A Practical Look at Franchising A Step-By-Step Look At Franchising!
By Ken M. Hollowell There comes a time in the evolution of every business that a decision needs to be made concerning whether or not to expand to reach a larger marketplace and, if so, the best method to achieve that goal.
Franchising, which is one method of expansion, has become increasingly popular in the past three decades. There is no doubt as to its success but the important questions are whether it is right for you and whether you are ready to be a franchisor. To help you answer those questions, let us explore what being a franchisor requires, mentally, physically and financially.
You first need to understand that franchising is a business in and of it self. Your existing business (the underlying concept that you want to franchise) is another business. It is necessary, therefore, for you to begin adjusting your thinking to this business. It is, of course, advantageous to have a unique or superior product or service concept to offer to the public; however, it will not hold up well without a good franchise system built around it. Conversely, some less than outstanding concepts have made a name for themselves because of a superior franchise system.
The single most important aspect of any franchise system is the trademark or service mark, which is being licensed to the franchisee. Your first priority should be to design a unique mark by which your franchise system and its products or services will be identified. You then must search the files of the federal government and the states in order to determine whether anyone else is presently using the same or a similar mark. If you have a green light, you must proceed to secure a registration of that mark for yourself. Your franchise agreement must protect your interest in those marks and you must set up strict and well-enforced standards for the franchisee to follow so as not to endanger those marks.
The offer of a franchise is subject to state and federal regulations. The penalties for failure to comply with those laws can be damaging both to our pocket book and your reputation. You must present prospective franchisees with a specially prepared disclosure document (known as an offering circular) in strict compliance with those regulations at least ten business days before they sign the franchise agreement or pay you any money. There are also fifteen states, which may require you to register the offering and submit the disclosure for review before marketing can occur within their jurisdictions. Furthermore, any form of advertising, which is used to solicit a prospective franchisee, must comply with governmental regulations.
There is more to being a franchisor than simply having a franchise agreement and an offering circular. The franchisees who receive that disclosure and eventually sign the agreement must be trained to operate an outlet in an organized manner. Therefore, an operations manual must be prepared and a training program should be in place. A staff of qualified individuals who will run the franchisor’s organization and train the franchisees must be assembled. Once again, remember that franchising is a different business. Thus, any existing manual which merely outlines the day-to-day conduct of your present business will not be adequate to explain to a franchisee how he or she is to operate your concept. You should develop a program of continual field support to assist franchisees with problems which they may encounter in daily operations of the outlet. The team assigned to that function will also monitor and report on the franchisee’s compliance with your standards. The creation of an aggressive advertising campaign to promote your franchised outlets and the image which you wish them to convey to the marketplace is of utmost importance.
Although federal and state regulations do considerably inhibit your ability as a new franchisor to indicate the income potential of an outlet to a prospective franchisee, it is still wise to have a prototype of the typical outlet in existence in order to indicate the viability of the concept and your actual hands-on experience in its operation.
It is also advantageous from a sales standpoint to have an actual facility that a prospective franchisee can visit since you will be engaged in a new business (franchising), your existing business needs to be secure enough to function without your daily participation. Likewise, do not expect to raid the ranks of your present organization in order to staff the new business. Remember, they must be replaced.
To be a successful franchisor, you must be committed to meet these and other requirements. However, it is very possible for you to do this in an efficient manner with help from individuals experienced in the franchising process – so long as they have your best interests at heart.
No doubt, you have heard of the fantastic sums of money that a franchisor may gain from a franchise system by way of the initial franchise fee, monthly royalty payments and contributions to the advertising budget from franchisees. Although you may eventually realize great income from your franchise system, the road leading up to that result could be expensive. We believe in teaching the client to do or oversee, as much of the work the client is willing to do himself. This will save the client a healthy portion of the fees that some development and consulting firms charge. The major advantage is that the client receives a greater understanding of what franchising is all about and receives first hand training on how to become a quality franchisor, rather than relying on others who may not have your total interest at heart.
Proper franchise development does take time. Depending upon the extent to which you wish to market your offering, you should be prepared to devote six months to one year to that task. Don’t expect to create the necessary documentation overnight and head straight to marketing. You need to be trained to think and act like a franchisor, to learn the new business that you area in and the obligations that it entails and to make intelligent, informed decisions regarding the structure of the franchise system. In addition, registration of your offering with a state regulatory agency can take a good deal of time and patience.
Whom should you choose to develop your franchise system? Attorneys will normally only handle the franchise agreement, the offering circular and the registration. Attorneys with a true background in franchising are few in number and high in price. All others will be learning the ropes at your expense – and they charge by the hour. Most attorneys will provide you with a document which may be “legal” but which is rarely constructed from the standpoint of a businessperson or a marketing specialist. We take clients and their individual needs seriously. We are dedicated to teaching, informing, educating and training franchisors in how to effectively and professionally become the best franchisor possible. Our basic philosophy is to teach the client to do as much as he can, while providing expert assistance in those areas the client decides not to accomplish himself. We think that is keeping your best interests at heart.
Franchise Consultant Developer Author & Lecturer
Listed in “Who’s Who in Marketing in America” Ken M. Hollowell Ken M. Hollowell, President and Founder of National Franchise Services, Inc. from 1980 to present is known for his creative and positive leadership in the field of franchising. Mr. Hollowell has lectured before many business organizations, Universities and Colleges on the subject of franchising. He conducts numerous seminars annually on franchise development and investing in a franchise business throughout the United States. He is regularly requested by the Small Business Administration in Washington, D.C., S.C.O.R.E. and the International Franchise Association to speak on franchising. For several years, Mr. Hollowell hosted a radio talk show and has appeared on television program to promote franchising. His well-rounded experience and practical knowledge in both development and marketing have led him to be one of the most sought after franchise consultants in America.
Mr. Hollowell works with dozens of companies each year in consulting, development and franchise marketing. His keen knowledge of the Federal Trade Commission’s Rule on Franchising and the various State Regulations on franchising has earned him the respect of many attorneys who call upon him for counsel and have used him as an expert witness in legal matters and litigations.
As of 2004, Mr. Hollowell has developed over 730 franchise companies and has sold more than 100 million dollars in franchises.
STEP-BY-STEP PROCEDURES FOR FRANCHISE DEVELOPMENT Corporate Structure It is recommended that a new corporation be formed for the purposes of franchising. Since an audit must be prepared, a newly formed corporation can save thousands of dollars in this area. Also, for liability reasons, a new corporation may be advisable.
Trade Name The cornerstone of a franchise is the trademark, commercial symbol, logo and/or slogan. To achieve the necessary registration from the U.S. Trademark & Patent Office it takes from 12 to 18 months to receive.
Uniform Franchise Offering Circular The Federal Trade Commission requires that all franchisors provide a prospective buyer with the necessary disclosure documents in compliance with Rule 436 of the FTC. This document is usually 50 to 60 pages and addresses 23 Items of disclosure. The UFOC document must be updated and be current within 90 days at all times.
Audit The FTC requires an audit of the financial condition of the franchisor corporation annually. Registration States will require updates every 90 days in addition to the annual audit.
Web Site Instead of the preparation of printed promotional materials which can be extremely costly and often times outdated within months, franchisors are developing websites that contain all the necessary information concerning the franchise opportunity. The Confidential Franchise Application Form is part of the website. Printed materials are optional.
Printed Materials There are basic printed materials that are created for the purpose of sending to a prospective franchisee. They include a cover letter, franchise application, Q&A, History, and qualifications for a franchisee.
Manuals Most franchisors provide 2 sets of manuals to their franchisees. Development Manual which is all of the pre-opening things requirements that must be completed by the franchisee before the business can be opened. Then the Operations Manual is the day-to-day procedures, policy, and guidelines of the business.
Training The training program is always on-going, but the initial franchisee training is usually provided at the national headquarters of the franchisor for 5 days. Then a field representative will usually be available for another 3 days after the business is opened.
Field Support It is necessary to inspect the operations of a franchisee on a regular basis to ensure quality control standards.
Registration States There are 15 States that require registration of your UFOC before marketing is allowed within their States. There are fillings required also.
Marketing/Advertising To find qualified potential franchisees, various methods are employed through the media to reach these individuals.
A Practical Look At Franchising - To learn more about this author, visit Ken Hollowell's Website.
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