6 Steps to Franchising Your Business
From drawing up a Financial Disclosure Document to figuring out what potted plants will line the storefront, when turning a business into a franchise the devil is in the details. The pay off, however, can be lucrative, as franchising is one of the best ways to spread a brand and grow a business quickly.
Data released by the U.S. Census Bureau in 2010, the first report drawn up by the Bureau that gathered information on franchises, says that franchises made up 10.5 percent of business across 295 industries in 2007. Franchises accounted for $1.3 trillion in revenue and $153.7 billion in payroll disbursed to 7.9 million workers.
For businesses that are looking to become franchises, there are franchise consultants. Dennis Mulgannon walked the beat as a police officer until 1983, when he decided that he wanted to start his own business. He opened a sandwich shop in the San Jose area. He named it SUBS2U. His chief competition was another upstart shop down the block called Subway.
"That crashed and burned," Mulgannon says of his first try at his own business. "But I kind of cut my teeth and fell in love with the franchise process." Now Mulgannon is a franchise development consultant and director of franchising for Junk King, a junk hauling service that was founded in 2005 and now has 31 franchisees managing 58 units in the United States. Mulgannon said that potential clients come to him with some sense of why they want to become a franchise, but where they are in their planning tends to vary. "Usually they are at the level where they want to scale, and they want to grow. They’re looking at themselves, they’re looking at their business, and they have some level of success," Mulgannon said. "They want to utilize other people’s skills and other people’s capital to grow their brand."
Here are six tips for any small business owner thinking about turning their company into a franchise:
1. Know your business inside and out.
The directions provided to each franchisee will likely have to be precise. Business owners, however, are frequently accustomed to running their companies on intuition, and it may be difficult for them to itemize all the infinitesimal but important obligations they fulfill every day. Franchisees will not have the freedom to improvise, and will need to be told how to do everything from keeping the books to ordering supplies. Every step of the process must be carefully outlined. The business owner may have to rediscover what it is like to run a company for the first time.
Tariq Farid had owned four flower shops by the time he was 19. He remembers sitting with his mother, who helped him around the shop, when he was making sixty dollars a day, and he’d tell her of his dream to someday make seventy. When he reached his goal, he turned it in for another dream. Soon he was telling his mother that he wanted to make eight, nine thousand dollars a day. "It never ends," he says.
It still hasn’t for Farid, CEO and founder of Edible Arrangements. That early experience was better than any business school for Farid, but it still didn’t prepare him for the challenges of building his next idea, a shop that sold bouquets made of carved fresh fruit, into an international franchise. When he started out, he says, the franchising wasn’t part of his business plan. "We mostly focused on building the business," says Farid. Which means no job was too small for Farid to take on himself. When the company website needed photos of the product, Farid became an amateur food photographer. When his shop needed a more robust back end to allow them to fill more orders online, Farid built it.
With his head buried in how to increase revenues that were already steadily growing, Farid says he didn’t think much about franchising until a man walked into his shop one day and said he wanted to open an Edible Arrangements in Boston. To see what might be involved in opening a franchise, Farid decided to do a test run himself, in the form of a second store. He found a building, filed the documents, and went through all the minutiae himself, from interior decoration to training the staff. He forced himself to work through each step of the process exactly as a new franchisee would.
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2. Learn about the legal issues.
Mulgannon advises all business owners looking to get into the franchise business to pay close attention to Item 19 on their FDD filing. This is where a franchisor outlines financial performance information. Mulgannon says that if everything's not in order in a company's Item 19, he'll decline to work with them. These legal complications are an area in which the hopeful franchisor may want to seek out professional help.
Farid wouldn’t exactly advise anyone to go about franchising their business without expert advice. "I was mostly doing it myself," Farid says of his early efforts to raise money, cut through the legal thicket, and build his trial franchise. “We had no money, and it was tough to go to a bank with a basket of fruit. "The one consultant Farid did go to unintentionally set the ambitious business owner on the right course. "I went to this consultant and he gave me a bill, he said it would cost $100,000," Farid says. Farid told the consultant he couldn’t afford that. "I think he jokingly said, ‘Why don’t you try it yourself,’ and I took him seriously. I didn’t think he was kidding." Farid says that he made a lot of mistakes, and he did end up hiring franchising consultants ultimately, but by that time he had learned plenty himself.
The International Franchise Association is also a great resource when it comes to the legal issues surrounding franchising. The IFA compiles information on franchises, lobbies for legislation favorable to franchises, and provides resources and aid to businesses looking to become franchises. The association also publishes reports on the legalities involved in franchising, including one titled An Introduction to the Law of Franchising. Whether or not an interested small business owner manages to plow through the 450-page revised second edition may itself be a litmus test of an entrepreneur’s conviction.
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3. Know how you want to grow.
The idea of growth is appealing, but a small business owner wants his or her company to scale at a reasonable rate. For some companies looking to become franchises, the new business model may mean expanding coast to coast, even internationally. For others, it may mean adding a handful of new outlets. The experts recommend growing at the rate natural to your business.
When a business comes to Mulgannon to explore the potential of franchising, the first thing he does is sit down with them and carefully examine their proof of concept. "Before I start with anybody or take them on as a client I have to do my own due diligence to ensure my eyes are wide open."
When a franchise wants to grow, Mulgannon said, they have to consider where their business model will work and how far they can expand their brand into unfamiliar territory. He worked with a company called Erik’s DeliCafe, a popular sandwich shop and caterer in northern California. The company has reliable brand recognition in California and some surrounding states, and they decided, with Mulgannon’s help, to expand in California and into northern Nevada. They grew, but within the scope of their brand recognition.
At the other extreme is international franchising, something Mulgannon says he has explored with Junk King. "I put together a deal with a Panamanian investment group to develop Junk King throughout Central America," Mulgannon says. "They sought us out, and I spent twelve days there negotiating an international master license." Mulgannon is confident that this deal will allow Junk King to spread its brand beyond the United States with minimal risk.
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4. Screen your franchisees.
That someone wants to open a franchise with your company's name on it does not mean you should let them. They're going to be representing your brand, so be sure to have a system in place to make sure they'll take your company in the right direction in a new market.
Farid says he has a way of knowing whether or not someone will make a good franchisee. "I used to call it the googledy-eyes test. If someone would come up to me and say, ‘I want to build a franchise, I think it’s going to be great!’ and they didn’t realize the hard work involved," Farid says, he would pass.
Over enthusiasm is as common in franchising as it is in any realm of business. Apart from the documents and financial information supplied by potential franchisees, Mulgannon says, he considers the personalities of the business owners. He, like Farid, doesn’t want someone who’s all passion but no substance. Better that they’re thoughtful and measured, as well as enthusiastic about their business."Most franchises go to market with a shotgun approach," Mulgannon says of his approach to choosing clients. "Often they’ll sell to anyone. That’s a big mistake."
"We get about 20 inquiries a day and we eliminate about 75 percent of those," Mulgannon says. "Most of the people are looking for a job where they can work on the truck." Mulgannon described Junk Kings as much more of a white-collar franchise. Contrary to what one might expect, Junk King is not interested in franchisees who are primarily interested in putting on a pair of work gloves and getting on the truck. Mulgannon says he and his staff will scour over data supplied by applicants in the search for certain qualities. "One of the big indicators for us is what are their previous income expectations," Mulgannon says. "If they’re looking to replace six figures, that’s good for us."
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5. Set the right restrictions.
Even after giving franchisees very specific instructions on hiring, training, and other practices, there will be, and should be, certain freedoms they are allowed. They are small business owners, too, and as the franchisor begins to step back from daily operations, he or she will have to rely on the judgement of the franchisees as they explore new business opportunities. Give them freedoms, but keep those freedoms circumscribed.
Different franchises will have different ideas about the restrictions they want to place on their franchisees. They struggle with how to balance preserving brand identity with the touch and sensibilities of individual franchise owners. Mulgannon says he turned down one business that wanted help becoming a franchise because they were going to set very narrow limits on who could become a franchisee. "The requirements on the franchisee would have been much too stringent," Mulgannon said. "The pool of franchisees would have been much too small."
Growing the brand is always the end goal, Mulgannon says, and so one requirement Junk King does place on all franchisees is that they spend a minimum amount on advertisement, whether television, radio, print, or some other medium. "They have to reinvest back in their market ten percent of gross revenue," Mulgannon says. Junk King provides about 90 percent of the promotional materials required, he said, and companies can get other ideas approved through the corporate office.
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6. Support your franchisees.
Even as the franchisor begins to remove him or herself from the daily business of the franchises, he or she should spend extra time getting to know the franchisees.
A franchisee is unlike other types of small business owners. He or she has opened a new store or service provider and is responsible for its performance within a designated area. He or she derives a livelihood from the business, and oversees all daily operations. Yet, there is always a larger corporate structure overhead, and how the franchisee works within that structure varies from franchise to franchise.
A franchise model presents some particular challenges because, if business is good and new stores are opening, the company is always working with new recruits. Farid says Edible Arrangements has a department that works with franchises on the sourcing of their materials. Another handles training, and other worry about problems that may be coming down the road, unexpected variables of any kind. Ensuring that all the cogs spin together requires constant communication. "We’ll spend a lot of time communicating with them [the franchisees] online in terms of what’s happening this week, what are some of the challenges, and where to look for them," Farid says.
Farid says sometimes his employees say he’s too paranoid, too attached. The boy who wanted to find a way to sell more long-stemmed roses still finds it hard to fold up his apron at the end of the day. It wasn’t until Edible Arrangements had reached 500 or 600 stores that he began to take a step back, Farid says. "I still visit the stores because that is what I enjoy most," he says. "Beyond that, when you get to the size we are now, the franchisees have bought into you to start the next grand thing." Farid wouldn’t reveal what that next horizon may be for Edible Arrangements. But he would say that the hunt for it never ends.
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