Why You Want To Franchise
McDonald's Is The Worlds Most Recognizable Franchise
Franchising and franchise law is a complex subject. It covers several bodies of law including commerce, trademarks, trade secrets and intellectual property. Franchising is regulated on the federal level as one group but on the state level can be split into category by industry.
The Franchise Rule and The Franchise Disclosure Document
The Federal Trade Commission governs through the Franchise Rule. The rule dictates how franchises are to be run and directs the nature of franchise sales by way of the Franchise Disclosure Document. The Franchise Rule outlines 23 items that must be included in the document including all pertinent legal information, financial records, all agreements and the reasonable expectation of success. The FTC does require that you file the FDD with them but currently there are 15 states who do. There may also be other state level requirements. The franchise rule has the force of law and is enforced in federal courts.
What exactly is a franchise?
Franchising as a means of small business expansion has been around for over 150 years. The method is a great way for business owners to expand their reach and for aspiring entreprenuers to get started. The cost of opening a franchise are shared by the franchisor and the franchisee, reducing the cost of expansion for the owner and start up for the new business owner.
How it works
A franchisor owns and operates a business with a record of success. He (or she) packages the business model, trademarks and marketing into a franchise. The franchisor buys the franchise and then operates the business. The costs of starting each location are shared between the two parties and they each share in the success of the business.
Some common and popular franchises
Franchising grew in popularity following World War II. The economy was booming and franchising became a successful way for businesses to grow and limit their costs and risks. At the end of the war thousands of GI's came home to find jobs or, hopefully, to start their own business. Franchising was attractive to them because it reduced the cost of starting a business and came with the added assurance of a proven method. Some common franchises are , McDonald'sSubway and the UPS Store. Each location is owned in combination by the parent corporation and the franchise holder.
What makes a good franchise?
There are some elements of business common to all successful franchises. These include a proven track record of success, a repeatable business model and demand. Without a proven track record of success there is no reason for anyone to believe they could make money with the system. The business model should be operational and profitable. The business model should also be repeatable. Organized and streamlined operations that can be handled by any adequately qualified applicant have a much better chance of success. Businesses based on a local attraction or dependant on seasonal business may not be the best candidates for franchisig. Most importantly, there must be a demand for the business. If it's just another taco stand, aesthetic salon or sandwich shop there will be heavy competition.
Advantages to franchising
There are numerous advantages to franchising for the franchisor (seller) and franchisee (buyer).
For the franchisor:
- Reduced Cost- Opening a new location can be very expensive . Depending on industry, available real estate and cost of equipment this can total in the millions of dollars. The estimated cost of opening one, new, freestanding fast food restaurant is $1 million dollars. by franchising owners can reduce this cost by 50% or more.
- Reduced Risk- Risk in each new location is limited because of owner/operators. The owner/operators have a vested and active interest in the success of each location. Owner/operators tend to work harder than managers. Franchisors attract a higher quality of manager than other types of businesses. Franchisee's are hard working and resourceful business people.
For the franchisee
- Reduced Cost - The cost of starting a new business is even greater than opening new locations. Proving an idea, massive marketing campaigns and product costs can be crippling. Buying a franchise allows you to share the cost opening a business with a proven business partner. Franchisee's are instantly tapped into the existing marketing plan and benefit from the buying power of the parent corporation.
- Reduced Risk - Buying a proven business model reduces the time and cost of starting a new business. It also shortens the lag time between start up and profitability. Costs of marketing are spread throughout the franchise empire and are usually included in the fees.
KFC Goes Global Through Franchising
There are many resources for aspiring franchisors and franchisee's. Franchise consultants are one such resource. Consultants work on both sides of the business, helping franchisors with their operations and planning and helping franchisee's locate and source potential franchises. Consultants should not be confused with franchise agents, whose sole purpose is to connect franchisors and franchisee's together, earning commissions for the work.
There are three areas in which a qualified consultant can help build your business into a successful franchise; operations, planning and marketing.
- Operations - A qualified franchise consultant can analyze your operations to see if your business is viable for franchising. They can help standardize operations and create training materials. They will also make suggestions that will enhance your franchises function as well as its value to franchisee's.
- Planning - In the planning phase a qualified consultant will help determine the right course of action of for your franchise. The firm should conduct extensive market research into your market and competition. They will help you design a franchise package that will attract quality investors. You need to have goals for your expansion and realistic plans for meeting them.
- Marketing - A qualified consultant will help you design and implement a marketing plan for your franchise package. They can also help by introducing your franchise to their other clients who are looking to buy.
Financing your franchise expansion
Franchises are usually run by a "parent company", that is, the originator of the franchise. The parent company is usually a corporation formed specifically for the purpose of selling and operating the franchise empire. The cost of start-up, hiring a consultant and creation of the franchise business package can be immense. Then, the actual financial requirements of opening each new location are added in. It is possible to grow your franchise through internal and organic means. For some this strategy is too slow. There are sources of financing to help with funding an explosive franchise business expansion.
- Loans - Bank loans for small business can be difficult to get and require detailed documentation of the businesses success and projected profitability. Bank loans have the lowest cost in terms of business ownership, when you pay back the loan the bank is out of the picture. The downside is that the bank will want their money whether your business expansion succeeds or not.
- Private Equity Investors - Private equity can mean a lot things but is basically when a private investor buys a stock share in a non-publicly traded company. This could mean anything from family investment to a major investment by a Wall Street firm. The equity firm will take a stake in your business that will vary depending on the amount of investment and stage of your expansion plans.
- Venture Capital - Venture capital is a subset of private equity with a very specific idea of how to profit from business expansion. The goal of venture capital is to invest in business during it's early stages of growth and then sell the whole thing in a public offering in order to liquidate and capitalize on the investment. If you want to keep and operate your franchise business venture capital is not the right choice for you.
- Alternatives - There are some alternatives to the traditional methods of franchise expansion. One I have found is a website called Findmeabiz.com. This is an innovative approach to private equity. The firm acquires the expansion rights to qualified businesses, grows them through franchising and other methods and shares profits with the original business owner.
There is not much in the way of financing for franchisee's, the franchise is in itself a form of owner financing. In order to buy a franchise you will have to put up a substantial chunk of the upfront capital. This is usually required to be in the form of liquid, investable assets that can not be borrowed money. It is estimated to cost franchisee's a minimum of $300,000 just to open a new McDonald's.
Expanding my franchise business
If you already own a franchise business then there are some options for you. There are some lending institutions in existence for the purpose of loaning money to expand franchise businesses. These are not traditional bank loans and are designed specifically to help small business expansion through franchising. Funds from these loans can be used to expand current operations, open new locations or to consolidate holdings.