Strategic planning. What we call strategic growth planning really consists of decision-making. And, as you can imagine, many decisions need to be made before you establish your franchise program, such as: what kind of program should you offer? What kind of franchises will you sell? How much will they cost? What will the term of the contract be? What will you call your franchise company and outlets? (The name you currently use may be unusable or undesirable in the long run.)
Research. Before intelligent decisions can be made concerning the form of your franchise program, it can be useful to examine the structure of other franchise programs-especially those of any direct competitors. At the very least, you will want to know: what investment (cash plus non-cash) is being required of the franchisees? What services are being provided by the franchisor? What franchise fees, royalties, and advertising fees are being assessed? What other payments or purchases are required? What kinds of franchisees are they attracting? How is the territory defined? What is the duration of the franchise agreement?
You should obtain the offering circulars of these franchisors. With knowledge gleaned from these documents, you can get a feel for the structure of the franchising programs in your particular industry. This may sound easy, but the process entails a great deal of research-and much of it requires knowing where to look for such information as well as how to properly assess it. It's what you don't know that can be disastrous here. Consider using a qualified franchise consulting firm (see Francorp Consulting) with experience in this area.
Franchise types. The next step is to determine the type (or types) of franchises you are going to offer. The answer to this question will depend upon both the characteristics of the franchisor's business and the franchisor's goals. There are four to be considered:
1. Individual franchises-These are awarded to an individual, group of individuals, or a company for one business unit to be operated at one location or one geographically defined area. In most cases, especially in the early stages of a franchise program, offering individual franchises is the easiest, most cost-effective, and least risky option. For one thing, buyers of individual units are likely to be easier to find and, once found, easier to deal with than the multi-unit buyer.
2. Multi-unit or area development franchises-This type of franchise is awarded to an individual, group, or company for a territory in which more than one unit will be established and operated. Unquestionably, the sale of multiple units to a franchisee who is ready to open them immediately is the most rapid means of franchise expansion. But for a company new to franchising, it can be difficult to attract buyers capable of the large cash outlay it takes to open multiple units.
3. Subfranchises-In this system, subfranchises are awarded to an individual, group, or company for a territory in which several individual franchises will be sold, usually by the subfranchisor, and usually operated under the subfranchisor's administration and supervision. The subfranchisor normally does not operate units, other than a single "showcase" unit with headquarters and training facilities. Instead, the subfranchisor takes a large burden from the franchisor's shoulders by selling individual and/or multi-unit franchises within his or her territory, often training the franchises and making periodic supervisory visits. In return, the subfranchisor customarily shares in both the franchise fee and royalty paid by the franchisee(s), usually taking a larger portion than the franchisor.
4. Conversion franchises-This type consists of converting existing independent businesses into franchised outlets. Conversion franchising works most effectively in industries with scattered, established independent entities (such as real estate, construction/home improvement, and hotel/motels), and in industries where the advantages of belonging to a group (such as the power of cooperative advertising or buying) are more critical than the actual techniques of running the individual businesses.
Setting fees and royalties. Franchise fees and royalties are the two basic income sources for most franchise programs. The initial, one-time franchise fee enables the franchisor to recover to some degree, if not completely, the costs involved in developing the franchise program, selling the franchise, and training the franchisees during the start-up period, when expenses to the franchisor will likely exceed the royalty income received.
What should your franchise fee be? At least three factors should be considered: (1) what competitors in your industry and investment range charge; (2) the franchisee's return on investment (R.O.I.); and (3) your total cost to start the franchisee in business, plus a profit. The fee must be low enough so the franchisees have little difficulty paying it, yet high enough to enable the franchisor to provide the initial services and support the franchisee will require. The franchisee's volume and margin also play a role in determining royalty rates.
Royalties are usually paid as a percentage of sales, or sometimes as a minimum fee against a percentage of sales. In almost no cases should royalties be a fixed dollar amount.
Royalties should be collected at least weekly; franchisors who collect royalties monthly are really making their franchisees a loan of this money. And especially in the early stages of your program, this is a form of beneficence that you can ill afford. Prompt collection of royalties can also alert a franchisor, if a franchisee starts doing poorly in sales in relation to past performance or to other similar outlets, so he or she can correct problems before they get dangerous.
Calculation of royalties, while an art not a science, should be done with care, based on the need for a "win-win" situation long term. Before you make a final decision, you should run pro formas, and do sensitivity analysis at different percentages and different possible levels of sales volume. Experienced consultants (see Francorp Connect) can help. Remember that both you and your franchisees will have to live with this decision for a long time.
Determining franchise territories. Franchise territories are a geographic area in which no other franchise company-owned unit can be situated or conduct business. The two related questions each franchisor must answer regarding territories are: (1) How large should they be?; and, (2) On what criteria should the size be based?
Criteria can vary widely, depending on the type of business and especially on the type of customers to which the business caters. For example, looking at population alone may be sufficient to determine the territory for a fast-food franchise, but for a business-service franchise, the number of businesses in a given area would be a more important factor. And even after the criteria for size have been determined, it still may not be easy to pinpoint the size itself. It can't be too small (unhappy franchisees), or too large (lost franchisor sales opportunities); it must be "just right".
What is "just right" in your case? One way of approaching that question is to ask: what's the smallest size the territory must be to give the franchisee sufficient customers to be profitable or to meet the desired return R.O.I.? You can begin to answer this question with some accuracy, if you have an existing business, by determining the geographical makeup of your present customer base, perhaps, through a survey. If you discover, for example, that 3/4 of the customers of your average outlet live and/or work within a two-mile radius of your average outlet, and the residential and business population for that two-mile area is around 25,000, you might decide to set your territory size at an approximately two-mile radius containing 25,000-30,000 people.
Setting the term of agreement. How long should the term of your franchise agreements be? Five years? Twenty years? Forever? The two most important factors to consider:
1. Size of investment-The larger the franchisee's investment, the longer the franchisee will need to recoup it. For example, the term of agreement for a hotel franchise might be 25 years, while that for an ice cream outlet might only be five years. Obviously, the buyer of a hotel franchise is going to lay out and/or borrow much more money than would the buyer of an ice cream store. Franchisees and franchisors both need to have a reasonable return on their investments-a rate higher than could be obtained by leaving their money in a safe investment, such as a Treasury bond.
2. Term of the unit's lease-Sometimes, particularly in enclosed malls, the term of the agreement is tied to the length of the unit's lease. When the lease ends, the agreement ends (since continuation of the lease is integral to the continued success of that particular unit).
In general, we recommend five- to ten-year initial terms (depending on the size of the investment), with two or three automatic five-year renewals at the franchisee's option, subject to the franchisee remaining in compliance with the agreement and signing the then-current agreement at the then-current terms. This gives the franchisor the option and opportunity to revise royalties or other aspects of the agreement periodically. It also gives them the option to convert territories to company ownership in 15 or 20 years, if desired.
It should be noted, however, that many states have enacted franchise "relationships" laws, which require mandatory renewal of the relationship at the franchisee's option, as long as they have substantially complied with the terms and conditions of the franchise agreement.
Dealing with trademarks and logos. Not every franchiseable business is blessed with a protectable or desirable name. The name of your business may be too nonspecific to protect it (such as Quick Food or Color Copying) or may conflict with a business name that is already a federally registered trademark.
The purpose of obtaining a federally registered trademark, of course, is to restrict anyone else throughout the United States from doing business under that name and with that trademark. To be protected nationally, your mark must be registered with the U.S. Patent and Trademark Office, although there are reasons why you may wish to have your mark registered in certain states as well. (One is that after applying for a federal trademark, you can expect to wait a year or longer for approval; state registrations are quicker and enable you to establish a record for doing business under that name on a given date, which can be helpful, if a dispute should arise.) When seeking to obtain a registered trademark, it is mandatory to consult an attorney who specializes in trademark law (see Francorp Consulting).
Your name is just one of several ingredients that blend together to professionalize your public image. Another very important image enhancer is a business's logo (the stylized lettering or design that's used in conjunction with the business name). A good logo will convey at a glance what your business is about and can help attract the kind of customer you desire. Few expenditures you make in the course of your business development will have the lasting value of the dollars you pay for a skilled professional designer to create a logo that is accomplished-looking and conveys the image that is appropriate to your particular business. As usual, our advice is to get it done right by going to professionals (see Francorp Consulting.)
Marketing and operational materials. As with most business undertakings, developing a franchise program requires the development of a particular set of documents and materials. These materials generally fall into three categories: (1) operations; (2) marketing; and (3) legal. Here, we cover the operations manual and marketing materials.
The operations manual. The cornerstone of your franchise program will be your operations manual. If you have built a successful business, you've made mistakes along the way that have probably cost you money. Of course, you don't want your franchisees to repeat those mistakes. You want them to replicate your hard-earned success from their very first day in business. When they win, you win.
To ensure franchisees adopt your business system and adhere to it, you should describe clearly, and in detail, how that system operates from the moment the business opens each day until it closes each night. That is the function of the operations manual. It also should be cross-referenced to the franchise agreement, so that its provisions and procedures have the force of contractual obligation.
In theory, a good operations manual is so thorough that it eliminates the need for phone calls to clarify how and when to do something. Typical franchise operations manuals are divided into sections for easy reference and are often held together in some loose-leaf manner to easily allow additions and deletions as they become necessary.
Sample sections might include discussions of:
- Pre-opening procedures
- Personnel
- Administrative procedures
- Daily operational procedures
- Advertising and sales
Each franchisee should sign a statement of confidentiality pertaining to information found in the manual, as it contains your complete operations system and trade secrets. It is lent to the franchisee during the term of the agreement; it always remains the property of the franchisor. It's a good idea to prohibit copying any part of the manual, except as you specifically permit.
Marketing your franchise program. The process of marketing a franchise can be broken into three steps: (1) planning; (2) generating leads; and (3) following up on these leads.
1. Planning--Before you attempt to sell franchises, you will, of course, want to know who you should be targeting as potential buyers, how to reach these buyers, and how to best try to appeal to these buyers.
2. Generating leads-The easiest and least expensive, if not the fastest and most targeted, way to begin spreading the word about your franchise program is through indirect methods, such as networking through your professional contacts and advisers (salespeople, suppliers, attorney, accountant, banker, etc.). An even better way of spreading the word is through a dedicated public relations campaign. Advertising is also virtually a requirement in attracting a steady stream of potential franchisees. Holding seminars or open houses, setting up displays at franchise trade shows, and implementing direct mail programs can also be good ways to attract potential franchisees.
3. Prospect follow-up-When a call or email is received, record the caller's name, address, telephone number, email address, and where/how they heard about the franchise. Then, a franchise brochure should be immediately sent to the prospect. Speed is vital-a sales lead can easily go from hot to cold in less than a week. Many franchisors also use videotapes or CD-ROM presentations as part of their lead follow-up process. Done effectively, they can bring your business to life with motion, music, and special visual effects. They can fill prospects in on details in an entertaining and informative way.
Selling and awarding franchises. With decisions made, structures in place, and materials produced, you can finally begin the business of selling franchises. Remember that you are not merely selling, you are also selecting. A franchise is not a product, it is a relationship-this is why we say you are both selling (convincing the prospect to buy) and awarding (granting the franchise to a qualified prospect). This process roughly breaks down into four stages: (1) the first call; (2) the first meeting; (3) the wait; and (4) the award.
The first call. Actual selling begins with your first phone call to a prospective franchisee, as a follow-up to the materials you have sent. We strongly suggest, at least in the early days of your program, that this call be from you-nobody knows as much about your business as you do.
The purpose of the first call is twofold: (1) to provide information and build enthusiasm about your program; and (2) to begin qualifying the prospect. We recommend you begin the qualification process by asking questions designed to provide you with information regarding:
1. Finances-Don't be shy about asking whether the prospect is in a position to afford your franchise: "Mr. X, are you aware that the total investment required for this franchise is Y dollars, and you will probably need a minimum in cash of Z dollars?" (Most franchisees put down between 20- 40% and borrow the rest.) "Do you have either the borrowing capacity or net worth to be able to handle this kind of investment?" If it seems the prospect may not initially qualify, you should suggest alternative ways to finance the purchase: "Do you have equity in your house? Do you have a family member who could go in with you or could cosign a bank note? If, after exhausting the various possibilities, the prospect simply doesn't qualify on financial grounds, tell him or her so: "Mrs. X, it doesn't sound like you have the financial capabilities to qualify as a franchisee at this time. However, should that situation change, we'd very much like to talk with you again."
2. Readiness-A prospective franchisee can be financially well-qualified, but still not be fully prepared to move ahead. You should ask the prospect how soon he or she would be ready to seriously begin the process of becoming a franchisee. If the prospect will not be ready within a reasonable period of time (such as six months to a year), it's probably best to delay meeting with him or her until that point. Too much can change for both parties in that amount of time. You want to devote your full energies and attention toward the prospects that are ready to move ahead.
3. Experience-While you should not necessarily make business experience a hard and fast criterion, you certainly want to know who does or does not have it. The degree of the prospect's experience might not be apparent in a list of his or her previous vocational activities. Specific questions should be asked, such as: "Have you ever held a sales position? Have you ever managed people? Have you ever run your own business?"
Those who pass this preliminary screening and indicate an interest in your program should be invited to a meeting in your offices. Actually, this invitation can be considered a fourth qualifying procedure. A prospect who refuses to come to see you probably hasn't achieved a level of interest that will enable you to persuade him to commit his or her money and future to your program. A person who is pre-qualified in these four areas becomes an excellent prospect indeed.
The first meeting. At the meeting in your offices with the prospect, you will obtain additional qualification information. Persuade the candidate to fill out the full application (if not done already), including extensive business, financial, and reference information, then set up, either that same day or very soon afterward, a schedule of full interviews between the candidate and the other principals in your program. You'll also review all the selling points of your franchise, and probably take the candidate on a tour of a company-owned outlet.
At the first meeting, give the candidate the offering circular, explain its purpose and content, and obtain a signed receipt. Also stress the fact that no money can change hands for 10 business days from the time the candidate receives this document.
This is the time to explain that the franchise agreement is fundamentally a nonnegotiable document, and that franchise laws prescribe that, broadly speaking, all franchisees must be treated equally. And, while it is advisable to have a candidate consult his or her attorney, it should be clearly explained this involvement is only in an advisory capacity; they cannot regard a franchise agreement as a contract or lease on which they are generally expected to negotiate improvements or compromises.
After the meetings and interviews, you and your executives need to review the acceptability of the candidate, being sure to check the applicant's references and financial status and history. If the candidate is acceptable as a franchisee, notify him or her and set a date for the closing of the sale, keeping in mind the 10-business-day legal limit following the issuance of the offering circular.
The wait. Buyers often wonder during the waiting period whether or not they are making the proper decision. This is normal. Any big-ticket purchase evokes some amount of buyer's remorse in most people. And, beyond a mere purchase, this transaction represents a huge life change for the franchise-to-be. It is important that you communicate with the buyer, more than once during this period, and answer any questions and generally provide any necessary reassurances. Your confidence and forthrightness can help convince the buyer that he or she is making the correct decision in those days prior to the closing of the sale.
The award. It is customary for the franchisee and his or her attorney and the franchisor and his or her corporate attorney to meet for the closing-the awarding of the franchise to the new franchisee. All that remains is for the agreement to be executed and for the initial franchisee fee to be paid.
Making the program work. In the period immediately following the sale (and extending through the first few weeks, after the opening of the new franchised unit), the franchisor should be accessible to assist the franchisee in site selection, lease negotiations, equipment purchases, selecting initial inventory, and grand-opening promotions. (Although these phases apply most cogently for retail franchise outlets, service-oriented franchisees will also require plenty of initial attention and assistance from franchisors.)
The last few days and hours before the franchisee opens a unit are emotionally (and, often, physically) trying, with the franchisee knowing he or she has their life savings on the line, wondering whether customers will materialize, and, if they do, whether he or she will be able to handle them. The franchisor should be right there, reassuring and providing last-minute instructions.
As the franchisees become more knowledgeable in the operation of the business, they can no longer be treated as fledglings. The franchisor becomes more of a consultant or a senior partner.
The franchisor should have a planned program of support, including store visits by the field supervisor, who initially may be the founder and/or president. This supervisor should be available to assist the franchisee, as needed, with supplier relations, employee relationships, community relations, financial matters, and more. The supervisor should also act as a liaison between the franchisee and the franchisor's headquarters to notify the franchisor when the franchisee needs additional support, training, or any other assistance.
Of course, as in any successful relationship, communication is the key. Open lines of two-way communication can help both parties keep abreast of each other's situations. Keeping track of the facts and figures relating to your franchisees is, of course, important, but there are factors to keep in mind that can affect sales figures-location, regional economy, effect of advertising support, and level of competition are just some of the most obvious and critical ones. A franchisor who can understand and appreciate any given franchisee's complete situation is better positioned to maintain a healthy and nurturing relationship with that franchisee.
Using consultants. Launching a franchise program involves complexities that require qualified and experienced assistance. It may make sense to seek a franchise consultant for professional advice and assistance in this complex field (see Francorp Consulting).
