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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
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