Considerations for Developing a Franchise System
By many accounts, the franchise “industry” is one of the privileged few that is poised to react favorably to the down economy. Coupled with the recent boom in the popularity and understanding of the franchise model, this is perhaps one of many reasons that more and more businesses, across a wide array of industries, are developing franchiseopportunities to meet their growth objectives.
This article briefly outlines some of the key factors -- brand identity, policies & procedures, expansion targets, and management systems -- that businesses need take into consideration when evaluating whether their concept is ripe for franchising.
Strong Brand Identity
A strong brand identity is fundamental to any franchise system. If the franchisor’s brand name and reputation alone cannot get customers through the front door, prospective franchisees may question the value they would receive from investing in the particular franchise on offer. Moreover, in competing for franchise sales, a less-than-memorable trademark alone may cause prospects to cross your opportunity off the list. Finally, with a strong brand identity, franchisors can more easily get on the radar of the highest-quality prospective franchisees: with thousands of active franchise systems to consider (browse the FranchiseHelp.com franchise directory to see for yourself), potential franchise buyers -- like it or not -- tend to use shortcuts to narrow their franchise search. A recognizable brand or mark can be a key element to staying top of mind with investors. Prospective franchisors should invest significant time and effort in developing and protecting a strong brand identity.
Established Policies and Procedures
Also fundamental to building a successful franchise system is having clearly documented, well-defined policies and procedures in place for developing and operating the business. Along with name recognition, a tested and executable business model represents the primary value in purchasing a franchise as opposed to starting a new business from scratch. Franchisors need to have materials for training and assisting franchisees in the pre-opening phase of their business, and need to have comprehensive operational documents to guide franchisees throughout the term of the franchise agreement. In addition to providing value to franchisees, when properly written, these documents also serve to help protect the franchisor from unnecessary exposure to potential liability.
Defined Expansion Targets
Once the business decides on franchising as a means of expansion, it needs to decide exactly where it will be expanding to. Several states (including California, Maryland, New York and Virginia) have annual franchise registration requirements that entail relatively modest filing and legal fees. Perhaps the product offering is not necessarily palatable or otherwise suited to a particular region, or perhaps the market in certain regions is already over-saturated with competing offerings. Perhaps your goal is to take the entire nation by storm. These are all factors that should be considered when planning to roll out a new franchise system.
Capacity to Manage and Support a Network of Franchisees
It is also important to consider the impact that franchising will have on your existing business structure. Many small business owners have successfully transitioned into managing franchise systems on their own, but if you plan to pursue rapid growth it may be necessary to bring on franchise-specific personnel to manage and administer the system. Issues will inevitably arise, and it is important to be able to provide timely and meaningful responses to your franchisees. Failure to do so may lead to unhappy franchisees and degradation of the system and the brand, which can have significant impacts on the success of a franchise system.
Jeff Fabian is the owner of Fabian, LLC, a boutique intellectual property and business law firm serving franchisors and franchisees. Visit www.fabianlegal.com or www.thefranchisecafe.com for more information, or contact the firm directly at 410.908.0883 or jeff@fabianlegal.com. You can also follow Jeff on Twitter @jsfabian. This article is provided for informational purposes only, and does not constitute legal advice. Always consult an attorney before taking any action that may affect your legal rights or liabilities.
Before Buying a Franchise Identify Your TRUE Investment
Your approach as a potential franchise buyer is to identify the real investment dollars you’ll need to get the franchise to profitability. The initial source of this information is Item 7 in the FDD. Item 7 is a schedule that details the estimated investment in the franchise. This schedule includes the cost of various items, including: the initial franchise fee, training related expenses, rent, insurance, professional fees for legal and accounting services, supplies, equipment, licenses and permits and additional working capital. Depending upon the specific franchise, there may be added categories. When reviewing the Item 7 schedule it’s important to know that franchisors are not required to list every type of fee or expense that might be part of the investment in the franchise but rather the likely investment needed to start the franchise. As you work to establish your investment number keep in mind the words “estimated” and “typical.” Item 7 is a guide, and as such, you should use this information accordingly.
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