After some business owners achieve success, their thoughts may turn to franchising. And while a good franchise system can bring great financial and personal rewards, a lot of thought and planning needs to go into the decision. We spoke to Charles N. Internicola (pictured), a national franchise lawyer and creator of the 90 Day Franchise Launch Program, to get the basics about the process.
Small Business Center: Can every type of company be franchised or are certain business models better than others?
Charles Internicola: Within the franchising industry there are many business segments — retail, wholesale, and service based businesses — that have achieved franchise success. When evaluating whether or not a business can be franchised, the analysis should be focused on the individual business as opposed to the overall industry. When determining whether or a business can be franchised, these factors should be present:
- A successful business: The underlying business must be successful and have maintained a track record of success.
- Business systems that can be taught to franchisees: The underlying business must have business systems (methods of operating, marketing, and developing the underlying business), that can be successfully taught to franchisees. Although this is easier with less complex industries, franchise success can also be attained for more complex businesses and industries. In such cases, the training provided to franchisees must be more extensive.
- A genuine desire to expand the business and brand: Franchise success requires a genuine desire by business owners to expand their business and brand.
How long should a business exist before its owner begins to think about franchising?
It’s all about successful operations. Just because a business has been around a long time doesn’t mean that it’s a successful candidate for franchising. Typically a business must have a proven record of success — usually no less than two years — and have systems that can be taught to franchisees.
What are some “readiness” indicators that signal it might be the right time to franchise?
Readiness indicators typically include:
- You are constantly asked by customers, friends, and even family if your business is a franchise or if they could open up their own.
- Your business is successful and your product or service is well received and profitable, and your brand is recognized in your marketplace.
- You have been working hard on your business and you have focused on your brand and the systems that you and your team implement every day.
- You may already have multiple locations, or, if you don’t, you know there is much more room for growth and you are looking for the managerial talent and possibly capital for opening new locations.
What types of startup fees and expenses can a franchisor expect?
To properly develop and launch a franchise system, much will depend on the franchise development team and the business owner’s level of involvement in the development process. Fees for the development process will include legal fees, accounting fees, and development fees related to preparation of an operations manual. After the development process, there are costs associated with operating a franchise system.
A lot depends on franchisors’ underlying goals and their plans for expansion. For instance, is the startup franchisor looking to lay out the framework for a franchise system and slowly develop franchise sales (a slow and steady approach) or is the startup franchisor working with an extremely hot brand and looking for rapid year 1 and year 2 franchise sales growth (an accelerated approach)?
The costs depend on the goals and plan of action. Typically the franchise development process cost ranges anywhere from $30,000 to $70,000.
How long does it typically take to realize a profit?
Franchising is a long-term proposition and should never be viewed a “get rich quick” opportunity. Typically, startup franchisors should plan for a two-year horizon in terms of reaching profitability.
What size staff will a new franchise operation need?
That depends on the franchisor’s launch strategy (slow and steady or accelerated growth). Initially a startup franchisor will require assistance with franchise sales. After franchise units are sold, a franchisor must evaluate adding staff to provide franchisee support.
Can you give a brief summary of the legal documents required to franchise?
Franchising is extremely regulated, but the good news is that if approached properly and with an experienced franchise lawyer and development team, it’s extremely manageable. Prior to offering or selling a franchise, the startup franchisor must prepare a franchise disclosure document (FDD). The FDD covers specific disclosure items related to all aspects of the franchise that is being offered, including information about the franchisor, the management team, estimated startup costs, whether or not the franchisor makes earnings representations of claims, and the many legal aspects as to the franchisor-franchisee relationship. Within the FDD are the legal documents, including the franchise agreement, which will govern the relationship between the franchisor and franchisee.
Do you need a franchise attorney to navigate the federal and state franchise rules and laws?
Yes. You need an experienced franchise lawyer who will work with you, understand your business, and put together and implement a plan for launching the business. By the way, there are non-lawyer franchise developers who sometimes claim you don’t need a lawyer or that you can just use their lawyers. I believe this is a big mistake and probably improper. A startup franchisor needs an experienced franchise lawyer who is accountable to them and not a franchise developer’s lawyer who is beholden to the franchise developer.
What role does a franchise developer play?
Franchise developers serve an important role. They serve to provide startup franchisors with industry insights and experience that will help guide the business elements of the franchise development process. Franchise developers assist with creating the operations manual, and consult about the franchise offering and eventual sales.
Is it necessary to hire a franchise developer?
It depends on the track the startup franchisor takes. The answer is no, but you cannot underestimate the value of having a good development team. Although our firm also provides franchise consulting services, many times we work with and even bring in franchise consultants when we see an opportunity to add value to the system that we are developing.
Assuming the reader has decided to franchise at this point, what’s the next step?
Understand the process, understand the timing of the franchise development process, the costs and milestones involved, and do your research in seeking out and interviewing the right franchise lawyer to lead the development of your franchise.