Franchising has become an increasingly popular way for entrepreneurs to expand their businesses. By franchising your business, you can grant others the rights to use your brand name, business model, and other proprietary information, allowing them to start their own versions of your business under your guidance. However, franchising is not without its challenges and risks, and it’s important to understand the truth about franchising before you decide to take this step.
First, it’s important to understand what franchising is and how it works. When you franchise your business, you essentially license the use of your brand and business model to others, who then open their own locations using your brand name and business methods. In exchange for this license, the franchisee pays you a fee, usually in the form of an initial investment, ongoing royalties, and other fees.
One of the key benefits of franchising your business is that it allows you to rapidly expand your brand without having to fund all of the new locations yourself. Instead, the franchisees bear much of the financial risk, while you earn revenue through the fees you charge. Additionally, because the franchisees are responsible for running their own locations, you can focus on other aspects of your business, such as marketing, product development, and strategic planning.
However, franchising also comes with its share of challenges and risks. One of the biggest risks is that the franchisees may not operate their locations according to your standards, potentially damaging your brand and reputation. Additionally, if you do not provide sufficient training and support to your franchisees, they may struggle to succeed, which can also reflect poorly on your brand.
Another risk of franchising is that you may lose some control over your brand and business model. When you franchise your business, you must allow the franchisees to use your name and methods, which means that they may make changes that you don’t approve of. Additionally, because franchisees are independent business owners, they may have different goals and priorities than you do, which can lead to conflicts.
Despite these challenges and risks, franchising can still be a viable option for many businesses. To succeed as a franchisor, it’s important to have a strong brand and business model, as well as a clear set of standards and procedures for your franchisees to follow. You should also be prepared to invest significant time and resources into training and supporting your franchisees, as well as into developing and enforcing your franchise agreements.
Conclusion
Franchising can be a powerful tool for expanding your business, but it’s not without its challenges and risks. Before you decide to franchise your business, it’s important to carefully consider these factors and to seek advice from experienced franchisors and legal professionals. By doing so, you can increase your chances of success and build a strong and profitable franchise network.
Video Transcript
I was contacted this week by a business owner who is quite successful, and he was wondering about franchising his company. It is a pretty cool idea. I mean, think about it. If you have achieved great success in a company, why not let other people replicate that model and pay you for the ideas and the best practices you have come up with.
It seems like a great idea, but I encourage you in this video to think carefully about this, and hopefully, 99% of you will decide that franchise is not for you after watching this video. And it will become more apparent why as I talk through this.
What Is a Franchise?
In the United States, when you have a business model, you can sell that business concept to other people. Typically, they are using your brand, your business name, and let’s use a restaurant, for example. They would use your menu items. They would use what worked for you in advertising and promotion, and marketing.
Typically, then the person who is starting or buying a franchise from you that is called the franchisee. The franchisee would pay you as the owner of the franchise, called the franchisor. The franchisee pays you a few different fees, typically a startup fee or a fee to buy the franchise. Typically, then a monthly fee of sum rate, and then you, as the franchisor (the one who owns the franchise), may also make money through rebates, which sometimes are called kickbacks from the items that are purchased by the franchisee.
So I will give you an example here. Let’s say you have a really cool idea for a restaurant. You say, “All right, for $50,000, I will sell my concept to a new business owner who wants to run a restaurant but doesn’t really know how.” And so the new business owner wants to buy this proven concept, this proven business model that you have refined. So let’s say you sell that model for $50,000 upfront. Now, by the way, typically, you are going to use a franchise broker. And usually, most of the money that is paid for the franchise goes to the broker. So the broker might get $30,000 or maybe even $50,000 of the upfront franchise fee. But the business owner buying the franchise is also paying some sort of training fee and maybe some sort of then monthly fee for the use of your technology that you have set up for them. You then send a consultant to them, help them get everything set up, and launch. And you might even have a consultant or advisors available to answer questions and to kind of help as the business goes along. Then as this new business owner buys food through your approved vendors using your approved recipes, the vendor may have some sort of rebate that goes back to you.
So as you can see, there are three main sources of money for franchisors: the upfront selling price, the monthly fees, and then the rebates that come from when the franchisee is purchasing food or other items as part of owning the business.
So if you are running a franchise, you are probably thinking, wow, this is a great idea. It would be wonderful to have my business concept replicated throughout the country, and I would make money off this.
Why Do I Want to Talk People Out of It?
So why did I say in the very beginning that I am hoping I can talk a lot of people out of it? Well, there are a few reasons. First, selling a franchise and running a franchise is really a second business. Just like you running the restaurant and selling to customers and needing to work on that business model, having a franchise that you sell to customers, business owners who want to run a business like yours, setting up the processes, the legal fees, the accounting, the sales team that you need, the trainers that you need, the consultants that you need, the software; it’s a separate business. So, often when business owners with one successful business like a restaurant find out how much work and expense goes into setting up a franchise, it gives them some pause.
They think to themselves, I might be better off just launching more stores owned by me where I put a manager in place. Now, what holds you back? Well, often, it is money. You are interested in somebody else bringing some money to the table and that person having a financial stake in running the company well for you. So there is nothing wrong with the franchise per se. It works great in many scenarios. But I would say 99% of the business owners who contact me about setting up a franchise, ultimately, after doing their due diligence, decide not to pursue it. Interestingly, many business owners who then do set up a franchise also tell me confidentially that it was such a pain, that it was so exhausting and so frustrating, that they regret doing it. They wish they were just running their original business and maybe even launching a couple of other locations.
What Is the Next Step If I Am Exploring Setting Up a Franchise for My Business?
Generally, I say start with education. That includes hopping on YouTube and watching some videos from consultants and franchise development companies. Because this is a whole new business, you may have an idea for a restaurant or a business, but the idea of selling it and finding buyers and training them in, and setting up all the infrastructure, it is a lot of work. So generally, companies who want to offer their business as a franchise work with a franchise development company or a franchise consultant. And there is all sorts of educational information online about what do you need to do before you are even ready to do that. There is no problem in reaching out to those companies and asking for some initial guidance. You can get a free consultation.
Next, in order to prepare your business to be sold as a franchise, you need a number of years of proven profits. And think about it. Nobody wants to buy a business if profits are not proven. Why would they spend $50,000 or $300,000 to buy a franchise if it doesn’t have a track record of proven profits? So you at least want to have that in place.
Next, you want to make sure that you have documented all of your processes that have helped you achieve proven profits. Each of those processes need to be passed along to the franchisees who buy into your system. And they need to be trained in that.
You can categorize franchise opportunities in two different ways. One is the type where it needs to be run by the owner operator. In other words, whoever buys, the franchise from you and starts that new business, they need to be present at all times because a lot of learning is required. The other type is where the processes can be learned by a team of employees and the manager or the owner operator doesn’t actually need to be present at all times.
Subway Is a Great Example
Where subway can be run from a counter with one to two employees depending on how busy it is or more, of course. Subway is great because it is a very small footprint. You don’t have to lease a lot of space. Of course, Subway has some downsides as well. But thinking through, what kind of requirements are you going to have for the people who buy your business? And will they be trained in on complex aspects of your business? Or is it the type of work that can be passed along to an entry-level or moderately entry-level employee? So, documenting those proven processes and then putting together training materials. Those are additional steps in preparing to launch a profitable business or a profitable franchise.
Another really important part of offering a franchise is not just having your particular restaurant or business operating at a high-profit level but proving that you have set up other franchisees to achieve success. Those first few franchisees are vital to you being able to sell your franchise concept to many more buyers down the road. So usually, a franchisor like yourself is going to try to find, from friends and family or their existing network, a few reliable franchisees with whom you can work closely, help them achieve success, and get those franchisees with a track record of profitability. Why is that so important? Because if anyone else is going to buy into your franchise business concept, they want to know it didn’t just work for you; it worked for others.
Let’s face it, you might have a great personality, you might have had a great location, you might have had some sort of other advantage, and so prospective buyers of a franchise want to look at other buyers of the franchise and were they successful? If you can show a repeatable business model that produces success and profits for other franchisees, that is an attractive offering for people who would buy into your franchise.
So typically, you start out working with the first few franchisees very closely working to make sure they are successful and happy. By the way, there is one other important byproduct of this that is the potential buyers of your franchise will likely contact these other franchisees and ask them. How did it go? How supportive is the franchisor in helping you achieve success? What kind of success did you have? What kind of challenges did you have? How did you overcome those challenges? Or are they still present? So as you can see, there are a lot of steps in developing a business concept into a franchise offering.
I would recommend before you hire a franchise attorney like myself, before you spend a lot of money on anything, or before you even bring in investors, meet for free with some franchise development company representatives. Click in the description below. There is a great video talking about some of the more reputable ones.
Also, watch some YouTube videos and understand what is actually involved in offering your business as a franchise. Most people who do the due diligence and think about offering their business concept as a franchise, decide, you know what? I don’t think I want to start that business. It is a whole other business realm that I don’t know; I may not love, I might not be successful in.
And often, offering your franchise business is very different from whatever type of business you are looking at Franchising. By the way, one other thing you could consider is going to some of the franchise expose. They are offered every few months in all major cities. They are put on by the big franchise brokers. FranNet, for example, is one of the big ones. And you can go there and check out the different franchise opportunities. It can be a great educational opportunity. It allows you to mingle with potential buyers of franchises to get a sense of who is your potential customer that might buy into your business concept and what are they looking for.
I will warn you, though, the people who are manning the stations there, they are typically getting a sizable commission for selling their franchise concept to the prospective buyers. So obviously, you don’t want to interfere with that, and you want to be courteous and respectable to what they are trying to accomplish at these franchise expos.
Conclusion
So if you have questions about offering your business as a franchise, feel free to enter your questions and the comments below. You can rate this video with a thumbs up if you like educational videos like this. If you are a business owner or entrepreneur, you are welcome to follow the channel. And check out some of my other profiles on the different social media platforms.
By the way, if you are running a business and you are interested in avoiding some of the common legal pitfalls and problems that new business owners face, I made a list of those problems and some tips on how to avoid them. And I made that list through years of practicing law as a business attorney, working with business owners, seeing the problem, and then I would help them solve that problem. But what I would then do is make a little note, how can I help my other clients prevent those problems? And so after a number of years of putting together that list, I have the top ones available.
You can download them at aaronhall.com/free. And when you do that, I will email you the PDF. And then I will also give you the opportunity to watch some exclusive videos that are not available on the internet, but they are available to subscribers. You can watch those videos, and they will explain each one of the concepts in the PDF that you get so that you can try to avoid some of these issues in your business. I do this video and this channel to help educate and empower business owners to achieve success in their business and life.
This isn’t a replacement for an attorney. In fact, I can only represent business owners that have some sort of connection to Minnesota. But my hope is that what I have learned through the years of working alongside business owners might help some other business owners and entrepreneurs who watch this channel. Thank you for joining me here today.