January 19, 2012

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Franchising Fundamentals

Top Mistakes Business Owners Make When Franchising

C. Jeffrey Thompson and Kara K. Thompson

January 19, 2012

You have created a successful small business and are now looking to expand; franchising may be an option you are considering. Franchising allows a business owner to leverage limited capital to grow a business concept. It is a proven business model and when done correctly, has tremendous advantages. But if done incorrectly, it can lead to disastrous and often illegal consequences. By knowing how to navigate the potential pitfalls of franchising, you are more prepared to take your company-owned business and move it to a franchise business. Here are the initial questions you should ask yourself before franchising. Am I a franchise? By far the biggest and most problematic mistake a business owner can make is not realizing they are actually offering a franchise. Franchising is a highly regulated business. It is federally regulated by the FTC and each state can add to the numerous regulations. Failure to comply with the strict federal and state regulations can lead to a loss of one’s business and an accusation of illegal activity resulting in civil and criminal penalties. Before selling a chain store or business concept to another person, you should speak with an experienced franchise attorney to make sure you are not selling a franchise. An experienced franchise attorney can guide you through the process of developing your business and knowing if you are inadvertently creating a franchise system. Do I think franchising is easy? If you are looking to make a quick and easy return on your investment, franchising is not for you. Franchising is difficult and complicated. It requires time, energy and ambition. There are a multitude of new and intricate business and legal decisions that have to be made before you are ready to franchise, such as: What is an appropriate franchise fee? What is an acceptable royalty fee? How should advertising for all franchisees be handled? You also need to be able to communicate your business idea and concept in simple terms. Surprisingly, this is one of the more difficult aspects of franchising. Sit down and explain your concept to someone who is not experienced in business. If they can quickly understand your concept, you have a head start on entering the franchising arena. What is my golden egg and is it branded? Branding is the key to franchising. The brand is everything from trademarks to trade dress and all should integrate to promote your business. Your brand is what draws in customers and it is what will sell your franchise. Having a unique or innovative concept helps in promoting and developing your brand. Uniqueness can be the product, the service, the store design or location. It can be a number of things, but whatever it is, it needs to be unique to attract willing buyers. Be thoughtful and careful in how you develop and present your business idea. Do I have an adequate marketing plan? An effective marketing plan is vital to a franchise’s success. Think about how you are going to market your franchise. Do you have sufficient capital to market and develop your franchise? Who is your target buyer? Is the franchise fee too high to attract your target buyer? Is it too low to cover your actual costs? All of these questions and others need to be addressed in a comprehensive marketing plan. Failing to take the steps in developing a well thought out marketing plan can lead your business into one or more pitfalls. Is the company growing too quickly? There is a tendency to sell franchises, especially in the beginning, to whoever is willing to buy. This is a mistake. You should concentrate on growing regionally. Focusing your growth on a smaller and more manageable area will help you keep costs in line and will help create a brand that is recognizable. Growing too quickly has been the downfall of franchises nationwide. Do I have sufficient staff? You may not have needed more than a few people to run your current business, but franchising itself is a business that requires adequate staffing to make it successful. Fortunately, not having sufficient and experienced staff will not prevent you from franchising. There are a number of experienced companies that sub-contract services to fill the gaps for the first few years until the franchise is on its feet and able to recruit its own experienced employees. Do I know my customer base? Know your customer base and develop a business and marketing plan that will reach those customers. If your product or service is meant to attract the suburban soccer mom, selling your franchise concept to buyers in lower Manhattan may not be the best use of your resources. Do I have experienced counsel? Franchise law is complicated. The laws surrounding franchising create strict liability where mistakes, even innocent mistakes, do not excuse the franchisor from liability. For this reason, you want to make sure you are receiving advice from an attorney who has experience in franchising and understands the changing regulations on both the federal and state level. A great and potentially successful concept can fail simply because of legal counsel. C. Jeffrey Thompson is the senior partner at Thompson Ostler & Olsen and the founder of The Franchise Business Law Group (www.franchisebusinesslawgroup.com). He and his franchise team have over 30 years experience in franchising. Kara K. Thompson is an associate attorney at Thompson Ostler & Olsen and a part of the Franchise Business Law Group team.
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