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Branch Out
Franchising Might Make Your Business Blossom
By Carrie Madren
Subway, H&R Block, Jenny Craig and Dunkin’ Donuts are household names that have exploded across the U.S. through franchising. But these empires didn’t rise overnight—most big-name franchises started out as small, single-shop operations.
Today’s micro-businesses can use franchising as a way to expand into new markets and increase brand recognition. More than 3,000 established franchise brands are anchored in the U.S., reports Franchising.com. They range from restaurants to fitness centers to consulting companies.
In addition, the franchising business model boasts a fine track record: The U.S. Chamber of Commerce reports that well-run franchises generally have a higher success rate than other types of businesses.
Still, the idea of franchising can be mysterious and intimidating—unless you understand how this popular business model has worked for other micro-business owners, and how it might work for you.
Understand The Nuts And Bolts
When a micro-business owner finds his or her successful business bursting at the seams, expansion may be the solution. Options range from opening satellite locations to selling distributorships or licensing. But new satellite offices or stores can bring new complications: Managers in charge may not be personally invested in the new location’s success and they can become competitors after they leave.
“Enter franchising,” says Dave Waldman, who owns The Franchise Maker, a franchise development company based in San Diego, Calif., that helps businesses set up their franchise.
Waldman explains that a franchise is a business relationship in which the original business (the franchisor) sells an entrepreneur (the franchisee) a business model, the rights to open and operate the franchise business, and ongoing operational support.
If you’re the franchisor, new franchisees will train at your main office to learn how to make their franchise successful. You may help new franchisees select sites, find initial clients and market the business. They’ll glean wisdom from your years in business and receive support—in marketing, branding, structure and policy—to make their franchise successful.
Franchisors typically charge an initial franchise fee that covers the rights to franchise, as well as setup support and training. Franchising fees can range from $5,000 to more than $100,000 depending on the equipment, training and ongoing support.
Franchise arrangements vary, but typically, after franchisees begin to make a profit, you (as the franchisor) get a royalty—a percentage of gross revenues—from each franchise. Royalties range from 2 percent to 20 percent, says Waldman.
In addition to incoming fees, a franchisor can introduce his brand into markets that he otherwise couldn’t reach, Waldman explains, which can be invaluable for building your business’s name.
Cloning your business model is attractive to many business owners because franchisees love your business, and use their own resources and capital to make your brand succeed. And, it’s the franchisee who ultimately takes on the risk, while you, as the franchisor, provide the tools and guidance.
Get Started
“Franchising is the most efficient and fastest way of expanding with the least amount of capital from the company,” says Hossein Kasmai, founder of Guard-A-Kid, which sells child identification and safety products, and requires a franchise fee of $19,900.
Kasmai started franchising in 2005 when the company was just a year old with seven employees. Now his business, which is based in Miami, Fla., has nearly 200 franchisees, including units in 43 states plus Europe, South America and Africa.
Before taking the plunge, Kasmai researched how to franchise and consulted with attorneys and accountants who specialized in franchising. Then he jumped in with both feet, advertising his franchise online. He got his first franchisee within 21 days. As the number of franchise locations increases, he says, it helps everyone by boosting brand recognition.
Navigating the franchise process and legal requirements can be a daunting task, but help is available for hire.
To put together a legally sound document that will protect your business and clarify the terms of the franchise, business owners may want to hire a franchise attorney and franchise accountant. Or, they can turn to a franchise development service.
These services can guide a future franchise owner through everything from trademark filing to writing the franchise agreement. Such a service could even help a business owner figure out whether or not to franchise in the first place. To find a franchise development service or franchise professional, search online or at the International Franchise Association website, Franchise.org.
Always ask for an estimate of costs and for references. Setting up a franchise can take as few as 90 days if you have help from professionals.
Ambitious owners can try to figure out the paperwork and the franchise setup on their own. But heed the advice of Pete Bennett who owns Whiskers and Paws, a Southern California-based pet food delivery service that has franchises.
“It takes quite a long time to wade through paperwork and come up with the UFDD [Uniform Franchise Disclosure Document],” Bennett says.
In franchise-speak, the UFDD is a legal document required by the Federal Trade Commission that tells potential franchisees everything they need to know about your business—from required fees and basic investment to the company’s litigation history and duration of the franchise. Fifteen states, including California, have their own disclosure requirements and registration fees, which range from $125 to $750. In addition, any franchise package must spell out core values, costs and much more.
Bennett found that lawyers’ fees to draw up a UFDD would have topped $35,000. So after intensive online research, he put together a UFDD on his own. He had a lawyer fine-tune it and usher the document through state processes for about $7,500.
To keep your franchise going year after year, you’ll need to complete an annual audit. Hire a certified public accountant with franchise experience to ensure these audits are correctly filed.
Grow Wisely
Though franchising works for some micro-businesses, it isn’t for everyone.
Take Petra Geiger, owner of Beehive Co-op in Mt. Kisco, N.Y., for example. Her small business sells handmade products by emerging designers. Geiger began franchising in 2007, but now has decided to grow her business by licensing. In a licensing agreement, a licensee pays for the rights to use a business’s trademark, enjoying the name recognition and trust already established for the brand. But the licensee retains control and responsibility for the operations of the business, sometimes with limited support from the licensor.
“At the time franchising was really hot, and I was focused on maintaining quality across the board,” Geiger says.
She received about 15 franchise applications, but none worked out. She also found that she would spend $5,000 to $8,000 to hire an accountant for franchise audits and to pay state registration fees, making franchising cost-prohibitive for her small business.
Instead, she decided to launch an affiliate program to share her expertise about how to run a successful co-op that sells wares from independent designers and artisans. She charges a flat fee for each of several tiers of business support and trademark permission; licenses are renewable. One affiliate store in Atlanta, Ga., has already opened.
“I can help a similar business get up and running, and I’ll share what I’ve learned over the years, but I’m not going to expect royalties or have a hand in your business,” she says.
On the other hand franchising is working for Bennett, the owner of Whiskers and Paws. The franchising process started about a year ago. Experts told him that he may need to go through 100 responses to get 10 good prospects; and out of that 10, he may get one that works.
“It’s a question of numbers, being patient and not lowering standards,” Bennett says.
Future Whiskers and Paws franchisees will receive two weeks of training at the California headquarters. Then as franchisees are setting up their businesses in their own territory, Bennett visits the franchisee for a week. He offers operational guidance, helps select a warehouse, establishes territories so that future franchises don’t overlap, assists with initial sales calls and participates in marketing strategies.
Wisdom From The Field
Launching a franchise takes time and patience. It also takes a willingness to mentor franchisees in your business model and share lessons you’ve learned from running the company.
“As a franchisor, if I don’t provide support and hold their hand, they’ll fail,” Kasmai says.
You must be willing to continuously improve your system and products, he says, as well as make investments in your brand.
Bennett advises micro-business owners who are considering franchising to attend trade or franchise shows where they can get tidbits of advice from experts and find out more about the process.
“You have to be prepared to offer them [franchisees] full-time assistance and education, and help them over the hurdles,” Bennett says. “That’s part of your obligation: To make sure that your franchisees are successful.”
Carrie Madren is a freelance writer based in Maryland and has noticed that her favorite local coffee shop is in fact a small franchise.