What reasons should I consider in franchising my business?

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What reasons should I consider in franchising my business?

Franchising your business is a good way to expand your business if you want it to reach the greatest possible size and profitability. It is one of the fastest ways to grow a business, as it gets other people to take care of many of the burdens of financing and managing locations for you. Of course, not every type of business is well suited for being a franchise, but some of the characteristics of a business that make it a strong potential franchise are uniqueness, profitability within a niche that is well served, affordability (making it easy for a franchisee to get a new location up and running in a short amount of time), and a consistent system that is easy to train people in and which brings back excellent financial returns.
Choosing to turn your business into a franchise cuts back on management time, as management is largely taken care of by the individual franchisees. Once you turn your company into a franchise, the nature of the business changes, as it becomes less about running the individual location and more about taking care of the franchisees, ensuring franchisees maintain company standards, and making sure that every location is profitable. As a successful franchisor you can expect improved revenue and accelerated growth. Of course, becoming a franchise can also be a strain on the company, as it requires learning new kinds of business management skills, but the potential payoffs are huge: making your company a franchise removes most of the limits on its growth; it supplies your business with a large influx of resources from the franchisees and can quickly help you reach the point where your company is large enough to make an IPO on one of the stock exchanges. Once the stock market is able to put a value on your company, you can find yourself making profits far in excess of what you could dream of before.

What are the normal problems with creating a franchisable model?
First, you’re going to have to shift the focus of your business from running one or a handful of locations to franchise marketing and sales. You need to grow the franchise quickly if you want it to take off. That means putting together an effective marketing staff to make your franchise attractive to buyers, giving the buyers the support that they need to get their franchise businesses running (which means helping them put together any business plans that they need, helping them get loan applications approved, helping them find financing and get good prices on the necessary equipment etc.), effectively training the franchisees, and making sure that they abide by the rules of the franchise system. Once the franchisees start running their own businesses, everything they do reflects on the reputation of the franchise itself. Many of them are going to want to change things and do them their own way, which dilutes the brand and can harm individual performance (of course, they then blame the franchise company when their various changes cause problems). It is important to have a strong system with well laid out business methods and training materials, and to have a contract which specifies that the franchisees will adhere closely to the rules of the franchise system.

What are the costs involved?

A good franchise should be designed to cost one hundred thousand dollars or less. There are lots of people in the United States who are interested in running their own business and have around this much money to spend on it. Keep the design of your franchise light and affordable. Not every location is going to be successful, but if your plan is inexpensive enough and flexible enough to be set up in many places and the majority of those are profitable, you will successfully grow your brand. As you manage growth, remember that you want to be somewhat overstaffed at all times. If you aren’t growing you’re dying. Having enough staff to go around means that you can expand at the greatest possible rate that the market allows, and this is the real benefit of having a franchise.

What are the likely returns?

In a franchise system, there are lots of ways that you can make money. First of all, you have the advantage of starting businesses using investments from the franchisees – by using other people’s money you can grow much faster than if you had to seek out business loans for yourself. Your primary sources of income are the franchise fees charged when a new franchise starts up, as well as the franchise royalties. Most franchises stipulate the kind of equipment that the franchisees can purchase, and may require the franchisees to buy their equipment either directly through the franchisor, or from a supplier with which the franchisor has a business relationship. By making an agreement to get your equipment from a specific vendor you can often get a lower rate and make a profit between vendor and franchisee. This not only applies to the equipment for your business, but to all other kinds of supplies and material sales. Finally, as a franchisor you may charge for various types of services including assistance with advertising and property rentals, and you can set up lending programs to help potential franchisees start their new business which will allow you to make a profit from the loan interest. With all of these different sources of profit, a franchisor stands to make a lot of money. Finally, because the franchise business is likely to expand and grow very quickly, it is a good candidate for going public and / or being purchased by a large business conglomerate. This can mean millions of dollars for the owners of the franchise.

How does it work?

The rules for running the business have to be codified into a system that can be replicated over and over again by people in different places. Training materials and manuals have to be designed to explain exactly what the managers and employees should be doing as they grow the business, how they should react to any situation that may occur, how they should staff the store, how the staff should interact with the customers, how the food should be cooked, how they should purchase the supplies that they need, and so on. Contracts need to be drawn up which explain the responsibilities of the franchisees to abide by the rules of the system. A support structure has to be formed which helps the franchisees deal with any specific local problems that they run into. A sales staff has to be put together to advertise the franchise to potential small business owners. Finally, the franchisor has to handle advertising, make the appearance and behaviour of the franchise consistent across all locations, and do everything it can to raise the public appeal of the franchise.

How long will it take to do it?

Getting started is likely to take from several months to a year. If you already have several locations in your business, it makes things easier because you probably have a good sense of the location profile for your business (the kind of place that your business is most likely to be a success), and the various procedures and advertising that bring about positive results. It will take several months at least to develop your systems and training program for the franchisees. You’re going to need to develop a Uniform Franchise Offering Circular, which contains all of the relevant information on your franchise, as well as extensive marketing materials that you can take to franchise fairs and small business conventions. At first you will be selling the franchise to franchisees yourself, but as you grow you will put together a sales team and your growth will begin to ramp up quickly.

Some of the risk factors

Starting a franchise typically requires an initial investment of anywhere from fifty to two hundred thousand dollars. All of the things listed above (as well as filing all of the necessary legal forms) will have to take place before you can sell a single franchise, and you will want the support of an experienced accounting firm, franchise attorney and consultants. The risks are basically the same as with any other kind of business. Make sure that you have enough money to comfortably begin the franchising procedure without putting your home or anything that you consider vital to your quality of life at risk. Consider the market and your personal experience within your industry to determine whether it is likely that your franchise will be a success. Put together a solid business plan and get feedback about that plan from consultants and advisors who have experience in franchising and in your specific industry. Be realistic about what you are going to need, and have a positive and flexible attitude. If you keep all of this in mind you are likely to find success in franchising your existing business.

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