Small business owners and entrepreneurs looking for new business opportunities often wonder how to expand their business and how to generate more revenues. Often, these simple goals turn out to be impossible due to lack of time and lack of finance. Opening even a couple of additional business branches usually means a lot of money for inventory, equipment and staff and more long hours of work to set and control their operations.
These two major problems – time and money, can easily be overcomes if the business is franchised. Franchises tend to grow much faster. The real advantage of owning a franchise is that you can have hundreds or even thousands of units without investing your own money and without spending your time.
The most common question asked by anyone who conspires starting a franchise is “How to be a franchisor if I don’t have any previous experience in this field?” the good news is that it is really simple to be a franchisor even if you have never heard of franchising before.
How to be a franchisor? The basics of starting a franchise from a scratch
You can be a franchisor even if you have never been a business owner before. Starting a franchise business is probably easier than franchising an existing business. The first thing you need to do is to come up with a good business idea. Once you know what your products or services will be, you need to put in place the basic franchise documents. You cannot be a franchisor if you do not have a professional franchise operations manual and a franchise disclosure agreement. These can be prepared effortlessly if you use ready-to-use franchise templates. The third thing you need to do before opening for business is to register with the state authorities.
How to be a franchisor if you already have a company?
If you already have a company and what to be a franchisor, you will need to transform your current business. Although this sounds easier than starting a franchise from a scratch, in many occasions it proves to be more difficult. You will need to review all your company policies and operations and make sure they are executed in a way that can be followed by franchisees. What this means is that you will have to detailed and easy to follow system of rules regarding the way every simple aspect of your business operations is executed. Small business owners usually do not have such systems in place because of the scale of their business operations. Once you have this settled, you can proceed to preparing the franchise documents you need to register and launch your franchise.
What if you want to be a franchisor without opening your own franchise business?
You may decide that running your own franchise is much more than you can or want to handle. What you can do in this case is to invest in somebody else’s franchise. This way you will be a franchisor but you will be able to decide how involved you would like to be.
Franchise business is unique, different than any other type of business. Almost all of the aspects of franchise business must be looked at from a slightly different angle. Along with all specific diversity, there is also a significant difference between the expectations of franchisors customers (the franchisees) and the customers of any regular business. Meeting the expectations of your customers is of paramount importance to any business owner.
There are many guidelines that one can follow in order to perfect their company’s customer service. Yet again a franchisor’s responsibilities towards their franchisees often go beyond standard customer service. What a franchisee expects from a franchisor is definitely not what a regular customer expects from a service or a product provider.
Good relationships between franchisors and franchisees are one of the keys to success for any franchise business. Often the reasons for problems in this aspect are connected with the franchisor failing to meet franchisees’ expectations or failing to be responsible for the things they must be.
Franchisor responsibilities guide & tips
• Any franchisor is ultimately responsible for setting good business foundations. As a franchisor you must make sure the system you have established will be profitable for your franchisees as well as for you. If you fail at this initial state, it is very likely that your franchisees will fail too.
• Franchisors are responsible for the development and execution of national and/or local marketing strategy and communicating them to their franchisees. Although your company policy may include or allow advertising campaigns to be initiated by your franchisees, it is up to you to take care of the overall marketing plan and advertising campaigns.
• Brand management is another responsibility a franchisor has. How the brand will be developed, what trademarks will be used, maintaining and protecting the company identity is ultimately a responsibility of the franchisor.
• Territory protection may be or may not be part of your franchise policy. Whatever the case, make sure your franchisees are well informed prior to signing the agreement. Many franchisees expect territory protection and assume the franchisor would take care of this. Since territory protection is not part of any franchise business strategy you must clear this issue well in advance in order to avoid misunderstandings later.
• Make your potential franchisees well aware what type of training and support will be available to them. Be specific and describe in details when and how initial or any ongoing training activities will take place; what training materials will be provided to the franchisee and so on.
• One of the common reasons for disappointments is not because the franchisor is not being responsible for the things they should be, but because the franchisee expectations are unrealistic. Avoiding such situations is easy provided that the franchisor make sure every is well explained and incorporated in the company documents. Take the time and go over each point with a potential franchisee. Make sure their expectations are set to the correct level prior to signing the agreement.
So you are a business owner and you have decided it is time to expand. Naturally you would think about various ways how to achieve this and the idea to franchise your business would pop into your head. Indeed, franchising a business can not only help t grow but has the potential to bring greater return on investment that regular businesses. With all of this said, it is now time to see how exactly you can turn an existing business into a franchise one.
Transforming a business into a thriving franchise cannot happen overnight and it requires a little but more than simply signing some documents and forms required by state and federal laws. There are many things that need to be carefully considered. Here is how you can turn a business into franchise.
Franchise Your Business Tips
- Is your business good enough to be a franchise? Being a franchise means that you will directly meet much more challenges than you would face while being a regular business. Is your current business stable? Is it profitable? Are your products or services well differentiated? All of these questions just mark the basic requirements for franchising a business. If you do not have a good business you are very unlikely to have a good franchise either.
- What about your credibility? Think about your credibility. You must have established strong credibility among your peers in order to start a successful franchise.
- Do you run your business according to a set system of operations or it is somehow chaotic? If you do not have straightforward systems in place for each and every aspect of your business operation, it will be quite hard to transform it into a franchise.
- What type of products and services you offer? Does their demand depend on geographic or other specific factor? Your products or services must be in demand everywhere or must be easily adaptable or you will always meet serious market limitations.
- What return on investment do you expect after you switch to a franchise? You must do the calculations in advance and evaluate the viability of being a franchise vs keeping your business the way it is now.
If the answers to the above questions benefit the idea of transforming your business in a franchise, you can go ahead. You will need to check what the legal requirements are for franchises in your state as well as in all the states you would like to operate. You will also need to start preparing your franchise operation manual and marketing plan. Above all, you need to make the necessary steps to protect the intellectual property of your company logo and any other branding materials you currently have.
The best way to move forward is to use some help. You can either look for products specifically designed to help franchisors prepare all the required documents or hire a franchise consultant.
Franchise consultancy is available for every aspect of any franchise business. There are professional franchise consultants who not only can help you analyze whether or not your business is suitable to transform into a franchise, but can also lead you during every step of the way.
Many franchise owners start their franchise businesses all by themselves and often underestimate the benefits that a professional franchise consultancy can deliver. In many of the cases this is driven by the common conception that consultancy services are expensive. Another common school of thought follows the concept that it is simply impossible somebody, who doesn’t know your business to advise you how to set it up and run it.
In fact franchise consultancy can be quite helpful and it doesn’t necessarily cost a fortune. There are hundreds of examples of successful franchises that are so successful because they could rely on the services of experienced professionals.
Why you may consider hiring a professional franchise consultant?
Business owners who are interested in transforming their business into franchise may consider the services of a franchise consultant company. Franchise start up consultants will be able to analyze the current condition of the business and whether or not it is suitable to become a franchise. Having such advice early on not only can help to place the foundation to a very successful franchise but can also save you from bankruptcy in case your business doesn’t fit into the franchise concept.
Many franchisors risk to be put out of business soon after they have launched their franchises simply because they have failed to set their franchise fees and royalties accurately. While this particular aspect of franchising is not rocket science, still some knowledge and experience is required. And it is another area where franchise consultancy can be very useful.
Once your franchise is talking of, you may want to consider more aggressive expansion. Even if you want to keep a slower growth pace, you will need to carefully monitor and adjust your marketing strategy. Your business can be down overnight if you fail to develop a good marketing plan. There are many franchise marketing consultants that can help you in this area. Their services are very handy not only for devising a better marketing and advertising plan, but for making sure your marketing and advertising meets the state and federal franchise laws.
As a franchisor you know that the relationship with every single franchisee is of utmost importance. Even if you have managed to handle the few franchisees you have had at the beginning, a rapidly growing number of franchisees can quickly lead to problems. Communication problems, unless you know how to handle them, are underwater stones that lead to problems in the long run. Franchisor – franchisee relationships is an area where consultancy can help. It can show you the secrets to good franchisor – franchisee communication and can help you set your company policies into the right direction.
One of the most important jobs of franchisors is to create and maintain a successful marketing strategy. A well though marketing plan may mean the difference between a prosperous business and bankruptcy. Developing a good marketing plan doesn’t necessarily require a lot of money. You may need some professional advice and guidance especially if you do not have any previous experience in creating full marketing plans, but you can still get most of the work done yourself.
Issues to address when preparing a franchise marketing plan
The first thing that you need to keep in mind when creating your marketing plan is your goal. Knowing and picturing what you would like to achieve in one, two of five years will give you the clue of how to write a good marketing plan. Are you looking to establish your franchise locally or you are looking for nationwide or overseas expansion?
Identifying who your potential franchisees are is also vital. Knowing who your customers are will help you target your marketing activities into reaching the optimum number of sales. It will also help you establish reasonable franchise fees and royalties. You can research other franchise businesses offering similar products and services and see who their franchisees are.
Your marketing plan should include a great advertising strategy as well. There is a significant difference between advertising a franchise and advertising any other consumer targeted business. Often DYI franchisors fail to prepare good advertising plan just because they do not have the knowledge and the experience. You can either hire a professional franchise advertising consultant company. There are also some legal requirements that must be met in order to stay out of trouble.
Set a budget and stick to it. Working within strictly defined financial borders may be crucial for success of your business. Many franchises fail because they try to compete directly with large and well established businesses offering similar products or services. I fact you do not need to match your marketing budget with their in order to achieve great results. Work on product differentiation instead and try to find unique ways to promote your franchise.
Once you launch your business, try to gather as much information as possible from your franchisees. This will give you plenty of ideas how to develop your marketing strategy further.
FYI – As of now UFOCs may no longer be used for franchise sales anywhere in the U.S. – FDD is the new format.
One of the most difficult steps in setting up a franchise business is the preparation of your franchise documents. There are various documents that each franchisor should have in place before they launch the business officially. Some are documents that are good to be in place since the beginning just to set all aspects of the business in a working system. Other documents are required by the Federal Trade Commission and having them ready is obligatory.
One of the most challenging documents in terms of preparation is the so called Uniform Franchise Offering Circular (UFOC), most popular as franchise disclosure document. The UFOC must be prepared in advance and audited by an independent audit company. Only then the franchisor can go ahead and register their franchise business in the states where filling is required.
In most of the cases some professional help is required when getting a UFOC ready. Whether or not you will use the services of a franchise consultant or a franchise attorney, it is good to have at least a basic idea how to write your company’s UFOC and what information should be included in it.
Uniform Franchise Offering Circular (UFOC) Key Points
• The cover page. The cover page must be prepared according to the Federal Trade Commission Franchise Rule. It must contain the name of the franchisor, the type of the business organization, principal business contact information, a sample of the primary business trademark and some prescribed statements. There must be a reference to ite5 and item 7 as well.
• The Table of Contents. A UFOC Table of Contents must refer to all items included in the UFOC, and each one should be marked with a number. All exhibits are marked with letters.
• UFOC items. Each part of the disclosure document constitutes a separate item. There are 23 items in a UFOC. For example Item 5 and Item 6 disclose information about fees, Item 7 – initial franchise investment, Item 9 states what franchisee obligations are, Item 11 provides information about the franchisor’s assistance available to franchisees, Item 13 discloses information about trademarks, Item 17 is about termination and renewal terms, Item 21 discloses franchisor’s financial statements and so on. There are specific requirements about how each part must be structured and what information should be included.
• Item 21 – franchisor financial statement. Preparing the Financial Statement is one of the most challenging tasks. It must include copies of the franchisor’s financial statements for the last three years and these statements must be audited by a third party according to the generally accepted accounting principals (GAAP). The aim is to provide prospective franchisees with more information about the franchisor financial situation. While gathering the required information is usually not a big problem, getting it audit may turn into one. Franchisors should make arrangements way in advance as late audits are the most common reason for delays. Keep in mind that the GAAP may be changed or revised and this is why you may be need to seek the advice of an experiences franchise consultant who can help you getting this part of the UFOC ready.
All fresh franchisors start with optimism and faith. They believe the relationships they are going to establish with their franchisees will be perfect. They are confident that whatever troubles will arise, will be quickly addressed and resolved in the best possible manner. I doubt there is a franchise business owner who pictures poor communication between franchisees and franchise management and units closed after court fights.
On daylight things start to look different. Many franchisors soon realize they are unable to serve their franchisees the way they have originally planned. When the franchisee number starts to grow, things just take a turn into the worst. Now franchisors need to work with much more people, solve much more problems and be more flexible. And let’s face it – not everyone is up to this challenge. Many find themselves stuck into a vicious cycle of problems; they cannot stop their growing business and they cannot solve the issues that are piling.
Luckily there are several easy steps that every franchisor can take to reduce the chance of finding themselves into the above scenario.
How to solve problems before they have occurred?
• Be firm but fair. Once you set the basic foundations of your franchise business, stick to them. You will be exited when the first potential franchisee knocks on your doom and you may be tempted to do some tweaks on the operational manual or to adjust your fees just to make sure you will land the sale. Ask yourself – could you do so if you had 100 franchisees? Could you reduce your fees or royalty payments every time you want to land a sale? The answer is no, you cannot, because your business will fail. You must take into consideration the specifics of each sale but your decisions must be economically and not emotionally driven.
• Communicate. Every successful relationship between a franchisor and their franchisee is based on good communication. You may find it difficult to keep up with this once your franchisee number increase, and this is why you can set some standard procedures that anyone working for you can follow. Other times you may not want to communicate as the relationship with one of your franchisees has started on the wrong foot. Whatever the case you must try to make things work and you are the one who should initiate the communication process.
• Be patient. Sometimes it may seem that a franchise unit you have just sold is not performing according to your expectations. Instead of reaching out to call your attorney, stop and check if your impressions are really true. Review the franchisee balance sheets and meet the owner. May be you will really find a reason to worry or maybe you are just being impatient and unrealistic. Set a system (if you do not have it in place already) that will automatically alarm your financial department if the things are not going according to plan with any of your franchisees.
Any future franchisor should be well aware of all federal and state franchise laws. This is the only way to ensure smooth and trouble free operations. Most Federal and state laws coinside and if you manage to cover the requirements of the Federal laws you are pretty much set to go. However there are some state regulations that differ from the Federal ones and, if you plan to operate in such states, you need to comply with those too. It is always recommended to seek professional advice of an experienced franchise attorney who can review all your franchise documents and advertising materials. Here are the key points of several state franchise regulations.
Key points of several state franchise regulations.
• New York. You need to register your franchise at the Franchise & Securities Division State Department of Law. All of your franchise sale agents should also be registered there. You will be allowed to offer your franchise over the internet however not to residents of the state. Ultimately, if you get any sales from your online pages, you will need to register them the same way you do with all other sales.
• Rhode Island. New franchises should register at the Department of Business regulation prior to offering or selling franchise units. The franchise registration fee has been recently increased from $500 to $600 and must be paid upon registration. Another thing to take into account is that you need to submit your franchise registration application along with any other documents on a CD-ROM as paper documents are no longer accepted.
• North Dakota. In order to register your franchise at North Dakota you have to submit your FDD and a fee of $250. Similar to other states, you will also need to submit any advertising materials that you intend to use 5 days prior their media distribution.
• South Dakota. The registration is done by submitting a clean copy of your franchise disclosure documents, a uniform consent of service to proceed and a fee of $250. If your initial investment requirements exceed one million you will be exempt of registration. There is no need to file your advertising materials with the South Dakota Division of Securities.
• Virginia. The registration is done at the State Corporation Commission. You will need to prepare a franchise registration application and file it enclosing several other forms – costs and sources of funds, consent to service of process, affidavit of compliance, guarantee of performance, security bond, notice of claim exemption, escrow agreement and application for coordinated review of the franchise application.
• Washington. Filing is required prior to offering or selling franchises. This is done at the State Department of Financial Institutions. You need to submit all your advertising materials too prior to their use.
• Wisconsin. The registration should be done at the State Department of Financial Institutions. Your franchise disclosure documents should be prepared according the amended FTC Franchise rule.
If you are already preparing to launch your franchise, you are probably well aware of all Federal and state laws governing franchise business activities. Some states are known as easy states as the regulations maintaining franchise activities are minimal. Other states however have many and complicated laws and much consideration should be taken if you are setting up your franchise in such state.
Compliance with all Federal and state franchise regulations is paramount. If you fail to comply you may end up paying thousands of fees and even be banned from dealing with franchising! This is why it is much recommended to use the services of experiences franchise attorney. They will review all your documents as well as all your advertising materials.
Franchise state laws and regulations overview.
• Indiana. If you are opening a franchise in the state of Indiana, you must register it in the Division Office of Secretary of State. You need to file your disclosure documents prior to offering and selling. This is why you need to be registered in the state even if you only plan to make a few franchise offers. There are also some franchise law restriction related to termination and transfer of franchise units.
• Maryland. The registration of franchises is done at the Office Division of Securities. You are not allowed to sell or even offer franchises until you complete your registration and have your documents approved. There are franchise laws specifics regarding the way you will advertise your franchise. Similar to some other states, your ads cannot in any way show or discuss profits, earnings, revenues or imply that your franchise is free of risks. In addition you need to submit every advertising material to the Office Division of Securities 5 days prior to its release. There are also some exemptions of registration – for example franchisors that require more than %750,000 initial investments are exempt of registration. Internet offers are also exempt of registration.
• Michigan. Michigan is one of the “easy” states for franchisors. It is a notice only state and this is why the so called registration is much simple that the process in other states. You must register your franchise at the Department of Attorney’s General. The registration is called a “Notice of Intent”. There is a registration fee of $250 that must be paid along submitting the registration documents. According to the state’s franchise regulations, you do not have to submit your franchise disclosure documents.
• Minnesota. Franchises are registered at the Minnesota Department of Commerce and the registration fee is $400. Your franchise registration application must be notarized and you need to enclose costs and sources of fund documents, Uniform Consent to Service of Process (also notarized), your disclosure documents, Franchise Impoundment Agreement and Franchisor Surety Bond. The last two documents are required as condition of registration. You will need to submit all of your advertising materials. There are special laws regarding motor vehicle fuel and hardware franchise businesses as well to those that require $200,000 or more capital investment from their franchisees.
As start up franchise business owner you are probably already very well aware of your state franchising laws. On the other hand, if you are still working on your business and marketing strategy, and you are planning to expand nationwide, you will need to take into consideration the franchise laws in all of the states where you plan to expand. Moreover some states require that you register there even if you only plan to advertise your franchise on their territory.
There are 14 franchise registration states in The United States. They all have different franchise regulations. We have listed some of the key points in each state franchise laws and regulations. However it is strongly recommended that you consult a franchise attorney experienced in franchise law and registration procedures in each of the states where you plan to offer or sell franchise units.
US state franchise laws.
• California. According to California Franchise Investment Law and California Franchise Relations Act a franchise is the agreement between two parties, where one party gives the right to the other to use their trade name in exchange of a fee. In order to offer and sell franchises, you need to register your franchise. Visit the California Department of Corporations. There you can obtain all the legal forms and documents required. You will also need to pay a registration fee. You also need to know that every offer and sale you make must be registered with the Commissioner of Corporations. This is done with a Uniform Franchise registration Application. There are exemptions of this rule so you need to check with a lawyer about the specifics. If your business is dealing with automobiles, fuel, construction and beer, you will also need to comply with more industry specific regulations.
• Hawaii. Registration of franchises in the state of Hawaii is done through the Department of Commerce and Consumer Affairs. Similar to several other states, you will not be able to offer or sell franchises until you are registered at the state and until your disclosure agreement is approved.
• Illinois. As with the states discussed so far, offering and selling franchise units before you have registered your franchise business and have your disclosure documents approved is considered law offense. Franchise registration is done at Illinois Attorney’s General. According to state’s franchise regulations, franchise anniversary dates automatically expire 120 days after the end of the financial year. Moreover you no longer need to register your franchise brokers as you needed to do just several months ago. The registration of large franchises ($5,000,000 and $15,000,000) are processed faster and there is a $500 registration fee. Very large franchise (above 15 million) do not need to register, but they do need to provide their disclosure documents to prospective franchisees prior to signing the agreement.