount to $ 100,000 or more. Once printing, auditing, marketing, and personnel costs are considered, a franchisor can expect a budget of $ 250,000 or more to meet its development goals.

Obligation to relate

Successful franchisors focus on building long-term relationships with their franchisees that are mutually rewarding. Not all franchise organizations understand the connection between relationships and profits. Strong relationships with franchisees make it easier to sell franchises more effectively, make necessary system modifications more easily, and encourage franchisees and their managers to provide a reliable level of products and services to their customers.

Management strength

The most important aspect that contributes to the success of any franchise program is the soundness of its management. The biggest contributor to the collapse of startup franchisors is a lack of staff or a lack of management experience. In addition to taking on new job roles for which the franchisor may have little or no time, the franchisor must demonstrate experience in fields in which he may have little or no experience. These areas include franchise marketing, lead acquisition, franchise sales, advertising management, training, and multi-unit operations management. An appropriate first step in the franchise decision is to assess the question of whether or not a business concept is truly franchisable.