Success in one business model does not mean it works as a base for a franchise system.
As discussed in part 1 of this blog series, you may understand the potential benefits and some of the risks involved in converting to a franchisor, but you still need to ask this important question – is your business franchise ready? Not all businesses are. If your business is very technical or expertise based, it may be complex to articulate this information in a way that would be easy to transfer, train and educate franchisees and their staff. Franchise operations manuals, which are the bible for franchisors and franchisees, must be able to break down every process, product and service approach in order to make it understandable and repeatable. This does not mean the fast food franchisee needs to know how the fryer, salter and heating racks are built from a technical point of view; however they do need to understand the 24 steps to making the perfect French fry, as outlined in meticulous detail in the operating manuals provided by the franchisor. If you are not sure if your business model can be broken down to this level, take the time to document each step, review every process flowchart, and determine if it can be done.
Is your business model, service or product a unique concept? This can be a challenge because it means you will have to decide if you are willing to share the recipe for the “secret sauce” with others.
As in the example above of complexity, those processes and trade secrets will need to be codified, trademarked, copyrighted and protected through complex confidentiality, secrecy and privacy agreements. If the secret sauce is the key to your success, and you are uncertain if you want to share this information, this may be an important point in your decision making. Most of all, your success must be repeatable by someone other than you. You must be willing to share the risk and the control of the things that made you successful and entrust them to other business owners (franchsees).
If the above challenges cause you to shy away from franchising, there are other alternatives for you to consider. Franchising is just one option. You could look into:
- Sales agents to sell your product and provide customer support
- Set up dealerships for your products, which could be sold as part of group of products
- Distributorships – allow broader geographic distribution/warehousing through 3rd party
- Licensing – earn fees on what you know – someone else does all the work and pays you a fee for access and use of your intellectual property
Even if you answered affirmative to the above challenges, you still have to determine what resources you will need to get off the ground and how you will finance them. This is a difficult and challenging hurdle for many. It means they have to take the risk of putting their business and possibly other personal assets on the table in order to launch the franchise system and work to duplicate its success over and over.
As I said at the beginning, the key takeaway here is to do your due diligence. Know exactly what you are getting into and the risks involved. An important part of your due diligence is to surround yourself with professional advisors who can help you through the process and ensure you are set up in the best possible structure for your circumstance. Stay tuned for part 3 of this blog series when I will talk about advisors.
Kathy Steffan, CPA, CA
Partner
