Considering Franchising Your Successful Business
August 12, 2014
Considering Franchising: 5 Key Concerns
In my practice, people sometimes ask me questions about franchising. The reasons people give for considering franchising their business often relate to a desire to see growth in the business in which they have invested years of their time, substantial financial assets, and a great deal of their personal identity. Legacy is often the quest of the successful entrepreneur.
Whatever may be a person’s reason for wanting to transform their successful business into a franchise, one or more of five key considerations are often overlooked, until the potential franchisor has spent even more of his or her valuable time and resources. These five key considerations are:
- Adequate Capitalization,
- Legal Requirements,
- Accounting Needs,
- System Development, and
- Be a Leader: Maintaining Perspective in Your Franchise Business.
Over the next few weeks, Executive Legal Professionals will publish a series of several articles on its blog (www.ExecutiveLP.com/press), providing a more comprehensive treatment of each of these considerations. An abbreviated summary follows.
5 Key Concerns When Considering Franchising, In A Nutshell
With respect to adequate capitalization, allow me to lead with, perhaps, one of the more disconcerting figures you are likely to see.
“Most honest advisors in the franchise business will tell you that you’ll need at least $500,000 to $1,000,000 in initial capital to even think about starting a franchise company. You will probably work harder than you ever have for at least 2-3 years before you even start to make any money on your franchise operations, and it could easily be 3-5 years,” according to Jeff Elgin, who “has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He’s currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.” (entrepreneur.com) Mr. Elgin also adds some encouragement, however:
“The rewards and satisfaction of building a successful franchise company are incredible but so is the price that you’ll pay to reach this goal. Make sure that you want to pay the price before you start this process and then go forward with realistic expectations and you should do fine.”
I wholeheartedly agree with Mr. Elgin. When considering whether or not to franchise his or her business, the most important things a potential franchisor can have are reasonable expectations. Some other good news is that a potential franchisor does not necessarily need $500,000 – $1,000,000 right away. Bootstrapping a franchise company is not a good idea, but initial capital in the neighborhood of $100,000 can get the process started, as long as you can clearly see how you will finance projected expenses over the first three to five years of the franchise company’s operations.
In the United States, a franchise company’s legal needs include, at a minimum, proper business organization–choosing a structure that complements the goals and human resources of the business–as well as preparation of the Uniform Franchise Offering Circular (“UFOC”) required by the U.S. Federal Trade Commission, often referred to as the “Financial Disclosure Document(s)” or “FDD.” In reality, a franchise company will have ongoing legal needs throughout its life, and having general counsel services, like the outside general counsel services offered by Executive Legal Professionals, will be not only beneficial, but necessary. You should discuss with your attorney whether to use the same entity or to form a new entity to operate the franchise company; often the latter is advisable, for a variety of reasons, but, again, this is a topic to discuss with your attorney and your accountant.
A franchisor will also need to have a Certified Public Accountant (CPA) prepare audited financial statements for the franchise company. As with good general counsel, so too the value of an accountant to a franchise company cannot be overstated. One of the disclosure requirements under the legal section, above, is that the franchise company have such audited financial statements. The legal requirements, therefore, will not be able to be completely addressed until these statements have been audited.
Finally, a franchise company must develop and thoroughly document the systems that each franchisee must use to successfully operate their franchise. Marketing plans, training programs, sales systems, etc. all must be created and refined. Often, a good franchising consultant can be hired–for around $50,000.00–to assist with this process. One important thing to remember is what your franchise company will be selling. If your company, Acme Widget, Inc., has been family owned and operated for seventy-five years, and has been in the business, all that time, selling widgets, and if you decide to expand your brand by forming Acme Widgets of America, Inc., a franchise company, you have entered a whole new realm. No longer are you in the widget business! You are now in the business of selling franchises, not widgets! Of course, Acme Widget, Inc. may still carry on as it always has, but Acme Widgets of America, Inc. will never sell a widget–only franchises. So, if your passion is widgets, you may want to consider leaving that industry to enter the franchise industry.
Considering franchising, as Jeff Elgin says, can be immensely rewarding and satisfying. On the other hand, it is expensive, and requires one to enter unfamiliar territory. As Christopher Columbus famously said, “You can never cross the ocean until you have the courage to lose sight of the shore.” For those who dare to dream, the promise of immortality looms large. If you have questions about franchising your business and how Executive Legal Professionals can provide outside general counsel and franchising legal services to your business, please call (615) 669-6566 or just drop us a line. We look forward to helping you cross the ocean to a whole new world.
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