Guide to Franchising
How Long Will It Take To Franchise A Business?
From the time you decide that franchising is right for your company, you should expect that it will take approximately three to four months before you are able to begin offering franchises. This of course is subject to where you are located and the market in which you plan to offer franchises.
How Long Can It Take To Sell The First Franchise?
Once you have completed all your legal documents, you are ready to sell franchises. Even with all the strategy and legal work behind you, and you having completed all the required documents, in a practical sense, there is more to do before you can call yourself a real franchisor. To be a real franchisor, you first need a franchisee.
Depending on what type of business you are in, on average expect that you will close your first franchise sale within 3 months of its launch. Even then, while you may have signed a franchise agreement and received payment of your initial franchise fee, being a functional franchisor is going to take a bit more time.
Location and Training
If your business concept requires the franchisee to find an appropriate location and then develop it to your specifications, then It can take on average 3-4 months before the outlet is ready to open for business. During that period, you are going to be spending time with your franchisee in training, business support and franchise launch assistance.
When your franchisee has successfully opened their business, now in a practical sense you have achieved your goal and have practically become a franchisor.
You have not risked any capital in opening those businesses, have not diluted your ownership of your franchise system, and have not assumed any liability for leases, staffing, etc.
Franchising is most cost-effective way to expand your business globally!
Marketing Strategy for Your Franchise System
You need to make certain that your franchise offering, your legal agreements, your fees, and your support structure are in alignment with your marketing strategy if you want to get the results you planned for. Achieving those results is not hard, but it can’t be done in a boilerplate fashion. It takes thought, and that type of depth of business structuring is not something you should expect to receive even from the most gifted franchise lawyers as that is not their role.
Franchising is used by over 300 industries today, and even franchisors in the same industry segment use different methods to franchise based on the economics of their business, their culture as an organisation, their size, brand performance, targeted franchise, etc.
You market to your prospective franchisee “where they are.” Marketing is not a scattergun approach. For some franchisee candidates, lead generation sites, franchise magazines, brokers, and tradeshows are productive. For others, major business publications and investor forums are how they will spread the word about the opportunity. Where your press announcements are placed, how your SEO strategy is developed and executed, and where you spend your marketing resources all need to factor in who you are trying to reach.
Even when developing franchisee recruitment websites, what is being offered to a single-unit franchise or one of the other classes of franchises you may possibly be targeting needs to be carefully scripted, and the recruitment process differentiated.
What Is a Franchise Fee?
The franchise fee (also called the “initial franchise fee”) is the payment made by a franchisee to the franchisor for joining the franchise system.
While the definition of a franchise may differ slightly from country to country, franchising is defined throughout the world as a business relationship that qualifies as a franchise if three criteria are met:
- The franchisor licenses its trademarks, service marks, trade name, logo, or other proprietary marks to the franchisee.
- The franchisor has “significant operating control” or “significant operating assistance” over the franchisee’s business.
- The franchisee makes a payment to the franchisor.
What is a Franchise Royalty Fee?
A business qualifies as a “Franchise” (and is, therefore, subject to the specific regulations imposed on franchises) where three conditions are met:
- The business grants a licensee the right to use its marks and other proprietary assets;
- The business establishes and enforces brand standards that that licensee must uphold to be allowed to continue to use such proprietary assets; and
- There is a financial relationship between the business and the licensee.
In most franchise systems, the “financial relationship” element is usually met in two ways: a one-time upfront payment (known as the “Initial Franchise Fee”), and an ongoing payment (known as the “Royalty Payment”). The Royalty Payment is normally paid monthly or quarterly and can be calculated in a few different ways.
The Purpose of Royalty Fees
The typical financial relationship between a franchisee and a franchisor can be looked at similarly to that of a country club. While the initial franchise fee can be seen as the upfront cost to join as a “member” of the franchise system, the Royalty Payments can be seen as the ongoing “membership fees” required to remain that membership. These payments are collected by the franchisor to fund the franchisor entity’s actions, which include both corporate and franchise-related expenses.
- Transfer fee:
While technically not an initial franchise fee, a transfer fee is paid when a franchisee sells their business and transfers their rights as a franchise to another party. That “new” franchise will pay the franchisor a transfer fee, which is normally either a fixed amount or a percentage of the franchisor's then-existing franchise fee.
- Renewal fee:
At the end of the term of the franchise agreement, depending on the franchisee’s right to re-up with the relationship per the terms of their contract, they may elect to renew the relationship with the franchisor. The initial fee they pay when entering into the successor agreement is generally referred to as a renewal or successor fee. Similar to the transfer fee, the renewal fee usually is a lower amount than charged to new franchisees.
- Founders club:
Some new franchisors, when they first begin to offer franchises, recognise that their initial franchisees may look at their opportunity differently than they might look at a more established franchisor. To overcome any perceived additional risk and to prime the pump for franchise sales, you will occasionally see franchisors offer a reduced fee for what is often referred to as a “founders club.” For example, franchisors may discount their franchise fee for their first five or 10 franchises, or more frequently for those prospective franchisees that sign an agreement before a certain date; as an enticement to sign the agreement they offer a lower franchise fee to those inaugural franchises. These reduced fees are disclosed in their offering documents, provide a clear deadline or other parameters, and are less likely to cause problems with franchisees who sign later under a higher franchise fee.
While generally, franchise agreements are adhesion contracts (non-negotiable), there are several instances where the terms may be negotiable, and while not common, franchise fees may under the right circumstances fall into a negotiable category.
In establishing their fees, franchisors should calculate the anticipated financial returns for their franchisees and make sure that the level of return is sufficient for both the franchisee and the franchise system as a whole to achieve the desired financial results. It is, therefore, essential when setting initial and continuing fees that franchisors fully examine the economics of the relationship. Setting fees based primarily on those charged by direct competitors is one of the most common and significantly damaging approaches some new franchisors take and often results in fees that are either too high or too low, both of which can be damaging to the franchise system
Things you need to know about a franchise
Many types of franchises exist today, in an ever-growing range of industries. It's estimated that over 300 different industries use franchising. Restaurants and food offerings still make up the largest part, but today franchises have even developed in the home healthcare and medical services markets.
From a legal perspective, a franchise basically consists of a defined type of license granted by one business owner to another. At its core, though, franchising is really about the relationship the franchisor has with its franchisees.
The franchisor licenses its trade name and its operating methods, meaning its system of doing business, to a franchisee, and the franchisee agrees, as their part of the deal, to do business according to the terms of the license.
Role of a Franchisor
The franchisor provides the franchisee with many forms of business support, while also exercising control over some elements of the franchisee's operations as needed, to protect its intellectual property and ensure that the franchisee adheres to its brand guidelines.
In exchange for the use of the intellectual property and the provision of business support, the franchisee usually pays the franchisor a one-time initial franchise fee and a continuing royalty fee, covering the use of the franchisor’s trade name and operating methods.
The franchisor takes little to no role in the day-to-day management of the franchisee’s business because the franchisee is an independent operator, not a joint employer with the franchisor.
For this reason, while the franchisor may provide guidance on human resources best practices, for example, the franchisee is free to hire, compensate, schedule, set employment standards and practices, and discipline their staff without any input from the franchisor. While features like uniforms and food preparation processes are part of the system's brand standards, the rate of pay or the hours scheduled fall under control of the franchisee.
Growing a Business Through Franchising
Franchising is a methodical system for expanding a business and distributing goods and services through multiple outlets. It works based on the relationship between the brand owner and the local operator, teaming together to skilfully and successfully expand.
It's a contractual relationship and while both the franchisor and franchisees share a common brand, each is in a different business in a legal and practical sense. The franchisor works to add additional franchises and support its existing franchisees, while each franchisee agrees to manage and operate their business to the terms of the agreements.
The Legal Definition
While every franchise is a license, not every license is a franchise under the law. A license becomes a franchise when three specific elements take place:
- • The franchisee’s business is substantially associated with the franchisor’s trademark;
- • The franchisee pays an initial and/or continuing fee for the right to enter and remain in the business; and
- • The franchisor exercises control or provide help to the franchisee.
As a business owner, you might question whether it makes sense for you to franchise your business. Experienced and competent franchise lawyers or consultants can help you analyse your business needs and determine whether franchising fits.
Because care is not always taken in selecting the right lawyers or consultants, some businesses have either not needed to franchise to expand or expanded without meeting the requirements of the franchise laws. Both are costly and unnecessary mistakes to make.
Business Format Franchise
Under a Business Format Franchise, the type of franchising most familiar to the average person, the franchise relationship generally includes the entire business format and not simply the franchisor’s trade name, products, and services. The franchisor generally provides operating manuals, training, brand standards, quality control, a marketing strategy, site location assistance, and more.
For instance, McDonald’s doesn’t franchise hamburgers, and MOT Hub, doesn’t franchise oil changes. Both companies license their intellectual property, which includes their trademarks and business systems. As you might notice from the history of both brands, their products and services have dramatically changed over the years, and the structure of a business format franchise allows them to accomplish this easily.
The Power of the Franchisor's Brand
A franchisor’s brand is its most valuable asset. Customers decide which business to shop at and how often to frequent that business based on what they know, or like, about the brand.
Consumers don’t concern themselves with who owns the assets of the business. They just want to obtain the products and services for which the brand is known. Franchising allows “formula entrepreneurs” to own and operate a business under identified brands. When working with a good franchisor, franchisees receive the tools and support they need to live up to system standards and ensure customer satisfaction.
Franchisors expect consistent execution of the company's brand standards at each location, regardless of whether the location is company-owned or franchisee-owned. Franchisors invest a lot of time, energy, and financial resources in developing and supporting their brands, and in the consumer's mind, a franchisor's brand equals the company's reputation.
Successful franchisors enforce system standards with franchisees, because they want to ensure that customers are satisfied each and every time they shop at a franchised location.
The franchisor also needs to protect the equity of the brand, as well as other franchisees sharing the brand.
Franchisors provide not only the menu of established products and services but also an operational system and brand that have already proven themselves. In successful franchise systems, the franchisor and franchisee work together for mutual benefit.