There are two aspects to selling franchises. The first one involves doing everything reasonably possible to get the attention of prospective franchisees and then vetting them to ensure that you end up with the best qualified franchisees. The second involves actually providing the prospective franchisees with the requisite information, signing documents and completing the monetary transactions that will undergird the franchisor-franchisee relationship. The first is tremendously challenging, but once it is achieved, the second is comparatively straightforward.
Tracking down potential franchisees and convincing them that buying a franchise would be the fulfillment of one of their lifelong dreams is not a remotely easy endeavor to take on. Many first-time franchisors can likely attest to having waited more than one year before they managed to sell even one franchise. This is illustrative of the fact that franchise companies do not simply build themselves. However good a franchising idea you have, you will not go anywhere with it unless you are willing to undertake the research to find out whether there is a market for the goods and services you propose. Additionally, once you have established that there is indeed such a market, you should be willing to make the effort to promote your franchise company to potential franchisees with the aim of selling franchises to them.
Selling Franchises with Targeted Advertising
Promoting franchising opportunities can be highly expensive. If you choose to follow the normal media route, you will have to pay the high rates associated with advertising on the TV or radio or with taking out an advert in a regular newspaper. The problem with these forms of media is that, not only are they expensive, but they also reach a broad, undifferentiated audience. This is an inefficient way of advertising if you want your message to reach people who are actually likely to become franchisees. This problem can be remedied by putting advertisements which indicate that you are selling franchises in targeted advertising. In other words, you should place your adverts in places where entrepreneurs and potential franchisees are bound to look.
These places include business magazines which cater specifically to business-minded audiences. They also include online directories specifically set up to include franchise companies that are currently selling franchises. A franchisor’s best bet is to have his or her franchise company listed in the more popular directories, along with the contact information of those who are interested in learning more about the franchising opportunities. Yet another option is that of targeted advertising on the internet. This could involve paying to advertise on franchising-related websites and on social networking sites like Facebook.
Most first-time franchisors are unable to turn their independent businesses into successful franchise businesses. Much of the time, this is because of franchisor mistakes that they make along the way. To avoid falling into the same trap, you should tread carefully during the planning and implementation stages of franchising.
One of the significant franchisor mistakes that franchising experts describe is that of inadequate planning. Some franchisors fail to do their homework before making important decisions about the running of their franchise companies. For instance, they may fail to accurately calculate just how much money they will need to get the franchising show on the road. Various expenses come into play at many stages in the process. They include legal fees, fees for developing and producing marketing materials, and various other expenses associated with developing the franchise organization.
Other aspects of planning go into franchising. They include decisions about the fees and royalties that the franchisees will pay the franchisor. Determining what to charge your franchisees is not a decision that you should make on a whim. You have to figure out how much money you will need your franchisees to pay you in fees and royalties in order for you to meet all your financial obligations and to succeed as a franchisor. If the figures you come up with are too low then you could easily end up losing millions of dollars in potential revenue. These losses could ultimately cost you your franchise business. Thus, neglecting to devote adequate time and effort to the different terms of your relationship with your franchisees could result in a number of franchisor mistakes.
Franchisor mistakes that antagonize franchisees
Among the major franchisor mistakes is one involving failure on the part of the franchisor to recognize that certain business decisions will set him or her at loggerheads with the franchisees. The aim of franchising is ultimately to make money. Any decisions made by the franchisor with the intention of increasing his revenue are not going to go down well with the franchisees if they require some losses on their part. You should keep this in mind as you go about the daily operations of your franchise.
You should recognize that there is potential for conflict between you and your franchisees and make an effort to minimize that conflict by laying the terms of your franchise business out clearly right from the beginning. You should also have in place provisions for conflict resolution and, in the worst case scenario, for terminating dysfunctional franchisor-franchisee relationships. Last but not least, you must realize that one of the keys to franchising success is nurturing your franchisees and ensuring that they succeed. If your sole agenda is to reap profits by fleecing your franchisees, you will only succeed in antagonizing them and undermining your entire franchise system. If, however, you create an environment in which they can thrive, you will ultimately reap the monetary rewards.
Like any other business endeavor, franchising brings with it risks and benefits. Identifying the biggest franchising risks and trying to minimize them is likely to increase a franchisor’s chances of succeeding in his or her efforts.
One of the biggest hurdles in franchising is selling your first franchises. It is not enough to sell franchises to anybody. That would be too much of a gamble, and gambling happens to be among those franchising risks that have no place in a successful franchise company. You have to be certain that the franchisees you select will be the best possible fit for your franchise company. In other words, you have to vet them when they first apply to become franchisees.
Minimizing Specific Franchising Risks
If you have specific, detailed criteria describing your ideal franchisee, and if your criteria actually make sense for your business, then half the work is already done. You will be able to narrow down your pool of prospective franchisees so that it includes only the most desirable candidates. This is a very important part of the franchising process because, at the end of the day, it is the franchisees who will make or break your franchise company. If they don’t have the capacity to bring in a sustained stream of revenue then, sooner or later, you will be facing financial disaster.
There is no simple formula for selecting the right franchisee. Different franchise companies have different business models and offer different products or services to distinct markets. Selecting the right franchisee will necessitate attention to the unique qualities of your franchise company and calculations to determine what sort of person would be best placed to run a franchise unit in it. Simply duplicating the formulae followed by your competitors would be a big mistake. Business decisions must be tailored to suit specific businesses. Applying generic solutions to specific problems in such a scenario would be one of the biggest franchising risks you could take. Chances are you would end up experiencing problems in your relationships with your franchisees.
Other franchising risks become relevant during the later stages of the franchising process. One of them is the risk that franchisors take when they push for the accelerated growth of their franchise companies too soon. Such franchisors forget that it is their role to nurture the already operational franchise units and ensure they are thriving before running off to sell thousands more franchise units. A franchise company is viable as long as it has the capacity to give support to its established units. If a franchisor sells too many franchises too soon, then his or her resources will be stretched too thin. It will not be possible to give all the established franchisees the services that are provided for in their respective contracts. Naturally, without this kind of support and investment, the franchises will not do too well. This will ultimately result in the drying up of the franchisor’s revenue stream.
In order to turn your business into a franchise company, you need to have a set of recommendations to follow: you need a franchising guide. It doesn’t have to be a single, comprehensive text offering you every bit of information you need to know about franchising. Your franchising guide could be a website, or a series of websites designed with prospective franchisors in mind. It could include useful articles about the franchising process as well as products for prospective franchisors to purchase.
Websites of this kind are often directed at individuals who would like to be directly involved in the process of franchising their businesses. They may have reservations about simply handing the whole process over to a franchising expert or consultant without themselves taking the time to understand what it entails. Thus, they visit these websites, seeking to understand the steps involved in franchising, and the resources necessary to execute them.
They may ultimately decide to go the do-it-yourself route as franchisors. Alternatively, they may decide to hire professionals to facilitate the entire process for them. If they opt for the latter, they cannot be said to have wasted their time looking into the process and then handing it over to another individual. In fact, their actions are commendable. By seeking to first learn what they can from an online franchising guide, they are better able to supervise the franchising of their businesses by experts. This is positive. After all, informed ‘bosses’ are far more effective than ignorant ones.
A More In-Depth Consideration of the Franchising Guide
Some of the topics that an online franchising guide is likely to tackle include tips for identifying a business that is suitable for franchising, the pros and cons of franchising one’s business, advice for selecting the best possible franchisees from a pool of applicants, recommendations for optimizing a franchise agreement, and the legal issues faced by franchisors.
In some cases, franchising guides are not websites, but magazines and other publications from organizations that focus on franchising. Such associations include the International Franchise Association, and regional organizations like the ATLFA (Atlanta Franchise Alliance).
Among the best resources available to prospective franchisors are actual franchisors who have been doing it for years and can talk about it, not in general terms, but with reference to specific contextual details. Information of this kind is critical in helping prospective franchisors understand the complexities involved in the franchising endeavor. Reaching these franchisors need not be an impossible mission. Thanks to social networking sites, there are plenty of opportunities for aspiring franchisors to ‘meet’ ongoing franchisors and to learn from their mistakes and their successes.
A franchise territory is a region within which a franchisee has the right to locate his or her franchise unit. You could call it the catchment area for a particular franchise unit’s customers. If the franchise territory is exclusive, only one franchise unit of a given franchise system will be located within it. From a franchisee’s standpoint, this is ideal as it means that there will be no competing franchise units to contend with. From your standpoint as a franchisor, it may or may not be ideal, depending on the nature of your franchise business and other factors.
As a franchisor, you earn most revenue when the franchise units in your franchise system profit. So it is in your best interest to see these units thrive. If you allot each franchise unit a disproportionately large franchise territory, you will have more potential customers than you can serve. Chances are that you will end up losing them to competing businesses. This is not ideal. On the other hand, if you allot each franchise unit a disproportionately small territory, or if you allow more than one franchisee to set up franchise units in one territory, you could easily end up undermining all of the franchise units. They may find themselves competing for a limited number of customers. Sooner or later, at least one of them will go under because it will be impossible to drum up enough sales or profits to continue running.
Facing the Franchise Territory Issue Head On
In order to avoid future disagreements with your franchisees over franchise territory, you must make sure that this issue is addressed in length and in breadth in the franchise documents (i.e. the franchise disclosure document and the franchise agreement). Most importantly the conversations on the subject should take place before any documents are signed or transactions between you and your prospective franchisees completed. Hashing out details of this kind beforehand is the best way to ensure that franchising is as smooth a process as possible.
There are a number of details you should clarify in your conversations with your franchisees about territories. You should indicate to them what the nature of the territories will be (i.e. exclusive, non-exclusive or non-existent). You should also clarify what the process of determining territories will be. If you reserve the right to determine the location of the franchise unit, you should say so. If the franchisee is allowed to give some input into the decision-making process, you should indicate this. You should also be clear about whether you will be imposing conditions such as minimum sales quotas on your franchisees.
Is there any sure formula for franchise system success? The safest answer to this question is “No.” In business, there are never any guarantees when it comes to systems involving contextual factors like other people and entities. There will always be some element of the unpredictable about them. You can anticipate, speculate, and determine possible outcomes in your franchise system, and you can work towards them. In the best case scenario, everything will work out well and you will succeed beyond your wildest expectations. In the worst case scenario, an unexpected factor can undo all your well-laid plans, and if you don’t have any back-up arrangements, you will be in a fix.
This is not unique to franchising. It is the way of the business world. You may plan, coordinate and implement arrangements, but there are no guarantees that you will profit. However, if you are open to creative ideas, and if you are willing to put in all the hard work necessary to get things started and then to sustain them, you have some hope of achieving success. Subsequently, the key to doing well is to learn what conditions, decisions and actions were behind your prior mistakes, and then to avoid replicating them. Experience, whether direct or indirect, is the ultimate teacher in business. It is complemented by the courage to take calculated risks and the prudence to lay down a fall-back option ahead of time.
The Franchisee Factor in your Franchise System
For your franchise system to work, it will have to achieve a balance between meeting your own financial goals and ambitions and enabling your franchisees to thrive. As the franchisor, you will have control over such factors as marketing, franchise design and operation, and product quality. However, you will not have the ability to force your franchisees to work within the limits you have set. They will have to be amenable to the terms of your franchise agreement in order for your franchise relationship to work. They will also have to have managerial skills and abilities commensurate with the needs of your specific franchise. It would do you well to look into their backgrounds before selling franchising rights to them.
It is also important to give your franchisees a breathing chance when assigning them franchise territories. You might think that setting up numerous franchises in a particular territory will maximize your potential revenues. However, if you miscalculate, you will cause some of the franchises to go out of business. This will only undermine your franchise system.
Franchise royalties are regular payments made by franchisees to a franchisor for the right to continue using the franchise company’s copyrighted materials and ideas. It is important to note that franchise royalties, which are calculated as a percentage, are distinct from the franchise fee. The franchise fee is a flat fee which is paid at the beginning of the franchise relationship when the franchisor and franchisee have signed the franchise agreement. The one time franchise fee is, not surprisingly, large in amount. Franchise royalties are much more manageable, but because they are paid on a regular basis, they could add up to more over the length of the franchise relationship, which could last for decades.
Setting the Rates for your Franchise Royalties
As you already know, franchise royalties are the source of income for franchisors in a franchise relationship. Thus it is important for franchisors to use care in determining what rates to set for their franchisees. If, in the process of laying the groundwork for your own franchise company, you set your franchise royalty rate too low, then that is the amount you will earn for the length of the franchise relationship. The only way you can change the royalty rates is to convince your franchisees to accept a renegotiation of the franchising terms. But how likely is it that franchisees would agree to renegotiate the terms of an agreement that is advantageous to them? Why would they agree to an increase in their franchise royalties unless you were offering them something additional (which would undoubtedly cost you some money) to sweeten the pot? Thus, the best time to do research on franchise royalties and to decide what levels to set them at is long before you ever sit down to sign agreements with your franchisees.
There are different models for charging royalties. One of them is to ask your franchisees for a percentage of their net sales. The other is to ask them for a percentage of their gross sales. Those who go for the former model tend to set the royalties at a higher percentage because net sales are, by definition, lower than gross sales. In both cases, it is evident that, the more that the franchisee sales, the higher the royalties that he or she will pay you. Hence, it is in your best interests to create conditions conducive to your franchisees’ success. These could include advertizing efforts to market your products or services and specific franchise locations. They could also include efforts to optimize territorial boundaries so that the individual franchises are exploiting their markets to the best possible effect, but not competing with each other.
A quick internet search will reveal the term “franchise package” to be used in a variety of ways by different business entities. Some use it to refer to the documents initially given to those who are interested in learning about a particular franchise company’s franchising opportunities and applying to them. These may include a description of the franchising opportunity, a list of the factors determining the eligibility of potential franchisees, a form to indicate interest and apply to become a franchisee, and a form authorizing the franchisor to do a background check on the applicant.
Further examination of the term “franchise package”
Others may use the term to refer to the documents made available to those who are successful in applying to be franchisees. They include the franchise agreement and any other documents determining the terms of the franchise and governing the relationship between the franchisor and franchisee. These documents include a franchise operations manual, which informs franchisees about all dimensions of operating their franchises. They also include a franchise disclosure document, which discloses to franchisees the rights to which they have access under the franchise agreement, and their obligations towards the franchise company. A franchise package can also include deposit agreements, multiunit agreements, financial statements, account assumption agreements and software license agreements.
The term “franchise package” is also used by some to refer to what one gets upon signing the franchise agreement and paying the franchise fee. This could include equipment relevant to running the franchise, training, and access to certain products and services. For instance, an ice-cream kiosk franchise package could include a business plan, a marketing plan, an operation guide, exclusive rights to a protected territory, storage cabinets, a machine for storing and dispensing ice cream, storage space and dispensers for various toppings, brand marketing, signs, menus, workstations, etc.
Whichever understanding of the term “franchise package” you encounter, you will find that it describes a franchisor’s overtures towards franchisees and potential franchisees. Thus, the franchise package gives applicants and franchisees alike insight into the franchise company’s degree of professionalism and its level of organization. A comprehensive package, incorporating all the necessary information clearly indicates that the franchise company is thorough and worthy of further consideration. It may also reveal that the company has been in the franchising business for long and has had the time to iron out the irregularities in its process. The better put together a package is, the more confidence that applicants and franchisees are likely to have in the franchise company. Thus, putting a package together should be seen as an opportunity to engage in implicit PR for the franchise company.
Deciding whether to franchise your business in the first place is distinct from franchise expansion. The former entails a variety of steps to determine whether your business would succeed as a franchise business. It could end with you rejecting the idea of franchising and opting, instead, for smaller, more controlled growth. The latter involves a business that has already proven successful as a franchise business. Expanding this franchise business by opening more franchises in previously unexploited territories, regions, and even countries will make it possible to maximize the franchise company’s profits.
Sometimes franchise expansion is something that is considered as a long-term goal, right at the beginning of the franchising process. The franchise company typically starts small, expanding locally, and translating the franchise formula into success close to ‘home’ before considering larger conquests nationally and internationally. In this case, franchise expansion occurs in phases. This is a wonderful way to expand because, by the time the franchise company opens its doors to international franchisees or to franchisees in previously ‘unconquered’ regions of the country, it has established that it has potential for great success. This, more than anything, helps to win over potential franchisees who are shopping around for a franchise company to approach.
Some of the Complications of Franchise Expansion
Franchise expansion on an international scale brings into play issues that a franchisor probably has not had to deal with previously. One of these is the issue of the franchising laws in the country into which the franchise is expanding. Some countries simply do not have laws regulating franchising. Alternatively, they may have such laws, but they could be underdeveloped in comparison to the franchising laws that exist in the franchise company’s home country. The problem with venturing into new markets where franchising is not legally regulated is that legal issues might arise, putting the franchisor or franchisee in a position of great disadvantage. If this happens, then there is no legal basis for resolving these issues. Either party could incur great losses as a result. Franchisors are also likely to want to protect their trademarks and to feel concerned about their limited capacity to do so in countries that have poor franchising laws or don’t have any to speak of.
There are various models for franchise expansion. A particularly intriguing one involves partnering with a franchise business that already has infrastructure in the region or state into which you want to expand. This can be a mutually beneficial relationship, allowing each franchise company to benefit from the other’s infrastructure. It dramatically reduces expenses. However, it can create extra legal complications if it isn’t well-thought through and if the associated contracts are not drawn up well.
Franchising your business is not easy. Even with a checklist of franchise basics to keep you on track, it is a long, drawn-out process. It also involves a lot of research, preparatory work and requires tremendous courage and resources to make radical changes to the business that you have already poured your heart and soul into. However, if you do it right, the effort will eventually pay off. Once the franchise system is well-established and your franchisees are raking in revenues, you will be able to enjoy relative financial security. Furthermore, you will be able to take pride in hearing the name of your business on the lips of hundreds upon thousands of new customers regionally or nationwide.
Defining Franchise Basics
To get to a situation where you can lay back and bask in your franchise success, you must ensure that you persevere through all the necessary work and that you accomplish it well. Everything you decide at the beginning of the franchising process will have implications for the rest of your career as a franchisor. Thus, you must get certain decisions right at the beginning. Some of these decisions are pretty obvious, even to somebody who is not a specialist in franchising. Thus, it makes sense to call them franchise basics.
Perhaps the most important of franchise basics is making sure that you do your franchising ‘homework’ then review it multiple times as necessary. You must tread extra-carefully, making sure to research everything, and to countercheck the solutions you are given. Seek a variety of informed opinions about issues that you are not 100% certain about before agreeing to anything legally binding.
Another basic step in the franchising process is to make sure that you come across as a credible franchisor. The franchise package that you give your potential franchisees must contain every single relevant document. You should have thought out all the likely eventualities, and even the unlikely ones in the drafting of your contract and other documents. This includes making sure you have an exit plan. If a particular franchisee proves to be a terrible match for your franchise company, you should have the option of letting go of him or her through a set of legal steps that you have both previously agreed to. Another important point on the list of franchise basics involves coming up with a suitable brand for your franchise, and subsequently protecting it from being exploited by others.