Franchise your business
If you are looking for ways to expand your successful business, you may want to consider franchising. By allowing others to replicate your business for a fee, you can expand your business faster and for less investment capital than you would need for other business expansion models. This is because your franchisees will be using their money to help your business grow.
When you create more distribution points for your goods or services by developing franchises, your business will gain market share. Because your franchisees will have invested their own money and efforts into your brand, they will be committed to working towards mutual success and growth.
How does it work? As a franchisor, you grant a licence that gives the franchisee the right to use your trademark, brand and operating methods after paying an initial franchise fee. The licence tends to be of a contractual, fixed-term nature.
Both parties win — you profit by taking in a franchise fee and royalties as you increase market share, while the franchisee has the benefit of buying into a proven business model, a brand and a support system.
To consider franchising, you should:
- Have a successful business with a concept that can be replicated
- Be able to choose franchisees who are committed to selling your goods or services
- Implement procedures that will create consistency among your franchise units
- Demonstrate strong leadership and provide a healthy corporate culture
In addition to the initial franchise fee, your franchisees will pay you royalties based on their revenue. The royalty is often calculated on a percentage of gross sales revenue, but can also be based on net sales (after expenses). Because business models vary, there is no standard royalty amount. The royalty fee is usually paid on a monthly basis.
As a franchisor, you can use these royalties to provide support to your franchisees. This infrastructure could include:
- Research and development
- Branding and promotion
- Computerization and accounting systems
It is always sensible to get legal and accounting advice before making any decisions regarding franchising. A lawyer who is well-versed in the field can provide help in drawing up the franchise agreement, as well as other legal documents you may require. An accountant or other financial expert who can assist you in developing a financial model that includes cash flow and royalty structure should also be able to determine if revenues will be adequate for all parties.
Other questions you may want to think about include the following:
- Will you require a franchise fee deposit while prospective franchisees take time to come to a firm decision?
- How will you word your disclosure agreements in preparation for the end of the licences?
- Should your franchisees contribute fees to a cooperative advertising budget?
Keep in mind that the key to successful franchising is consistency — an element of business that builds consumer confidence. By increasing your number of distribution points or units, you also increase your clients' familiarity with your brand. They will expect all units to adhere to the same standards, so it is up to you to ensure that all your franchisees follow your operating systems and methods. Nevertheless, while the onus falls on you to uphold your brand, it is also a good idea to encourage input from your franchisees: strong relationships will reinforce everyone's objectives.
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