Fundamentals

Successful franchise requires thorough planning and preparation. Here are some qualities shared by many successful franchises:

Concept: A good business concept is required, preferably one that is unique and interesting and with long-term potential. This is what your business is all about. This needs to be appealing to consumers and to potential franchisees.

System: A systemized standard for operations is needed. These include things like policies, procedures and other types of standards that will be used like every business location. The system includes the special know-how about how to set up and run the businesses. Usually, the system is represented by the operations manual.

Stability: Most franchisees have long-term contracts and have made major investments. They are in the business for the long haul, which adds stability to the franchisor and franchisee relationship.

Transferability: The system needs to be transferable. Most franchise systems do not require new franchisees to have any experience in any particular industry. You must be able to teach your franchisees how to successfully set up and run the business using your system. The transfer of this detailed information takes place through the initial training program, the operations manual, and the ongoing support the franchisor provides. If there are parts of the system that require special skills that are not easily transferable (such as business experience, musical ability or artistic talent), it may still be possible to franchise your concept, but the pool of potential franchisees will be limited to those people who already have these special skills.

Identity: Your concept needs distinguishing features to give it a clear identity in the marketplace. This identity includes things like trade dress and image (the way the locations look); trademarks (identify the business and/or the products offered), and service marks (identify the business and/or the services offered).

Protection of Identity: You should take the necessary steps to protect the franchise identity by registering with the U.S. Patent and Trademark Office all important trademarks and service marks. This federal registration will give you important legal rights. Part of this process will be to investigate who else might already be using the same or similar names and logos. A trademark lawyer should be involved in this process for maximum protection of the marks.

Protection of System: You should also protect the system to the extent possible. This involves steps like:

Experience: You should have experience in setting up and running the same business that your franchisees will. Actual operating experience is important for several reasons:

All of these factors will help you sell franchises. While experience is strongly recommended, it is not required. It is possible to start a new franchise without experience but inexperienced franchisors usually have a tough time selling franchises.

Profitability: Operating a franchise is a business and the primary purpose of businesses is to make money for the owners. Each franchisee will expect to make a reasonable return on initial investment by the end of the initial term. You must make sure that the concept is capable of generating profits sufficient to make money for your franchisees (even after paying you royalties and other fees).

Operations Manual: The franchisees’ operations manual needs to be comprehensive. Your franchise agreement will require your franchisees to follow the mandatory system standards in the manual, so it is important that the manual includes everything that the franchisees must do. It can also include non-mandatory suggestions for other things. Manuals evolve as system standards are added, dropped or changed. Your franchise agreement should allow you to modify the manual any time you want to. Mandatory standards must be carefully designed- you are legally liable for damages resulting from faulty or harmful system standards. An experienced franchise lawyer can help point out potentially problematic provisions. For more information, please see this site’s FAQ section.

Management: Your franchisees will need some initial support and additional ongoing support. You must have capable management to provide this support in appropriate categories such as site selection, lease negotiating, staff recruiting, staff training, marketing, customer service, etc. You will also need to inspect your franchised units periodically to make sure that the franchisees are following your system standards.

Capital: Some experts suggest that you will need from $50,000 to $250,000 to get started. However, the amount one will need depends on the system, how much of the start-up work has already been done, and how much of the additional start-up work you will do yourself. If your efforts are successful, you could recover your start-up capital quickly.

Entity: You will probably want to form a new legal entity to be the franchisor, however, this is not a requirement. By setting up a new entity, you will help protect other assets (such as company-owned units) from liability that may arise under the franchise system, and you will reduce the cost of getting audited financial statements. The most popular entity choice for franchisors is limited liability companies and corporations.

Legal Compliance: To be able to sell franchises legally, you must have a Uniform Franchise Offering Circular (UFOC) to deliver to your franchisee prospects, and you will need to register the franchise in certain states. The UFOC must comply with certain rules for the content and format of the required information, and it must include copies of the form franchise agreement and other contracts you will use with your franchisees. You will also need to learn about the federal and state laws that regulate franchising before you begin talking to franchisee prospects.

Audited Financial Statements: The UFOC must also include audited financial statements prepared by an independent certified public accountant. The fastest and least expensive type of audit is one done for a company as of the day of formation (or initial capitalization). Audits for companies with existing business operations will take more time and money.

Business Plan: To help you formulate your plans for your new franchise system, you should develop a business plan. This is not a requirement, and many start-up franchisors do not do this.

Marketing Plan: Similarly, you should develop a specific plan for how to sell franchises. There are many different marketing techniques and tools available for selling franchises. You should formulate your plan based on your budget, and the target audience of prospective franchisees. Franchise advertising is regulated in some states, so be sure to consult an experienced franchise lawyer early in this process.