Franchises can be an excellent way to maximize business growth while minimizing the overhead costs involved with opening additional locations. You are basically leasing rights to your model, brand, and business strategy to another entrepreneur in a franchised business.
The franchisee receives a proven business model and ongoing support to ensure success in their business venture in exchange for the franchise fees and royalties paid to you. Franchises for small businesses can be challenging, but they can also be professionally and financially rewarding.
Things to Consider Before Franchising Your Business
Consider the following things before franchising your business.
1- Analyze Your Business
It is in your best interest to analyze your business while you are still determining whether it is ready to be franchised or not. You may want to expand after everything is settled, but that does not mean your business should become a franchise.
Even if your business lacks some capital, if it has characteristics like high demand and repeatability, then it is a green light.
2- Organize Your Business Before Franchising
When you franchise, you hand over your business to someone who has never heard of your system. Although a prospective franchisee might not know a thing about your business style, he or she might be able to run your franchise effectively.
Therefore, it becomes necessary for you to understand your business system to train others on it. To accomplish this, there should be a process that outlines precisely what your business does.
For franchisees, detailed instructions and procedural guidelines are crucial to getting the business up and running. Everything needs to be streamlined from marketing to signage to staff training, so you can construct a blueprint for your franchisees to follow.
3- Develop Legal Documentations
Both parties abiding by legal rules should nurture a franchise relationship to maintain a healthy relationship. So, legal documentation is of utmost importance to preserve a healthy relationship.
The Franchise Disclosure Document outlines the roles and responsibilities of both franchisees and franchisors.
It is essential that you set pricing, create franchise agreements, determine intellectual property protection, and many other things when you are a beginner in the field of franchising. A lawyer can provide expert advice in this regard.
4- Being Selective While Choosing a Franchisee
It is just as essential to research the background of your prospective franchisee (both financial and professional), their skills and knowledge, and many other factors.
Choosing the right franchise requires a lot of analysis, research, and interviewing. They will represent your self-made empire (so what if it is small?).
5- Choosing Right Locations
There is no doubt that location plays an essential role in the growth of any business. A location that suits your business the best – from where your target customers can easily access your services, and where there is less competition – all of these things combined make a perfect location for you to start your franchise business.
Documents Required for Franchising Your business
There are two primary documents you require to start a franchise business. These are the Franchise Agreement and Franchise Disclosure Document (FDD).
1- Franchise Agreement
As a legal document, the franchise agreement constitutes a contract between the franchisor and franchisee, defining their duties and rights towards one another.
This agreement aims to protect the integrity of the franchise system. An excellent franchise agreement emphasizes transparency and conciseness.
A good franchise agreement addresses the following issues:
- Initial & ongoing franchise fees
- Timelines for commencing the franchise for business
- Franchise territory protections (if applicable)
- Detailed information about the inventory, equipment, supplies, and suppliers
- Rules on whether the franchise can be transferred to a third party as part of the renewal agreement
- Conditions regarding the termination of the agreement
- Post-termination obligations
- Non-compete agreements
- Min. sales requirements
- Arbitration for Disputes settlement
2- Franchise Disclosure Document
The Franchise Disclosure Document (FDD) should be drafted in compliance with existing law. The law requires the franchisor to provide the prospective franchisee an FDD before he or she can sell a franchise.
There are no separate laws governing franchised businesses, so franchise agreements are primarily contractual in nature, making franchise agreements a critical component of the business world.
Additionally, the type of franchise arrangement and the franchise’s sector can influence several other laws that apply to franchise businesses.
Is Your Small Business Ready for Franchising?
When considering franchising a business, franchisors should consider the five franchisability factors listed below.
1- Is Your Business Successful?
Franchises are about taking yourself, your brand, and the systems that have allowed you to make your business a success and replicating these systems for new franchisees. Your business must be successful, and a track record of success is a must.
2- Is Your Business Scalable?
Your business is scalable if you can replicate it successfully through franchise partners.
Here are some scalability questions to think about:
- Are you able to teach franchisees how to offer the same products and services that made your business successful?
- Do you have systems in place to ensure franchisees maintain quality standards and customer service consistency?
- Can you deliver the necessary products (for example, ingredients and branded packaging for foodservice businesses) and support systems for franchisees?
3- Is Your Brand Protectable?
Protecting your brand as a franchisor is essential since it will be the most critical asset you license and convey to your franchisees.
If you wish to protect your brand, you must obtain control of your trade name and business name. At the most basic level, you should register your trademark with the United States Patent and Trademark Office (USPTO) and control the website domain name for your brand.
Brand protection questions to consider:
- Does your business trade name have a USPTO registration? If not, is it possible to obtain a USPTO registration shortly?
- Do your competitors have almost identical brand names, i.e., is your brand name generic?
4- Are You Committed to Building a Franchise System?
The most successful franchise system is often not the one with the best ideas, products, or services, but the one with the best execution and commitment to the development of the franchise system.
Whether you’re starting as a one-person company or a team of four, the success of a franchise and the franchisability of the business are connected to the degree of commitment you have to build a franchise system.
Questions you need to consider:
- Is it possible for you to construct a franchise system that grows over time rather than overnight using 1-, 2-, and 5-year plans?
- Are you of the opinion that franchise success is much more dependent on focused execution than on enormous ideas?
- Is franchising a natural progression from your company’s success and your desire to expand and grow?
5- Do You Have the Right Franchise Budget?
Launching a franchise requires the proper budget and capital to grow as with any new business. Shortcuts do not work.
To franchise your business successfully, you need to know your franchise goals, how quickly you want to reach them, and how much money you need to reach them. You should not think of launching your franchise system as the end of your financial planning.
Here are some questions to consider:
- In what way will your franchise system be priced that includes a Franchise Disclosure Document as well as an infrastructure that is unique to your business and your franchise system?
- Would you like to know the cost of protecting your brand and trademark?
- Would you like to know the cost of registering your FDD in the franchise states you are targeting?
- After you launch your franchise, how much will it cost to maintain your FDD and your franchise registrations?
- How much will it cost to market your franchise system and sell franchises after launching your franchise?
A franchise provides a robust business model that alleviates the franchisee’s exposure to the losses inherent to other business forms. Entrepreneurs and startups who do not wish to face significant risks up-front consider franchising a growth-oriented business form.
Swatejas R is a business consultant and a market researcher at Sparkleminds, specializing in franchise business expansion. Along with strategic planning and developing new business growth models, he helped several businesses lay strong franchise foundations. Apart from this, he loves movies and biking.
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