There are now over 320,000 franchised small businesses in the US, according to figures from the International Franchise Association.

Franchises account for over 40 percent of US retail sales and employ over eight million people. One in twelve US business establishments is franchised, with a new franchise business opening every eight minutes.

When you think of franchising the first thing to spring to mind is probably fast food. But franchising now covers over 75 industry sectors. It has proved successful in areas such as video rental, printing and copying, home repair services, advertising, real estate, hotels, shipping and transport, health and fitness, and auto maintenance.

Franchising may entail no more than the right to sell a particular product or brand. For example, gas stations may be franchised despite doing business in different ways. But business format franchising is the most frequent form of franchise operation.

Under a business format franchising agreement a business owner (the franchiser) allows other businesses (the franchisees) to start up and trade under their trademark, using a particular business system. The franchiser provides the franchisees with a total business concept – a unique way of selling or distributing goods or services.

You might be attracted to the idea of franchising if you have a successful business and a unique business concept. Franchising could allow you to expand faster and at less expense than opening another branch of your own. In one respect, a franchise allows you to expand using someone else’s investment capital.

The downside is that you will get a lower return from a franchise than from a branch operation. However, you can open a lot more franchises than branches, so your net return may eventually be greater. You will also run a lower financial risk, since this falls more directly on the franchisee.

Franchising can give you access to economies of scale making it easier to buy inventory. You will have a larger advertising budget thanks to franchisee contributions. Franchise fees will give you a steady cash flow and you may be able to use some of this for research and development to further refine your product.

If you choose your franchisees well you may avoid many of the difficulties of hiring and retaining high-performing managers. And franchisees are likely to run a business in a distinctive way. They will see the franchise as their own business and are likely to manage it with a focus and motivation that is typically greater than someone who is drawing a salary. They may also bring special expertise and local knowledge to your business.

Franchising is an attractive option and thrives in a range of industry sectors, but it is not suitable for all businesses. For a business to be successfully franchised it needs to have a unique and proven way of operating – one that can succeed in your absence, and which can be explained and systematized so that others can adopt it.

You also need a business with a solid cash flow that can support the costs of franchise start up - less than those for opening a new branch but still substantial.

You need to satisfy yourself that:

• There will be adequate demand for your franchised goods and services

• Profit margins will be high enough to support both you and your franchisees

• You have an established and credible brand that can generate customer loyalty

• Customers are loyal to your brand rather than to individual owners

• The distinctive features of your product or system will succeed in other locations

• Suitable locations are commercially available

• You will be able to identify a customer base for targeted advertising

• Your business systems can be readily documented, so that franchisees and their team members can pick them up in a relatively short period

• You have good people skills and are able to manage people who are not your team members and have a degree of independence

• You have the financial means to help franchisees with start-up financing

• You have the means to cover the expansion of your business

• You can run a pilot scheme to test out whether the franchise concept works in your case

You need to take a number of steps to start a franchise. You will need professional help with most of them.

Get an experienced franchise lawyer

If you are seriously considering setting up a franchise, you need to seek the advice of a lawyer who specializes in the area. Franchising is heavily regulated and the law is highly complex. Legal mistakes can leave you liable to heavy penalties. Bodies such as the International Franchising Association can help you locate a suitable lawyer.

Franchising laws are not only complex, but also varied. Franchising is regulated by both state and federal laws in the US. For example, Federal Trade Commission rules will require you to prepare a detailed disclosure document to present to potential franchisees. You would be legally bound to hand over this document at your first personal meeting with the franchisee.

In fifteen US states, the document follows the guidelines of the Uniform Franchise Offering Circular, but requirements will vary in other states. As you may face significant costs in preparing the circular and other compliance documents, you might want to open your first franchises in states that have similar franchise laws. A franchise lawyer can advise you on this.

You will also need a lawyer to help you with ongoing franchise management. Franchising depends on building and protecting a brand that customers will recognize and franchisees will pay money to be associated with. You will need legal advice to help you protect your brand, perhaps at a national level. Your lawyer can also offer advice on copyright and the registered trade name that is key to your business.

You may need legal advice on managing difficulties in the franchise relationship. If a franchisee refuses to honor the terms set out in the franchise contract, you may ultimately need a lawyer to deal with them and any associated litigation.

You will also need the services of your RAN ONE accountant. Franchising will mean significant changes in the way you do business and your RAN ONE accountant can help you work through the financial issues associated with expanding your business.

Prepare a business plan

Also engage your RAN ONE accountant in preparing a business plan for franchising, including a full SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Your analysis will start with your strengths – assuring yourself that your business idea or operating system is distinctive enough to attract a consumer base over a wide area.

You need to analyze the market and assess areas where you are weaker and susceptible to competition. There will be no point expanding into areas where competitors can threaten your business and grab market share. On the other hand, if your market offering is strong and dominant, you need to identify areas of opportunity where you can exploit that dominance.

You need to make a realistic assessment of the market potential for your goods or services and estimate a return on investment for you and your franchisees. How much is your reputation, brand and product worth to franchisees, and how will that balance against their costs in opening a business?

You will charge franchisees an initial fee to buy a franchise and then charge ongoing royalties. You need to set the fee and royalties at a rate that will be profitable for you, but which will not overburden the franchisees. You need to set fees that will ensure their long-term prosperity.

Franchisers often run a pilot program to help them assess costs and returns. They may run one of their existing outlets as a franchise for a time.

Do not underestimate the start-up costs of a franchise. While you will get an initial fee from franchisees, this is generally diverted towards marketing and support services for the franchise network. Be prepared for a wait of six months to a year before the franchise starts breaking even.

Your business plan will also need to estimate the cost of setting up a head office to run the franchise. You will need to hire more team members or train existing ones. You will have a whole new level of communication and coordination responsibilities.

You will incur costs when you assess possible franchisees, run training courses or advertise and promote your franchise. A classic franchiser mistake is to invest in expensive new premises. You really need to run a franchise with the same attention to cost and detail that you show in running an individual outlet.

Prepare a prospectus or offering circular

The legal requirements for the prospectus or offering circular will vary according to legal jurisdiction. But it is always a complex document that reveals a lot about your business. It typically includes audited financial statements, information on your fee structure, your company history (covering areas such as litigation and investment), franchise contract terms and franchise renewal conditions.

Prepare an operations manual

Franchisees have some of the freedom of a true entrepreneur but avoid the headaches of having to solve all the management and operational problems that a fully independent entrepreneur needs to deal with. They buy a package of solutions that has a proven track record of success.

These solutions are contained in your operations manual. Your manual breaks down the way you do business and sets out the procedures and standards you expect franchisees to adhere to.

You may wish to prepare two manuals – one to help franchisees deal with start-up problems and the other to help with ongoing operational issues. You may be able to write the manuals yourself, but you are likely to get a better product if you ask your RAN ONE accountant to write one with you. Even if you draft an initial document yourself, you will benefit from a professional review that will assess how well you are communicating.

Set up procedures for ongoing support

The operations manual is one way of helping ensure that your franchises have a uniform look and feel and that customers can expect a certain kind of product and service when they do business with you.

But you also need to support the manual with training programs. Every time a new franchise starts up you will need to run training programs to induct team members into your way of doing business.

You will also have to offer ongoing business advice to franchisees. You will be their educator, psychologist, and troubleshooter. Depending on the nature of your business, you might also offer administrative support services. If you are running a home repair network and franchisees operate out of their vans, your head office might carry out a lot of administrative tasks.

Prepare a franchise agreement

A franchise agreement is a contract that sets out the terms of the business relationship between you and the franchisees. It generally lasts for five to ten years, with renewal rights.

The agreement sets out the franchise operating standards. It will also cover financial obligations, such as franchisee contributions to network advertising. It should cover franchisee accounting and record keeping obligations. Franchisees will need to disclose information to you, so that you can verify that they are correctly reporting on their business activities. This will ensure that they are paying you the correct level of fees.

Good franchisees are typically not true entrepreneurs. True entrepreneurs want to explore issues and do things their own way. Franchisees need to be comfortable following instructions and adhering to guidelines.

Franchisers often select a person (or couple) with a stable marriage, a solid work ethic and the physical and emotional capacity needed to cope with hard work and the pressures of running a business. Franchisees may find themselves working sixty to seventy hours a week.

When you set out, you may appoint one franchisee for every ten applicants. Established franchises tend to be much more picky, appointing one in fifty or even one in a hundred applicants. They are very choosy because they realize that it can be very expensive to get out of a relationship with a franchisee.

Some franchises only appoint franchisees who have worked with their company for a year. But you can also advertise through franchise exhibitions, newspapers and trade magazines. You may rely on word of mouth and business contacts, or search through franchise associations.

The application is a very important first step in a ‘weeding out’ process that helps you determine whom to talk with further and whom to send a polite "no thank-you" response.

The initial franchisee application is designed to tell you something about the applicant. You need to know a lot more than where the potential franchisee lives, what jobs they've held and how much money they have in the bank. You are really looking to learn, at a glance, what type of person they are, so you can attempt to evaluate their likelihood of success as a franchisee.

Franchising may offer you a quick and relatively low-cost way to expand your business and increase your revenue. You may benefit from joining the global trend towards franchising. On the other hand, franchising may be fundamentally unsuited to your business and you might be better advised to look at other options for expansion.

Everything should be as simple as possible, but not simpler.

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

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