Is Becoming a Franchise Right for Your Business?
January 4, 2016
It’s About the Business of What You Do
Deciding to start a franchise really does not depend on what goods your business produces or what kind of services it provides; rather, whether your business is franchise-eligible largely depends on how well you can instruct others to replicate the business of what you do. Many small business owners have a hard time separating what they do from the business of what they do. This might seem counter-intuitive, because “running the business” takes up so much time, and, unless you really enjoy things like record-keeping, bill-paying, employee management, etc., small business owners are likely to feel like such things get in the way of actually doing what they love.
My aunt and uncle, together, own and operate a business called Free Spirit Adventures, in Caldwell, West Virginia, near Lewisburg and the famous, historic resort, The Greenbrier, in White Sulphur Springs. If Aunt Lynn and Uncle Bobby wanted to turn Free Spirit Adventures into a franchise, it probably wouldn’t be too difficult, relatively speaking, for them to do. This is because they intimately know their business, because they have been running it for years. Not only that, they have been successfully operating the business in a really tough business climate with minimal staff. Nevertheless, they have found a way that works to run their business even when the economy is bad, their town is small, and tourism in their area is undependable (as it was, a few years back when The Greenbrier was facing bankruptcy, before it was bought and turned-around by Jim Justice in 2009).
Free Spirit Adventures is a service business, offering bicycle rentals, shuttles, and vacation lodgings. They can also help you plan and organize fun adventure activities, like hiking, climbing, white water rafting, snow tubing or skiing (winter weather permitting), and just about any other outdoor fun thing there is to do in West Virginia south of highways 33 and 48 and east of highway 19. That’s a big area and a lot of potential business activities to cover. So, how can I say it would be relatively easy for my aunt and uncle to turn such a business into a franchise? The answer is: because whether or not you can successfully franchise your business has little to do with what you do, where you do it, or even when your business is at its busiest time (many small businesses are seasonal); rather, successfully franchising your business depends on an ability to be able to teach others to replicate your successful business model–how you do the business of what you do.
Evaluating Your Franchise Potential
I’m going to pose–and you can answer–a few quick questions. Depending on your answers, your business might be a good candidate for franchising. Here are five questions to ask yourself if you are curious about franchising your small business:
1. Does your business have a demonstrable history of profitability?
Notice: I did not ask, “Is your business profitable?” That is not the question. Rather, the question is whether you can demonstrate your business has been profitable for a period of time–usually more than three to five years. If you cannot demonstrate a history of profitability in the business, others are unlikely to want to get involved with a business exactly like yours. If you’re losing money, they’re likely to lose money if they do the same things you’re doing, the same way you’re doing them.
If your answer is, “Yes, I can demonstrate that my business has a history of profitability,” (by disclosing business records and such) then move on to Question #2. If not, you should contact ExecutiveLP™ and an accountant; talk to us and to your accountant about establishing the kinds of record-keeping systems, legal policies, and fiscal policies that can help you create the conditions for being able to answer, “Yes,” to this question in the future.
2. Do you like teaching others and explaining how things work?
You might not necessarily have to teach people to ride a bicycle or climb a mountain or anything like that (even if that’s what your business does). Instead, you need to be able to look at the business of what you do, and teach others and explain to them how you do what you do in the ways that you do what you do. That’s the heart of a franchise–your business processes, replicated by others–and it starts with you teaching someone else how to do it “your way.”
If the answer to this question is, “No,” then you’re going to need to either reconsider whether franchising is right for you or consider hiring someone (or a group of people) who (1) intimately understands (or can learn) your business, its processes, and how to replicate your business model; (2) has the skills to teach and explain to others your business processes and how to replicate your business model; and (3) has proper incentives to stay with the new franchise company until all your training materials and training programs are well-established and can operate without dependence upon this person or group.
You absolutely are going to need a strong, well-drafted Executive Employment Agreement to manage your relationship with that person (or a vendor contract, if you’re going to be outsourcing this work to a firm offering such services). For the work of drafting these essential contracts, you should contact ExecutiveLP™; this is not a project on which you want to skimp on the cost or DIY, because you will get what you pay for.
3. Is your brand strong enough?
Think about the franchises that most prominently stand out in your mind. Each of them has powerful branding. Does your business have a memorable brand, which clearly communicates what you offer to your clients or customers? If so, you may find it easier than your competition to capture a larger share of the market for your goods or services by franchising your business. The relative strength of your brand has a lot to do with how successful your franchise can become.
Of course, with a strong brand, comes strong brand protections, and that means securing and protecting your Intellectual Property–your trade name, your logo, your slogan, and other marketing materials. Registering copyrights, trade marks, and service marks is an important part of protecting your brand, and ExecutiveLP™ can help. Download our Menu of Services for pricing on ExecutiveLP™ Intellectual Property legal services.
4. Are you ready — financially, emotionally, and logistically — to change?
As I have repeated throughout this article, choosing to franchise your business is a decision that revolves around the business of what you do, not just doing what you do, day-in and day-out, to earn a living. Starting a franchise company will mean you will be in the business of selling the franchise. Before, maybe you rented bicycles and vacation lodgings, organized ski trips, or sold widgets. Once you franchise your company, you won’t be doing those things; you will be selling the business model and branding for businesses that sell those things.
Franchising might not be for you if you really, really love what you do, and if you can’t imagine yourself doing anything else, each day. If, however, you love the business of what you do more than actually doing whatever it is you do, and if you love teaching and explaining to others what you do and how you do it, turning your successful small business into a franchise might be just the kind of career change you would love.
5. How will you afford the costs involved in starting your new franchise company?
Starting a new franchise company involves both high costs and proportionally high rewards. You should expect to spend half a million dollars or more just to get your franchise company started. This means you’re going to need to raise a lot of money.
Thankfully, now that the SEC has finally promulgated the rules for Title III of the JOBS Act, you have more options than ever before for raising capital for your new franchise company. You can raise up to $1 million through Equity Crowdfunding. If you don’t like the idea of getting into bed with strangers, you might want to consider a more traditional funding route–like raising money the old fashioned way, from friends and family or by taking out a business loan.
Legal fees for starting a franchise company are often as much as (and sometimes more than) $150,000.00, and you are going to need a lawyer to assist you with developing basic franchise legal documents (and all the related work that goes along with creating them); performing quality control with respect to your new company’s operations manual, potentially working with one or more consultants to develop that important book; preparing legal documents for state registrations in each state in which the franchise must register to do business; providing ongoing General Counsel legal services to the franchise company; and providing human resources legal support. ExecutiveLP™ provides all of these legal services, as a single high-value package, for well under $150,000.00.
Big Risks, Big Rewards
There are risks and costs to action. But they are far less than the long range risks of comfortable inaction.
–John F. Kennedy
I believe JFK was right. The risk of doing nothing is far greater than the risk of doing something. I once heard someone say, at the end of our lives, we regret not the things we did, but the things we didn’t do. Maybe you have built a successful small business. Wouldn’t you regret not giving other people the opportunity to share in your success, to work hard like you did and achieve the same kind of prosperity? Wouldn’t you regret not seeing how big your dream could grow, how far your business could go in the hands of others?
When I think of franchising, I think of a race. A single runner, dashing 100 yards or even running a marathon is impressive. When we start the Olympics, though, we don’t start with a marathon that has a single winner. We start with a global relay race in which one runner hands a torch off to another, who then hands it to another, and so on. Eventually, the Olympic flame is lit with a torch that has been passed around the world from runner to runner–an accomplishment for which they all can take credit, yet which none could have achieved alone. This puts me in mind of a franchise, because every time a franchisor sells a franchise to a franchisee, they’re passing on the torch of your success. That’s a beautiful thing, and it makes each person who is a part of that process better-off, more prosperous, and less vulnerable to financial hardship.
Even if you have to raise and spend half a million dollars to get a franchise company off the ground, that is not such a big problem, if you can use that new franchise company to raise millions of dollars over the next three, five, ten or more years. That would be an investment worth making. Whether you have a dream of making the world a better place, or just making a buck, franchise companies can bring you closer to your goals, and when you’re ready to take that leap — or just get some help preparing — ExecutiveLP™ is here to help.
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