Franchising Your Business: Changes in Latitude, Changes in Attitude

05/01/2000 / Joseph Fittante

You started a small service business with no employees and little capital. Over the years you refined and honed your services. You now have 10 locations throughout the Midwest. Business was so good you spent additional money on research and development and now your company provides a variety of services and products. Sales are strong, but they have plateaued. Your competitors are beginning to pass you by. What do you do? Spend more on research and development? Hire an advertising firm to help you sell your services in this changing business climate? Sell the business? The answer may be any one of the above or the answer may be to franchise your business.

You may initially scoff at franchising your business, thinking only retail sales businesses like McDonalds are successful at franchising. For many service businesses that have entered the franchise arena, this is untrue. In fact, many service businesses have used franchising to spur growth, increase the public’s awareness of the services the business offers, and expand nationally as well as internationally.

If you are willing to explore the idea of franchising, you must determine whether your business system or a specific line of your business can be successfully franchised. Certain components are present in virtually every successful franchise business. First, the business has been refined over a number of years or is one which is recognized either locally, regionally or nationally. Second, sales must be strong. Third, the owners of the business are so familiar with the system that they can teach it to others in a quick and efficient manner.

Before venturing into the franchise arena, you need to reflect on those days when you started your business and the work it took to make the business successful. If you choose to embark on the franchising journey, you will need to dedicate the same time and energy to making the program successful. Although you now have the benefit of years of experience, you will face challenges which you did not face in starting and growing your initial business. You will be required to invest not only large amounts of your own time, but you may be required to make significant capital expenditures in the early stages of creating the franchise program.

As the CEO of the business, you probably do not have the extra time to create and run a new franchise program. Accordingly, you have two options: (i) hire someone with professional experience to operate your franchise program (perhaps someone within the organization who is infinitely familiar with the business system or an outsider with prior franchising experience); or (ii) operate the franchise program yourself and allow others to take over the day-to-day operations of your existing business.

The next issue which awaits you is to structure your franchise program. What amounts can franchisees afford to pay you in initial franchise fees and royalties, and will that be sufficient for you to earn a profit after providing needed services to your franchisees? How long will the franchise relationship last and will franchisees have the opportunity to renew the relationship? How and for what reasons may the relationship be terminated, and what will happen upon termination? This is only a short list of the issues you need to resolve before selling your first franchise. Once you resolve these issues, they need to be described in what is called the Uniform Franchise Offering Circular (the "UFOC"), a document that describes and explains the franchise business and contains the agreements franchisees must sign. Speak with other franchisors who can give you their insights on the advantages, disadvantages and issues which arise in the franchise area. It is also extremely important you obtain competent legal counsel from someone who specializes in the representation of franchisors to help you structure your franchise program and avoid the hazards which await an inexperienced franchisor.

You need to analyze the effect a franchise system will have on existing company owned stores. After all, you do not want to cut off your nose to spite your face. You want to ensure that franchisees and company owned stores are not competing for the same business. On the other hand, if you are contemplating franchising a specific line of your business which compliments the services provided by your company owned stores, or vice versa, you may want to give some thought to locating franchisees in reasonable proximity to company owned stores.

The final and arguably most important issue relates to retaining the franchisees in the franchise system. Asked another way from the franchisor’s perspective; "Will you still need me when I’m 64?" The answer to this question is not as easy as it may seem. A common response is "I will have the franchisee sign a noncompetition agreement, which will force the franchisee to stay in the system because if he leaves, he will not be able to continue in the same business." This, however, is an inadequate and short-sighted answer that only guarantees you will spend more time in your lawyer’s office than in your own.

In thinking in terms of franchisee retention, think back to the days when you were building your business and faced the struggle of keeping key employees. You were able to keep them because you invested in them, both personally and financially, and you had a vision to make the business successful. Franchisees are much the same. Franchisees want to know they are part of a "system "and that their franchisor will make attempts to refine the system and the services they provide. Franchisees want to know their franchisor will make continuing efforts to advertise the services and products and listen to their input. Unless there are business reasons for franchisees to stay with you, and unless they see continuing benefits from being associated with you, the franchise system will not succeed. 

Browse through any franchising trade magazine, and you will see virtually thousands of business which have decided to franchise. An increasing number of them are service businesses. If you can address the issues in this article, yours could be the next successful franchise business.