The Basics Of Franchising

By: John Matthews, founder and president of Gray Cat Enterprises Inc.

Upon opening their first store, many single-store operators come to an, often premature, conclusion that they are going to franchise. While this may be a noble end-game goal, what is often missing from this proclamation is determining whether or not their concept is “franchishable.”

There are many questions that need to be answered; systems and procedures that need to be developed; and a myriad of other items to be addressed before one can venture off and franchise their concept.

The difference between a Franchisor and franchisee is fairly obvious—the franchisor is the person who owns a company, along with its trademarks and products, while the franchisee is in charge of running their individual franchise. Potential Franchisors have to address the following questions before moving forward with the plan to franchise:

Will a franchisee be able to afford the typical business operating expenses that your concept currently experiences?

Does the operating break-even analysis offset the royalty, ad fee and other ongoing expenses for the franchisee?

What will the products and/or services that will be offered and will they succeed in other locations?

How steep is the learning curve for an inexperienced individual to understand and learn the business’s concept?

What makes a franchise business attractive for an outsider is that the services and products are generally proven and have an established reputation, so the concept has been vetted. In addition, with incremental locations all sharing the same brand, costs for marketing, advertising and launching the business are shared. Procurement costs should be lower as more locations combine their purchasing power for products. Lastly, systems and procedures are mapped for the franchisee so that each individual can quickly be trained on “how-to-go-to-market.”

These are just a few of the items that can quickly indicate if your concept is ready to be transformed into a franchise. If it is full-steam ahead, then the following items need to be addressed:

Disclosure Overview: Every franchise has to produce a Franchise Disclosure Document (FDD) in order to legally offer franchises. The FDD must disclose a number of items for potential franchisees to review. First and foremost, is an overall summary of the business and any potential competitors. Other items that are included are regulatory compliance for their particular industry, as well as background and litigation history information for the franchisor. Information on trademark registrations, investment expectations for the franchisee, in addition to the Franchisor’s audited financials. Essentially, the FDD provides pertinent background of the potential franchisees future partner.

Franchisor Duties: The Franchisor has many duties to not only support the overall franchise, but provide support to the individual franchisees as well. The franchise is only as strong as the collective strengths of the franchisees. Therefore, the Franchisor needs to maintain a solid organization that continually grows the enterprise with new franchisees and locations. In addition, once the franchisees are established, the franchisor is responsible for training and supporting the franchisees, managing the stewardship of the overall brand and outsourcing all of the products/services for the company. Lastly, the Franchisor is obligated to manage and maintain the integrity of the market areas and territory of stores.

Franchisor Key Decisions: Now you have to get down to the hard, cold facts – what to charge! Generally, every franchise has an initial franchise fee as well as ongoing royalties. In some cases, multiple franchise locations may allow for a reduction in the initial franchise fee. Royalty payments are calculated on a percentage of sales. In addition, in order to maintain the integrity of the franchise, certain suppliers will be determined as authorized for use by the franchisees. The Franchisor also needs to determine what ongoing support and training will be provided and disclose this in the FDD. Lastly, the Franchisor should determine the ongoing advertising contributions that should be charged to the franchisees.

Franchisor Responsibilities: Pre-Opening: Once the franchisee is onboard, the work doesn’t stop for the Franchisor. Prior to opening, the Franchisor generally helps the franchisee in selecting a site and assisting with the lease negotiations. It is in the Franchisor’s best interest to attract franchisees that are positioned for success with “A” locations. Once the site is selected, training the franchisee staff is next as will as instructing them on the Franchisor systems and procedures. In this area, the Franchisor needs to be extremely tight with their procedures or the processes at the store level will deviate significantly from the original concept. Lastly, prior to open, the Franchisor should assist in the procurement of products, store buildout and development of a Grand Opening plan.

Franchisor Responsibilities: Post-Opening: After the store is open, the Franchisor should have both training and operational staff on a scheduled routine to ensure that the franchisee is complying with all programs. Creating a vibrant brand for the enterprise remains paramount for the Franchisor as they manage the stewardship of the Ad Fund and its implementation. Once critical mass is achieved, sharing this stewardship with a Franchise Advisory Committee (FAC) and gaining their input in advance ensures a greater success ratio for ad campaigns. Lastly, as with all well-run agreements, clearly holding both parties accountable to their obligations of the contract creates a long-lasting, mutually beneficial arrangement.

Deciding whether to franchise or not is a decision that should not be taken lightly. If the concept is unique and its financial success can be transferred to another owner where both parties can benefit, then the franchise has legs. All too often, store operators that wish to franchise do not have the appropriate levels of discipline and controls in place in advance of offering their franchise. This, in hindsight, is a disservice to not only the Franchisor, but ultimately the franchisee.

John Matthews is the founder and president of Gray Cat Enterprises Inc., a strategic planning and marketing services firm that specializes in helping businesses grow in the restaurant, convenience and general retail industries.  With more than 20 years of senior-level experience in retail and a speaker at retail-group events throughout the U.S., Matthews has recently written two step-by-step manuals, Local Store Marketing Manual for Retailers and Grand Opening Manual for Retailers, which are available at www.graycatenterprises.com.

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