How to Franchise Your Business: An Overview

 

By Michael Seid, Managing Director, MSA Worldwide

Franchising your business can be a very successful method for expansion if you take your time and do it properly. While becoming a franchisor can require considerable expense, the capital required to grow a network of franchised locations is far less for you than achieving the same number of company-owned locations.

How Long Will It Really Take to Franchise My Business?

Assuming your business is ready to franchise, from the time you decide that franchising is right for your company, you should expect that it will take approximately four to five months before you are able to begin offering franchises (assuming you have a qualified franchise lawyer). Depending on where you are located and the markets in which you plan to offer franchises, if you need to register your franchise in one of those states with the state franchise regulator, plan on an additional month. Expect up to 450-510 days before your first franchise has opened for business and started to pay you royalties.

Legally, once you have completed your legal documents, you are a franchisor. But – even with all the strategy and legal work behind you, and your having completed the franchise registration process where required – there is much more to do before you can call yourself a real franchisor. To be a real franchisor, you first need a franchise:

• Assuming that you have intelligently (and legally) primed the pump while you were developing your franchise system, and have a queue of people who are ready, willing and able to become franchisees, you will first need to provide them with the necessary franchise disclosure documents.
• If your franchise offering is compelling, and these prospective franchisees are people that you want as franchisees, on average expect that you will close your first franchise sale within 120 days. Even then, while you may have signed a franchise agreement and received payment of your initial franchise fee, being a functional franchisor is going to take a bit more time.

Franchisors license their brands and operating systems to business owners who serve customers under the franchisor’s marks. Since your franchisee has not yet opened their business to serve customers, you are not there yet:

• If your concept requires the franchisee to find an appropriate location and then develop it to your specifications, you can expect, on average, that their location will be ready to open in approximately 180 to 210 days.
• During that period of time, you will be spending time with your franchisee in training, site selection assistance, opening assistance, and providing the support they require to begin their business.
• Only once they are open and customers begin to frequent their location will the franchisee generally begin to pay you your royalty on their sales.

When your first franchisee has successfully opened their business, now, in a practical sense, you have achieved your goal and are really a franchisor… approximately 450 to 510 days since you started the process.

Attracting Potential Franchisees

450 to 510 days seems like a long period of time. It is. However, consider that except for the time spent in developing and completing the initial franchising process, the time spent is identical to opening a new company-owned location. The difference is that during that time, if you were able to attract the right prospective franchisees, you may now have multiple locations under development, without expending the amount of human and financial capital required to open a similar number of company-owned locations.

Now you are in a position to begin to enjoy being a franchisor:

• You have attracted qualified franchisees who are opening up branded locations and using your operating system appropriately.
• Hopefully, your franchisees are beginning to make a good living using your brand and your support, have paid you their initial franchise fees, and are now sending you their royalty payments. Those fees over time will amortize your cost of becoming a franchisor.
• The important thing to consider is that those locations opened because of the investment of the franchisee and their trust in you as a franchisor. You have not risked any capital in opening those businesses, have not diluted your ownership of your franchise system, and have not assumed any liability for leases, staffing, etc.

Your initial franchisees are likely people you may have already met. Frequently, your first franchisees are customers of your existing company-owned locations. People tend to want to invest in brands they know and trust. Franchising, at its core, is an emotional investment.

However, let’s focus on the reality that while your first franchisees may be making their investment based on the excitement of joining your brand and because of their experience as your customers, the second group of franchisee investors are going to learn about you in a different way. Likely, your marketing and publicity about your franchise system are what is going to bring them to your door.

• With your first group of franchisees, you relied on their trust in you in closing the franchise sale.
• However, the second tranche of franchisees will evaluate your franchise opportunity on more objective information. How well your established franchises are doing, how well you are meeting your commitments to them, how often you communicate with them, how ethically and intelligently you manage your relationship with them – how you are performing as a franchisor – will be how all of your future franchisees will evaluate you and make their franchising decision.

Being a great franchisor is much more than being a great salesperson of franchise opportunities. Franchisees want brands that can be sustainable economic opportunities. If your first franchisees are not successful, recruiting additional franchises is going to be next to impossible.

Let’s assume that you are a great franchisor and your first franchisees are not only doing well financially, they also think highly of you and your team. In that situation, recruiting new franchisees is not difficult. However, how you recruit new franchisees will be based on your marketing approach, that should be developed based on the attributes of your franchise system. Regardless of whether you market your franchises directly or through a third-party brokerage, having a clear understanding of who your targeted franchisee is and what they are looking for in a business opportunity will be the difference between generating a lot of leads, vs. closing a lot of franchise sales.

Multi-Unit Development

Every franchise system will have a single-unit franchise offering, but opening and managing a system of individual owners may not be what your planning envisioned. If your targeted franchisee is a multi-unit developer, then it’s essential that your franchise offering is structured in a way that is attractive to that class of investor. Taking even a deeper dive into understanding your prospective franchisee, how you structure your franchise offering for a strategic franchise should differ from the structure for an investment franchise. Having the same initial and continuing fees and the same level of support services and obligations for each class of franchisee makes little sense in modern franchising.

It’s essential that you define, in advance, your target franchisee profile. Only after that can you structure your franchise offering appropriately and have the proper business case that will allow you to realistically attract and expand your franchise system as you have planned.

A Marketing Strategy for Your Franchise System

You need to make certain that your franchise offering, your legal agreements, your fees, and your support structure are in alignment with your marketing strategy if you want to get the results you planned for. Achieving those results is not hard, but it can’t be done in a boilerplate fashion. It takes thought, and that depth of business structuring is not something you should expect to receive even from the most gifted franchise lawyers (that is not their role) or from working with one of the franchise packaging factories (that is not in their wheelhouse). The franchising model is used by over 300 industries today, and even franchisors in the same industry segment use different methods to franchise based on the economics of their business, their culture as an organization, their size, brand performance, targeted franchise, etc.

You market to your prospective franchisee “where they are.” Marketing is not a scattergun approach. For some franchisee candidates, lead generation sites, franchise magazines, brokers, and tradeshows are productive. For others, major business publications and investor forums are how they will spread the word about the opportunity. Where your press announcements are placed, how your SEO strategy is developed and executed, and where you spend your marketing resources all need to factor in who you are trying to reach. Even when developing franchisee recruitment websites, what is being offered to a single-unit franchisee or one of the other classes of franchisees you may be targeting needs to be carefully scripted, and the recruitment process differentiated.