WHY COMPANIES FRANCHISE A BUSINESS MODEL
Imagine opening 100 new business locations without having to foot any bills for real estate, equipment and build out costs or taking on any risk. Even more, imagine managers running all those locations, which are just as committed to growing the company as you – and not having to pay them a dime. In fact they pay you money for the right to operate your business model.
For many companies, creating a franchise program is a sensible way to achieve rapid, profitable growth without giving up any control or ownership. Going from a single location to a dozens or even hundreds is possible and well-documented because franchise owner-investors put up all investment capital, shoulder all risk and assume all day-to-day operating responsibilities. It’s expansion, using OPM – Other People’s Money.
ENTERING A NEW BUSINESS
The bad news is a company planning to franchise must realize it is entering a new business, offering an entirely different service (training & support) to entirely new customers (business owner-operators). This new business requires different skills, abilities and expertise. In the new business of franchising, it is critical to develop effective evaluation, documentation, mentoring, training and consulting skills.
THE FRANCHISE FEASIBILITY ANALYSIS PHASE
An indispensable step before any franchise a business development program gets underway is an analysis of the concept and business model. Has the concept been sufficiently proven in the marketplace? How profitable are existing prototypes or company-owned outlets? Franchising will not solve existing problems, it will only intensify them. Franchising is not a way to raise capital, get rich quickly or expand a business with existing problems. There must be sufficient profitability in the business model so that royalty and other payments can be made and leave the franchise owner with a sufficient profit.
THE FRANCHISE STRATEGIC PLANNING PHASE
A successful franchise development program begins with a solid plan – a foundation for franchising. Often there is little or no strategic planning with new companies entering the franchise industry. This is because they utilize the services of a franchise consulting firm or franchise attorney, where little or no attention is paid to critical strategic planning issues. What is called for is not a traditional business plan, a rather thick document that normally does nothing but collect dust in the dark drawer of someone’s desk. More important than a business plan is a strategic plan – a vision of the franchise program together with a limited number of concrete, achievable action steps.
THE FRANCHISE DOCUMENTATION PHASE
If your company made doing a good job at the planning stage its number one priority, franchise documentation goals will be apparent. Proprietary assets (like recipes, formulas, methods, branding, operating techniques and customer information) need to be identified and protected. A catchy and appropriate name, logo and tag lines are registered as trademarks or service marks.
A franchise operations manual and franchise training program are developed, often from scratch, to impart business day-to-day operating skills to franchise owners as well as ensure uniformity of products and services. The franchise operations manual and training program curriculum must be drafted or edited with a particular focus. Certain topics, chapters and policies used in manuals for company-owned locations, for example, are entirely inappropriate in a franchise environment, creating significant franchise liability issues.
Finally, and only after all of the above are underway, a FDD Franchise Disclosure Document, similar to a securities (stock offering) prospectus, is prepared by a competent franchise attorney. Doing it correctly and with a balanced, fair perspective can save going to the courtroom later. Using a boilerplate or online FDD template will almost certainly guarantee a visit to the courtroom down the road. Since these visits cost hundreds of thousands of dollars and up, they are not cheap and far outweigh the cost of doing it right to begin with.
Training the Franchise Management Team
When the documentation phase is over, momentum gathers as the exciting implementation phase begins. This is where the sparks begin to fly as franchises are sold, new franchise owners are taught and trained, and opening assistance is provided. It’s also when most new franchise companies make serious mistakes that haunt them for years or even decades to come.
The reason: most new start-up franchise management teams have not been trained in how to properly operate their new business, nor can they afford to hire a six-figure, salaried person with franchise management experience. A more practical solution: provide new franchise companies with in-depth franchise training instructional workshops as well as on-going, as-needed advice based. At FDD, we offer this type of training and on-going support based on three decades of excellence and experience in franchise industry best practices.
Kevin B. Murphy, Mr. Franchise, is a franchise lawyer based in San Francisco with a 30-year practice devoted exclusively to franchise law. For 20-years he has been a testifying franchise attorney expert witness in court and arbitration proceedings, giving him vast experience in knowing where the bullets come from in franchise litigation. In 2002 -2003 he started, operated and sold a very successful franchise. Mr. Franchise holds degrees in business administration and law from the University of San Francisco and an MBA from San Francisco State University. He is the author of over 50 publications, including 4 books on franchising and one book on trade secrets.