Often, when people think of franchises, they think of fast food places, but a franchise can be anything from a trash hauler to a boutique jeweler. The 2010 U.S. Census reported that franchises make up 10.5 percent of businesses across 295 industries. Since then, the numbers have steadily increased, even during the slowdown of the economy. Franchising is proving a lucrative way of doing business for both franchiser and franchisee.
Why should you franchise your retail store?
Those who have successfully franchised find it an excellent way to increase income and share their unique brands with new customers. Owners enjoy taking this next big step, moving from the daily details of service to the more strategic management of growing a retail empire.
For those wanting to expand, franchising takes some of the risk off them personally, as the franchisee takes on the bulk of expenses, including the building rental, employee payment and liability if something happens in their store. They pay you a franchise fee upfront and then a monthly stipend. Thus, once the initial costs of franchising are complete, it's far less expensive than opening a second store.
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For some entrepreneurs, however, the financial gains pale compared to knowing that they are spreading their unique brand, product or message beyond their local area.
When should you not franchise your retail business?
Franchising is not a step to take lightly. Franchises can fail; in fact, the International Franchise Association reported that nearly 40 percent of businesses that applied to franchise still did not have a second store a year later. Be sure your business is ready for the next step. Here are warning signs against franchising.
- Your business isn't profitable enough. If you aren’t regularly making 10 to 20 percent profits each month, you may not have the demand needed to expand. Franchisees, after all, need to know they are going to make a profit after paying your franchise fee.
- You can't get 100 grand. The act of franchising your business can cost as much as $100,000 upfront. That covers the legal paperwork, advisors and preparing all the materials, plus advertising.
- Your business is too unique. A franchise lives and dies by brand recognition, so you must have a business you can clone, from the products sold to the decor of the building. If your business depends on coffee grown in a very specific area, then your ability to franchise is limited to how much coffee your supplier can produce.
- You can't capture the market. The most successful franchises have a familiar product with a unique hook. Your bookstore that has been successfully in business for 50 years because of its local reputation may not compete against Barnes & Noble unless you can offer something that B&N does not.
- You're hands-on and unwilling to let go of control. While franchises take on your brand, including your style and way of doing business, they are still independently run. You set the standards and provide training, but you cannot dictate every action the way you can with your own store.
- You can do as well or better online. E-commerce has come a long way. A 2016 survey by analytics firm comScore found that shoppers make 51 percent of their purchases online. You may find that you get as much reach by establishing an online store or selling through venues like Amazon or Etsy as you would if you opened a new store. Even better, e-commerce has very little overhead and upfront expenses compared to franchising.
Steps for franchising a business
Ready to take the plunge? Here are the general steps for franchising your retail business. However, before you jump in with both feet, do some market research. Make sure there's a demand for your product, identify your demographic, and determine the best way to market your store outside your local area. Not only does this information confirm the potential of your franchise, it can help with the legal, financing and marketing developments. Once you've done that, you can start the real work.
Hire a lawyer.
Find one specializing in franchise law. While it's possible to DIY, you need to be sure to meet the guidelines set by the Federal Trade Commission, plus those set by your state and any state you want to franchise in. (About 15 states have additional laws.) These laws protect your brand and your prosperity, but they are complex.
Polish your brand and set your standards.
If you are still using the logo your cousin made in Gimp, it might be time to have one professionally done. Also, secure your trademarks and copyrights of any materials you want to protect. In the meantime, decide on these issues and incorporate them into your franchising guide:
- Territory. Some franchises assign a territory to the franchisee, letting them open as many stores as they're willing to support. Others limit the number of stores.
- Franchisee freedom. Will you determine what the decor looks like? Will you mandate what POS system is used? Or will you provide guidelines and products, then let the franchisee determine the rest?
- Support system. Franchisees expect support from the corporate office. Will you run marketing campaigns or just provide the supplies? Will you assist them in financing? How much training will you provide?
- Fees. This is important because fees that are too high will discourage anyone from requesting a franchise, while fees too low can kill your profits. The one-time franchise fee averages $35,000, but it can range from $10,000 to $150,000. Meanwhile, royalties can be 4 to 15 percent of the franchisee's gross revenue. Many businesses hire a consultant to help them come up with the best numbers. In addition, some franchisers charge for supplies, such as brand-specific decor, and charge a national advertising fee, which goes to large-scale promotions a franchisee might not otherwise be able to afford. That fee can run as high as 5 percent, but match the service you provide to the fee you charge.
Prepare your franchising documents.
No job is finished until the paperwork is done, and the paperwork for franchising goes well beyond the Franchise Disclosure Document you prepare for the FTC. The FDD is intimidating enough, as it contains your business experience, patents, financial statements, how you will work with your franchises and more. It can run up to 200 pages. You can check out the sample table of contents on Franchise.com.
After the FDD, you want to create your franchise agreement or contract. Pay careful attention to this one, as it's what protects your brand. It includes the definition of franchise territory, fees, and even how and when you can take back franchise rights.
In addition, you want a thorough operating manual that outlines how to run the store, including the types of products it can sell and how your clerks deal with difficult customers. Here’s where your decisions on standards and control come in.
Get your training program ready.
You need to prepare a program, whether in person or online, for teaching your owners, managers and even workers how to run the franchise up to your standards. Some franchises train in person, either on-site or at headquarters; others employ webinar software for online training. In addition, you want comprehensive documents that can answer a manager's questions after the training ends. If you require the use of specific software or services, ask those companies for how-to documentation that you can add to with any franchise-specific procedures.
Prepare your marketing.
You are no longer responsible for promoting your individual store alone. To be successful as a franchise, you need to promote your brand to the benefit of all the stores. That means expanding your campaigns beyond what worked locally and setting up a larger presence. You also need to determine the following:
- Will you have one corporate website with franchise pages or let franchises set up their own websites? How about for social media
- What materials will you provide franchises for their own promotions, and how will you distribute them?
- Do you want to approve all franchise advertising?
- What kind of opening-day push will you make? This is crucial for a franchise, so consider materials, special promotions, timetables and materials for the new owner.
Hiring the right people
You no longer market just to reach customers. To succeed as a franchiser, you need to promote yourself to potential franchisees as well. Businesses go about this in many ways. Some use a consultation service or talk to the local chamber of commerce. If you are near a military base, contact its family support center about finding veterans looking for new occupations after leaving the service. There are franchise fairs where you can talk to not only potential franchisees but other businesses. There are also marketing firms that specialize in B2B and franchise promotion.
Develop marketing materials that focus on not only what makes your franchise unique but also the potential advantages. Market analysis, business models and profit histories help persuade a potential franchisee to consider you.
In turn, you need to carefully consider them. Your hiring process should be at least as stringent as if you were hiring a new manager. Make sure they also have the attitude and experience for handling all levels of running their own business. Get a feel for their motivation; even a franchise requires hard work and dedication to start up.
In addition to conducting an interview and a background and reference check, you may want to invite them to your primary location to show them around and gauge their reaction. (Asking them to pay to travel to your location also gives you an indication of how seriously they want to open your store.) When training them, watch to see how seriously they take the things important to you.
You will also need a corporate staff, people to handle franchisee vetting and training, materials, and promotions. You’ll need an accountant or accountants who can keep track of the royalties and expenses, a lawyer on retainer, and someone who can write the manuals. At first this may only require a few people. In addition, you can outsource to other businesses. Thanks to the internet, there are crowdsourcing and virtual assistant companies that can gladly take on part-time work or simple projects.
Supporting your franchisees
Successful franchisees take care of their stores from the signing of the agreement on. Here are some of the most common ways to help them:
Founding the new location
- In addition to setting the standard for the location in terms of territory, building size and style, some franchises work with real estate agencies to help franchisees find the most advantageous place.
- If you expect a certain look or floor plan, you need to provide the blueprints.
- Establish the decor and branding. From the storefront sign to the posters on the walls, if you require a specific look, then provide a way for the franchisee to get the items they need.
- Provide suppliers for franchise-specific equipment and products. Discuss discounts or deals with the supplier that you can pass on to your franchisee.
- If there are local regulations or codes your store needs to follow, help the franchisee to meet them.
- Provide a marketing plan and materials for the grand opening and the few months afterward.
- Some companies offer financial assistance through a bank they’re partnered with.
Once the store is established
- Make sure your training is available for staff that comes after the grand opening. When you have a new procedure, product or service, train for it as well.
- Provide guidance and franchise-branded materials for individual marketing efforts. Also, advertise yourself on a broader level in order to help all your franchises.
- If you provide the website, be sure to support it and make it easy for franchises to make changes to their own pages. If you let them make their own websites, provide branding instructions (logos, colors, content, etc.).
- Hire a field consultant to visit the franchises periodically to help with problems and ensure they are adhering to standards.
- Set up a hotline so franchisees can contact you with problems.
- Some franchises provide HR and accounting assistance.
Franchise Direct reported that there were over 780,000 franchises in the United States in 2015, a growth of over 10,000 from the year before. The monetary output increased by over $50,000 between 2014 and 2015 alone. If your business makes steady profit, can be duplicated and has a potential market of customers, then franchising is worth looking into.