CONGRATULATIONS! You’ve spent years building your business, developing a loyal following, and honing your operations into a replicable format. You own two, three or maybe ten different locations, all profitable, and understand your business inside and out. You know the right demographics and cost to jumpstart new locations. You’ve cultivated reliable supply relationships, built a loyal management team, and learned to delegate daily details. Over the years, you’ve turned away numerous inquiries about franchising while you’ve built your reputation and financial base. Now you’re ready to franchise and you’re determined to avoid common mistakes.
Not to fear! Here are 5 essential tips for launching a franchise program successfully:
Rochelle Spandorf chairs Davis Wright Tremaine’s national franchise practice. Based in the firm’s Los Angeles office, she is a California State Bar Certified Specialist in Franchise and Distribution Law and was recently recognized by Who’s Who Legal as one of the 10 “Most Highly Regarded Individuals” in franchise law worldwide, one of just six U.S. lawyers and the only U.S. woman included in the ranking.
- Budget Wisely: Being undercapitalized is the number one mistake of start-up franchisors. You’ll incur legal fees to prepare the franchise disclosure document (FDD) and franchise agreements; more legal fees if you open franchises in states like California, New York and others with annual registration requirements; accounting fees (franchisors must be audited annually); filing fees (to incorporate and complete state registrations); and marketing expenses to generate initial franchise sales. Smart start-ups buy consulting advice to prepare realistic financial models (franchise terms are often 10 years or longer). How much are we talking about realistically? Figure easily $100,000 or more. It is a mistake to launch a franchise program on a shoestring budget and bank on franchise fees to keep you afloat.
- Assemble a Strong Franchise Team: As a franchisor, you’ll be engaged in entirely different activities than running your business. Your job now is to recruit prospects and train them to replicate your business model; facilitate onboarding (the real money in franchising comes from continuing fees, which only start flowing when the franchisee opens); advertise to attract consumers and new franchisees; support your franchisees by continually refreshing the concept and helping them maximize their results (your easiest next franchise sale is to a happy existing franchisee); and police your brand and enforce your contracts. Assemble a strong management team, and do not assume that you can handle all launch duties capably while also keeping a fulltime schedule running your business.
- Know the Law: Franchise arrangements are highly regulated. There are elaborate federal and state presale disclosure and registration rules for selling franchises. State laws may restrict how and when you may terminate a franchise or dictate substantive terms for your franchise relationships. Your franchisees can’t waive these protections even assuming they want to. Violating a franchise law is a felony in some cases. Violations may allow franchisees to recover their business losses and attorney’s fees and rescind their contracts. And even though you operate as a business entity, you and your management may each have personal liability for franchise law violations whether or not you know about the laws or intend to violate them.Franchising is a specialized field of law, so hire an experienced franchise law expert, one dedicated to training you and your management team on your legal responsibilities. Steer clear of general practitioners who have never written a FDD and franchise consultants that offer FDD toolkits or “all-under- one-roof” services including full legal documentation. To structure franchise relationships properly, hire a full-service law firm that not only offers franchising expertise, but also knows your industry and can coordinate seamless legal support covering related legal issues like lease control, trademark protection, capital formation, pricing programs, and supply chain issues.
- Show Your Numbers: Companies that lack a profitable track record should not sell franchises. Given your multiunit success, be prepared to share your numbers as this is every candidate’s most probing question. Franchise sales laws forbid you from making any representations about actual or potential sales, income or profits of franchise units, unless the information is in your FDD. An expert franchise law attorney can help you craft lawful financial performance representations that put your business’ best foot forward. With 40% of all franchisors today making some type of financial performance representation, what impression will you make if you don’t put your numbers in your FDD? Unless you do, you may not make financial representations on your website (the first place prospects check for franchise opportunities) or anywhere else.
- Be Selective: Franchising is not an automatic ticket to success. Smart franchising takes considerable pre-planning. Plot your franchise expansion strategy by considering distance from your headquarters. Importantly, don’t sell a franchise to anyone just because they show interest in your brand. Be selective. Franchise arrangements are long-term, and ideal candidates should be capable of operating multiple units themselves. Set appropriate minimum net worth, liquid capital and experience requirements, and, while you may be tempted, don’t deviate.