Ask yourself these 6 questions before branching out
Some industries may seem like a better fit for franchising ― for example, a recent U.S. Census Bureau report found that fast food restaurants had the highest number of franchised establishments with paid employees.
But many small businesses could, in theory, spread their reach by opening new, independently owned locations.
Franchises total 10.5 percent of all businesses in the U.S., employing nearly 8 million workers, according to U.S. Census Bureau data.
If business is booming, and you’ve been thinking of becoming a franchisor, ask yourself the following questions:
- Is there a strong consumer demand for your product or service that warrants expansion? Start out by studying your local market and industry trends. In 2012, Forbes’ Top 20 Franchises for the Buck list ranked mobile tool suppliers, convenience stores, and appliance and furniture leasing businesses as three of the most profitable choices. The International Franchise Association (IFC) predicted business services (e.g., data processing, office administration, employment services, tax preparation and cleaning services), the sector growth leader in 2013, would retain its title in 2014, along with commercial and residential services (e.g., facility support, building maintenance and repair, and waste disposal). The IFC also forecasted retail food and product and services businesses to show the slowest growth rates.
- What franchise model would work best? The two main types, according to the Small Business Administration, are product/trade name franchising ― where a business owner sells the right to a trademark or name to a franchisee ― and business format franchising ― which involves an ongoing relationship in which the franchisor provides a franchisee services like training, product supply and marketing help. The amount of operational control you’d like to keep may help you decide. Depending on the arrangement structure, franchisors can limit franchisees’ choices about sales area, suppliers and merchandise, according to the Federal Trade Commission (FTC). You can also opt to charge advertising fees.
- What potential earnings do you want to make by franchising? According to the FTC, earnings can include initial fees charged to your franchisees (ranging from several thousand dollars to several hundred thousand dollars), royalties based on a percentage of a franchisee’s weekly or monthly gross income, and fees you ask franchisees to put into an overall advertising fund. USA Today’s Franchise Ownership Center lists opportunities for interested franchisees, which range from $2,995 to $500,000.
- How will you find franchisees to expand your business? The Internet age has helped franchised businesses avoid some of the sales legwork, according to the International Franchise Association. Unlike in the past, when franchisors had to actively pitch their company to potential franchisees, interested franchisees often now research your business online. The IFC recommends franchisors have a clear concept with credible facts to back up their claims, and a strong online presence to attract franchisees.
- Are you familiar with all the legal considerations? The Federal Trade Commission regulates franchise sales. Franchisors’ legal responsibilities ― such as providing a franchise disclosure at least 14 days before a contract is signed or a payment is made ― are listed in the FTC’s Electronic Code of Franchise Regulations. Fourteen states also have additional requirements; the SBA recommends looking into hiring an attorney and possibly an accountant to help you gauge franchise package and tax considerations.
- How much information should you share with franchisees? Transparency can be a crucial way to ensure franchisee satisfaction. In 2012, approximately 185 franchise owners filed a lawsuit against Cold Stone Creamery Inc., asking, according to The Wall Street Journal, for the ice cream chain to tell franchisees how much of its vendor rebate money was truly being used for marketing. Franchisees from other companies, including Burger King and Edible Arrangements, have also filed suits against their franchisors in recent years, according to The Wall Street Journal.
Currently, there are more than 1,500 franchise companies in the U.S., and their sales account for more than 40 percent of all businesses’ sales, according to the USA Today Franchise Ownership Center.
While setting up a franchise operation involves more than just finding eager entrepreneurs who want to license your company name, with careful preparation, franchising may be a viable option to help you expand your small business.