Franchising is a method of disseminating products or services. Franchising consists of a franchisor providing the use of a trademark or trade name and business system and a franchisee paying a franchise fee to become part of the franchise business as well as a royalty on a regular basis. For any franchisor to be successful, the majority of its franchisees must maintain profitable long-term franchise units. The success of a brand depends on an ongoing partnership between the franchisor and the franchisee.

The biggest draw of franchising is the opportunity for an individual to be in control of their destiny and secure their future. The franchise model has become an attractive business opportunity for wealthier individuals and investors who buy many units at once; or they buy the rights to develop a geographic area or “territory” and develop a certain number of units within a specific time frame. These multiple unit owners, area developers, or area representatives often recruit and support new franchisees within their territory, are part of a growing movement in franchising, and represent approximately 50 percent of all franchised units in the US. USA today.

Multi-brand franchises are also on the rise. These franchisees operate different brands under a single organization, creating efficiencies, economies of scale, and market penetration to increase sales and profitability. The main reasons successful franchisees seek out additional brands is because they have “saturated” their territory for their current brand, or are looking for a corresponding new brand to even out the ups and downs of business or seasonal cycles. Franchisors also combine several different brands under one roof, often offering concessions to current franchisees expanding to a second or third brand. Co-branding, in which one franchisee operates two brands from the same location, is another recent trend. Co-branding saves on real estate or leasing costs, leading to more profit per square foot.

Entrepreneurs often look to franchises for peace of mind. They want to know, as confidently as possible, whether the franchisor is presenting the franchise opportunity accurately and realistically and are taking the time to perform “due diligence” by talking to current franchisees, reading the Franchise Disclosure Document (FDD) carefully with the help of an experienced franchise attorney and after comparing the brand and industry under consideration with the competition (franchise or not), your chances of making money and building a successful business are better than starting a business from scratch.

For many aspiring entrepreneurs looking at the franchise business model for the first time, the business proposition may seem absurd. Why would someone pay tens of thousands of dollars up front and then a percentage discount every month for 10 or 15 years? For those who consider it further, the answer is obvious. They can make more money faster through franchises than on their own; and realize the potential for a higher long-term return on their investment. Legally, franchisees do not “own” the franchise, but rather are, or are granted, a license that gives them the right to operate and manage the franchise business. However, franchisees own the assets of their business and, as long as they adhere to the franchise agreement, they have specific rights under state and federal law. Franchisees can form franchisee associations in which they can participate. They can get involved in corporate decision-making if the franchisor is willing, or band together to oppose decisions that they see as detrimental to their operation and the brand in general.

franchise criteria
Determining if a company can be franchised is not an easy task; however, there are some predictive factors that can be used to assess a company’s readiness for franchising and the likelihood that it will achieve success as a franchisor.

Consistency
To sell franchises, a company must first be reasonable with prospective franchisees. This can be discovered in several ways: size of the organization, number of units, years of operation, appearance of the prototype unit, promotion, familiarity with the brand, and strength of management.

Segregation
In addition to credibility, a franchise organization must be sufficiently separate from its competitors. This can come in the form of a unique product or service, a low investment cost, a unique marketing tactic, different target markets, or a business model that is sufficiently different from the others.

Knowledge transport
An extremely important aspect of a successful franchise is the ability to teach a system to others. To franchise, a company generally must be able to systematically educate a potential franchisee in a comparatively short period of time. If a business is so complex that it cannot be taught to a franchise in three months, the company will have problems with the franchise. Some more multifaceted franchisors make up for this shortcoming by only targeting potential franchisees who are already knowledgeable in their field. A medical franchise that caters only to doctors is a prime example.

Amendment
A potential franchisor needs to know how well a model can be modified from one market to another. Some concepts are not easily changed over large geographic areas due to local variations in consumer tastes or preferences. Others are controlled by various state laws. Other models work just because they are in a very unique location. Some work well because of the unique skills or talents of the individual behind the model. Some models are only successful based on years of determination and relationship building.

Thriving prototype operations
A thriving prototype is required to show that the model is proven and is usually integrated into franchisee training. The prototype also functions as a testing ground for new products, new services, marketing techniques, merchandising, and operational efficiencies. The exception to this is companies whose franchises involve the direct sale of a proprietary product or service.

Documented Systems
All profitable businesses have systems. But to be franchiseable, these routines must be documented in a way that efficiently conveys them to franchisees. In all cases, a franchisor must record its policies, procedures, systems, forms and business routines in a comprehensive and user-friendly written operations manual. Some franchises offer computer-based training modules or written, computerized manuals.

affordability
Affordability reveals a potential franchisee’s ability to pay for the franchise. This condition is both an indication of the prospective franchisee and the actual cost of starting a franchise. A $50,000 startup franchise might be affordable for some prospects but not for others. Therefore, it is advisable to choose a franchise fee that is reasonable for the franchisees and allows the franchisors to cover the initial costs.

Return of investment
A franchised business must be profitable. At the same time, you must allow enough profit after royalty and other ongoing franchise expenses for franchisees to get a sufficient return on their investment of time and money. ROI must be calculated against investment to provide a consistent number. The franchise investment can be compared to other investments of equivalent risk that compete for the franchisee’s dollar. A good franchise system should allow an ROI of at least 20 percent between the second and third year of operations.

Movement and market conditions.
Market movement and conditions are paramount for long-term planning. Is the market growing or consolidating? How will those changes affect your business in the future? What impact will the Internet have? Will the franchisee’s products and services still be relevant in the future? What are other franchised and non-franchised competitors doing? How will the competitive environment affect your franchisee’s likelihood of long-term success?

Capital
While franchising is a low-cost means of expanding a business, it requires varying amounts of capital to get started. A franchisor needs the capital and resources to run a franchise program. The assets required to initially begin operating as a franchise program will fluctuate depending on the scope of the expansion plan. If a business is looking to sell one or two franchised units, the necessary legal paperwork can be completed for as little as $15,000. However, for franchisors aiming for rapid expansion, start-up costs can run to $100,000 or more. Once printing, auditing, marketing, and staffing costs are factored in, a franchisor can expect a budget of $250,000 or more to meet their development goals.

Relationship Obligation
Successful franchisors focus on building long-term relationships with their franchisees that are mutually rewarding. Not all franchise organizations understand the connection between relationships and profits. Strong relationships with franchisees make it easier to sell franchises more effectively, make necessary changes to the system more easily, and encourage franchisees and their managers to provide a reliable level of products and services to their customers.

management force
The most important aspect that contributes to the success of any franchise program is the soundness of its management. The most common contributor to the collapse of start-up franchisors is a lack of staff or lack of management experience. In addition to taking on new job duties in which the franchisor may have little or no time, the franchisor must demonstrate experience in fields in which they may have little or no experience. These areas include franchise marketing, lead generation, franchise sales, advertising management, training, and managing multi-unit operations. An appropriate first step in the decision to franchise is an assessment of the question of whether or not a business concept is truly franchiseable.

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