| THINKING ABOUT FRANCHISING? Another in the Smart StartSM Series. It is very difficult to determine if your business is ready to be offered as a franchise without a substantial amount of investigation. However the industry has identified the most important factors that should be considered prior to beginning the franchise process. The most important predictive factors are set out below. 1. Adaptability – Another important factor is how well does a concept conform from one market to the next. Some restaurant franchise concepts do not adapt well over large geographic areas because of regional variations in consumer tastes or preferences. Others are constrained by differences in local and state laws. The key to adaptability is finding the concept that has broad appeal. 2. Affordability – This factor relates directly to the ability of the prospective franchisee to pay for the franchise. If the start-up cost is too high, the franchisor limits the target market. For example, a multi-million dollar hotel franchise is affordable by far few prospective franchisees than a franchise with a $100,000 initial cost. 3. Capital – Franchising is a low-cost method for expanding a business. However, a franchisor does need the capital and resources to implement a franchise program which will vary depending on the scope of the franchising plan. A franchising plan limited in terms of units and scope will be substantially different than geographically unlimited and aggressive expansion. Each state requires compliance with its franchise offerings. The franchisor will also need to comply with reporting and auditing requirements. Not all franchise organizations understand the connection between relationships and profits. Strong franchisee relationships allow the company to sell franchises more effectively, make changes to the franchise program more readily, and control the level of quality of the goods and services being offered to franchise customers. 4. Company Stores – A company store or model franchise is essential to demonstrate that the franchised business is proven. The model may be an existing franchisee or company owned store that demonstrate successful operation. This location may also act as a testing ground for new developments. 5. Credibility – The business must be credible in the eyes of the prospective franchisee. Numerous factors impact credibility, but organization size, number of units, years in operation, publicity, consumer awareness and strength of the brand, and strength of management have been identified as the most significant. 6. Differentiation – In order to be successful, a franchise organization must distinguish itself from its competitors. Differentiation may be achieved by differentiated products or services, distinct or unique marketing strategies, attractive investment costs or franchise fees, or different target markets. 7. Documentation – All successful businesses have methods, procedures and systems that work. These systems should be documented for easy reference by the franchisees. It is preferred for the franchisor to document its policies, procedures, systems, forms, and business practices in a comprehensive and user-friendly manual and/or computer-based training module. 8. Know how – An important aspect of an attractive franchise is the ease of operation. Complicated processes and procedures attract very few prospective franchisees. To franchise, a business must generally be able to thoroughly educate a prospective franchisee in a relatively short period of time. If the operation of the business cannot be taught to a franchisee in three months, it will have difficulty franchising. 9. Management – Last but not least in the success of a franchise is the strength of its management. A common contributor to the failure of franchises is understaffing and inexperience of management. Start-up franchisors will often try to take-on every responsibility or micromanage the business. In addition the franchisor may lack the expertise or time to address certain requirements of the business. The franchisor will need to find and rely upon others having experience in many other areas so that the business does not lag in the expansion. 10. Market trends – Market trends are crucial to long-term planning. As the franchisor you have to take these factors into consideration in how your structure the offering. The timetable will be greatly accelerated if the business model has a short life span, where it goes without saying that the opposite will be true for sustainable business models. 11. Return on Investment – Perhaps the most important aspect of a franchise is the estimated return on the investment. Everyone expects a franchised business to be profitable otherwise there is no incentive. Profitability must be measured against investment to provide a meaningful number. Without it the franchise investment can not be measured against other investments of comparable risk that compete for the franchisee’s dollar. Ideally it would be preferred to offer a franchise operation that provides a ROI between 15 and 25 percent within the second or third year of operation. Any organization seriously considering franchising should carefully evaluate each of the factors before implementing a franchise strategy. For further information on franchising your business feel free to contact one of our attorneys. Kane & Co., PLC Patent Trademark Copyright & Business Attorneys 5 Lyon St, N.W. 210 Commerce Building, Grand Rapids, MI 49503 (616) 726-5905 (v) (616) 726-5906 (f) www.kaneplc.com © Kane & Co., PLC, 2007, All Rights Reserved | 
