Franchising provides opportunities for business ownership and growth.
Starting a small business is a dream for entrepreneurs, but it can be a daunting prospect involving a huge investment of time and resources. On the flip side, a successful small business owner may find her products or services in high demand, and want to take advantage of that popularity to grow the business. In both cases, franchising may provide a viable path.
WHAT IS A FRANCHISE? A franchise is a type of license that allows one party to have access to a business’ proprietary knowledge and procedures for doing business. An example most people are readily familiar with is the fast food industry. A customer can visit a Burger King in Colorado and have almost exactly the same experience if they visit a Burger King in Alabama. Standards apply to provide a consistent menu and environment that meets an expectation.
By purchasing a franchise license, the franchisee has rights to use the business’s name, logo, trademarks and established business system to follow in operation of the business. The franchisee generally pays the franchisor an initial start-up fee for these rights, and an annual licensing fee. A franchise contract is similar to a lease or rental agreement. The franchisee does not own the business.
WHO REGULATES FRANCHISES?
In the United States, franchises are regulated by law at the state level. There also is one federal regulation established in 1979 by the Federal Trade Commission (FTC). The Franchise Rule requires franchisers to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise, its officers and other franchisees.
WHO CAN FRANCHISE?
Selling a franchise is not limited to big businesses like fast food giants. Franchising is also a good opportunity for a small locally owned business to expand regionally or even nationally.
Should you franchise?
PROS OF FRANCHISING YOUR BUSINESS:
• Expand your established brand across different markets
• Passively earn good revenues
CONS OF FRANCHISING YOUR BUSINESS:
• More staff needed to support franchisees
• Investment of time and money needed to complete franchise legal paperwork
• Discrepancies in service or bad press can affect the franchise as well as the overall brand
• A badly run franchise can negatively affect public perception of the entire brand in general
• Bad performance of one franchise can negatively affect the franchise’s financial performance
It’s business. It’s personal.
In 1999, Pam Martin and her husband J.T. purchased Peaches & Clean carpet cleaning company from two of their business colleagues who had started it. The original owners had been toying with the idea of franchising the company, and Pam had helped draw up the federal paperwork in preparation. When the owners decided to sell instead, Pam and her husband bought the company to franchise it regionally.
Pam took on the day-to-day operation and management for about three years while finishing work on the federal requirements. During that time, she devoted herself to creating a stepby-step business operations plan and materials for future franchisees to follow. She standardized everything from brand colors to the logo and created trademarked materials. “You have to assume your franchisee knows nothing. From getting in the van and cranking it to going to the job and so on, I got the business systems into writing,” she said.
The first franchise opened in Auburn around 2002 and was immediately very successful. In about 2006, Peaches & Clean had its second franchise in Birmingham. They were in talks with a prospective franchisee in Dothan in 2008, but the economy took a downturn, and they had to pull the plug on that.
Things began to snowball, and Pam said she began to get overwhelmed. The Birmingham franchisee decided to sell the business, and the new owner was even more successful, but began to stray from the approved business model, and the Montgomery location had to resume operation of that franchise. She was the only person able to train new franchisees, and she just didn’t have the time or resources. “We didn’t really have enough professional staff to buy into the training and oversight that was needed,” Pam said. “That was all falling on me. I had nobody to help me train franchisees properly and provide the oversight to the franchises. We think we should have sought some financing or outside revenue sources, so we weren’t limited by revenue and personnel we needed. I think our business model was good and the product was good.”
In 2013, she and J.T. decided to sell the business. Although the franchise didn’t work out as planned, Pam said she feels there were a lot of positives in the experience. “It ended up being a good thing that we were franchised, and it helped us when we were ready to sell.”
THE INS & OUTS
ADVANTAGES TO BUYING A FRANCHISE:
• Buying a well known brand; instant name recognition
• Buying an established business system to follow in operations of the business
• Prices for equipment and supplies are typically lower than starting a business alone
DISADVANTAGES TO BUYING A FRANCHISE:
• Having to share financial information
• Having to conform to uniform procedures
• Expensive start-up costs and annual licensing fees
• Ongoing royalty fees generally 4-8 percent of sales revenue
• Reliance on the support of the franchiser
WRITE IT DOWN
Even if you don’t have plans to franchise your business, it’s smart to document all of your business procedures. Here are a few reasons why:
• As your company, grows, it will minimize chaos. People can go on vacation, get sick, etc. and the business can still function properly
• Impact from employee turnover will be minimized since training will be easier
• You can only sell a business that can run without the current business owner
• You can hire someone who makes less money than you to handle many tasks
• Documenting tasks highlights what is important; improves communication between employees and boosts productivity
