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What to consider before franchising your business

Written by: Diarmuid Kieran

Article Overview: What factors influence whether or not you should franchise your business

What to consider before franchising your business

Good franchising is based on careful planning and preparation. A successful franchise can only be achieved through the development of a well-structured franchise package. However, before a company considers taking the franchise route, it must meet strictly defined criteria.

Satisfy an enduring need with suitable reward.
The product or service offered must have long-term market potential. Franchisees will have been advised to look for business opportunities that take advantage of coming trends and avoid those based on passing attractions or fads. Although franchisees may not expect substantial returns on their investment in the first couple of years, they will expect by the end of the initial franchise period to have paid off their bank loan (as will the bank) and to have achieved a reasonable return on their initial investment. The franchisor must ensure that there is sufficient margin in the business for the franchisee to pay on-going fees to the franchisor and to make money for him/herself.

Possess a clear identity.
Potential franchisees will evaluate the clarity and distinctiveness of the franchisor's identity, name and image. They will be looking for a franchise operation that has the potential to develop sales through its brand and reputation.
Display a proven track record. As with any good investment an investor will need to be able to evaluate the past success of the franchise. Potential franchisees, and those from whom they may be borrowing, will want to be assured that the franchise is proven, both financially and operationally.

Possess easily transferable operational methods.
Successful franchises are based on operations that do not require a potential franchisee to have any experience of the particular business. Regardless of the franchisee's experience, the methods of conducting the business must be transferable, allowing the franchisee to run it as successfully as the franchisor.

Have capable management to provide adequate support.
For the franchisor, franchising means decentralisation, with greater power being handed down to unit level. It also means the franchisor will have to deal with a new type of workforce whose motivation is very different to that of the company's own staff. While franchisees can be highly motivated, they can also be very demanding on the franchisor's staff. As the franchise develops the franchisor will be expected to invest in research and development to ensure that the business methods, products and services continue to meet changing consumer needs. It will also be necessary for the franchisor to provide on-going support to franchisees to assist and encourage them to develop their business and to improve its overall performance. In addition, the franchisor must see to it that the level of support provided is sufficient to ensure that the network as a whole maintains the quality standards set out in the operating manual.

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Any franchising horror story? - I am always writing about the benefits of franchising in this forum. Although I don't own a franchise I do believe in franchising is a great business model. Do any of you have horror stories to share about franchising?
Franchising is not a "no-cost" expansion model - Don's point above was right, and, if he only lost $5,000 getting into franchising, he got off very cheap. Getting into franchising is a serious business. We estimate that you need [u:32pu99ec]at least [/u:32pu99ec] $50,000 to do it right -- and it can cost five times that much for an aggressive expansion plan. Jim was right on. If you choose to franchise, you are getting into a new business -- the business of selling and servicing franchises. Mark
Is The E-Myth The Ultimate Franchise Guide? - Ever since the E-Myth made its way through to becoming one of the most popular books for entrepreneurs, the number of small business owners who have come to me discussing franchising has exploded. Is the E-Myth the reason why so many companies are now looking at franchising their business model? Are there any other resources you can suggest for new franchise owners or people considering it as an option?
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Re: STARBUCK - Licensing vs Joint venture - [quote="bmueller47":czemqiul]I often come here to learn something, therefore I would like to know what is the real practical difference between licensing and franchising. I might have an answer, but you are at the forefront with your knowledge.[/quote:czemqiul] Very good question. Although I am not an attorney, I will do my best to highlight what I believe are the main differences between franchising and licensing. First, here in the US, franchising is very regulated buy the Federal Trade Commission. Not anyone can franchise, you have to go through various steps. Licensing doesn't come with as much regulation. The franchisee can expect to have a very close relationship with his franchisor. In most cases, the franchisor will offer training, and on-going support. The franchisee will be able to use the franchisor's copyrights, trademarks, logo and so on. The franchisee is like the public face of the franchisor. This is I think the high value of franchising. Also, a franchise agreement will most likely define territories. The relationship between the licensee and the licensing company is much looser. In most cases, the licensee won't be able to retain the rights to trademarks, company name, etc and will have to establish his own identity in the marketplace. Licensees rarely get a protected territory which means you next door neighbor could be your competitor... Obviously, franchising is more expensive than licensing because you get a certain "safety". Again, franchising is highly regulated whereas licensing is not. There are many other differences between franchising and licensing but I think these are the main ones.


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