When a business owner wants to expand his business concept across a region or the country, franchising can be an attractive option. According to the International Trade Association’s 2016 Franchising Top Markets Report, franchising was projected to generate $944 billion in financial growth for the nation's economy, expanding more than 3 percent in 2016. The same report also expected the franchise business model to create an additional 278,000 jobs in 2016. With the potential for franchising to create greater value for business owners, is franchising right for your company?
- Determining a Business’ Ability to be Franchised.
Before a business model can be franchised, it’s worth looking at different types of franchise models. One model is creating a standardized business system that can take the form of a hotel or motel, a restaurant/dining establishment or a graphic design/printing business. Other types of franchises include selling either pre-made products or manufacturing a product onsite (be it a food item or tangible marketing materials) under the corporate headquarters’ direction and brand or trademark. From these different models, business owners should look at the type of product or service they are selling and how their experience compares to the rest of the industry.
When it comes to evaluating a business’ ability to be franchised, along with reviewing the profits and sales records, one important factor is the organization’s concept and how easy it can be replicated regionally or nationally. Franchises that have a greater chance of being successful give consumers something they are accustomed to in their daily lives. However, a franchise must also put a unique spin on a familiar product to help distinguish it and help it take off beyond its initial location.
Taking the food service industry for example, a quick-serve chain that sells hamburgers or pretzels that uses organic, sustainable raised ingredients and is served to customers via a conveyor belt is an example of delivering a familiar product through a unique approach. This is just one example – looking at how the product is differentiated from the rest of its competitors is what is important to scalability and consumer interest.
By highlighting that raw ingredients are grown 100 percent organically, consumers may be attracted to the brand’s product health and environmental commitments. Potential franchisees create value by producing a predictable and easily executable system for standardized employee training, both initially and for ongoing needs.
- What Role is Desired by the Business Owner?
When business owners transition from owning a single location to becoming a franchisor, their role changes. Business owners often transition from repairing shop fixtures and selling their namesake product to becoming the No. 1 salesperson, explaining how the franchise works and how it can benefit franchisee owners. Other considerations for business owners include how open are they to outside partners, or having to secure debt financing for future expansion.
Some individual states have regulations for selling franchises and the Federal Trade Commission requires a Franchise Disclosure Document to be filed with the agency. This document includes a manual of operations for franchisees, information on the management team’s business background, audited financial statements, etc. Along with the regulatory requirements, franchisors also need to think about what fees and royalties franchisees must pay; the detail and length of training each franchisee receives; and what products or equipment the franchisee buys from you, the franchisor.
Making the move from an established business owner to a franchisor is a complex process that may not be a good fit for every business. However, for the right type of business and those running it, becoming a franchisor can take a unique concept nationwide.
This information is general in nature and may be subject to change. Financial professionals and other representatives are not authorized to give legal, tax or accounting advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your individual circumstances, consult a professional attorney, tax advisor or accountant. .
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