Franchising can be an amazing vehicle to grow your concept to levels that you never dreamed possible. But, if it is not done the right way, franchising can also be a way to spend lots of money on lawyers and accountants – only to eventually lose control of your concept.
A franchise business consists of a franchisor – the corporate headquarters and entity that controls the franchise system – and franchisees – people or companies who contract with franchisors to operate the concept and franchise system in exchange for the payment of royalties.
There are three key advantages to franchising: capital, time and people. Franchising allows you to use other people’s money to grow your concept. Because other people are the ones opening and operating new locations of your concept, your brand can grow much faster than a standard all corporate model. Finally, you will have fewer “people issues” because your franchisee is literally invested in the business and will be incentivized to grow sales while providing a strong customer experience.
Still, there are downsides to franchising. Namely, regulation, loss of control and cost.
Franchising is an extremely regulated industry. You cannot simply start offering franchises. You must first draft a Franchise Disclosure Document and, in many states, register as a franchisor and be approved each year by the state attorney general.
You will lose some control over your brand when you become a franchisor. From a legal standpoint, your Franchise Agreement will give you complete and total control. It’s like a record deal and you are the record label. That makes you the king, right? WRONG! Franchising is not a dictatorship. It’s more like a legislative monarchy. The Franchisor is the king, but if you want people to actually do what you say, the impetus is on the franchisor to lead by influence – not force. The rule that I have always followed with D.P. Dough is that if I can’t get 80 percent of franchisees on board with a given policy, I will not take legal action to enforce it against those who are not following.
Finally, franchising is very expensive if you want to do it the right way. In addition to the cost of complying with regulations ($25,000+ for FDD, $7,500 for audited financial statements, $1,000 per state for state registrations), there are administrative costs to franchising. You’ll need employees to handle finances, franchise sales, franchisee training, new store openings, construction issues, and ongoing consulting with franchisees. D.P. Dough was able to bootstrap and jump into franchising largely because I was/am an attorney and was able to do all of our legal work in-house.
So, when is a restaurant concept ready to franchise? At a minimum, you should already have two to three locations you own that are operating both 1) at a profit and 2) exactly the same way.
On top of that, you’ll need to create detailed, documented systems for all of the following:
- – Employee training manuals, train the trainer guides, wall guides, etc.
- – New store opening checklist – minutiae is your friend.
- – New franchisee training – at your existing location, online, onsite for new location.
- – Marketing system – how exactly does your new franchisee get business?
- – Financial/accounting system – profit & loss statements are your window into the health of the franchisee.
- – Employee management/HR/scheduling system – provide tools to your franchisees to keep labor costs under control.
- – Company intranet – if you don’t have a place online where all of the systems live, you might as well not have any systems.
Franchising can be a great choice for many businesses. But, as I have learned, it is by no means easy. Like anything else you can excel in franchising by hard work, thoughtful strategy, and learning best practices from other franchisors (the International Franchise Association is an amazing resource).
The best advice I can give a new franchisor is to understand the details of how you get from where you are to where you want to be. Nothing will just happen. You have to make it happen.
For more information, visit ownadpdough.com.