A Beginner’s Guide for Investors and Businesspeople on How to Franchise a Business
A Beginner’s Guide for Investors and Businesspeople on How to Franchise a Business
There are various financial, legal, and other market hazards associated with expanding a new firm, which act as a barrier for investors and businesspeople. Many small, but successful, businesses are unable to develop past their first location because of the enormous amount of planning, compliance, and labour required to support sustained expansion.
This is arguably the main factor in why business owners who want to reduce risk while continuing to succeed frequently chow down on the franchise model.
By franchising, you may grow your company without incurring equity costs or debt-related risks and hire enthusiastic employees who will help you expand at a fast pace.
An Overview of the Indian Franchise Market
It should come as no surprise that many of the most prosperous businesses around the world have expanded via the franchise model. More than 120 sectors already use the franchise model to support their expansion and experience quick success. However, you ought to be aware of the following before entering the franchising industry:
One of the most important parts of a franchise business is the connection between the franchisor and the franchise owner. A franchisor is a person, firm, or organisation that permits other people to use its trademarks to do business. The franchise is the third-party (person, entity, or corporation) who pays the franchisor a one-time or ongoing royalty fee in exchange for the right to operate the business and receives support from the franchisor to do so.
To begin conducting business under the franchise name, the franchise must pay certain upfront setup charges in addition to a fee to the franchisor. The majority of franchisors offer operational, marketing, and training assistance, which is typically paid for by the setup fee. The following are some additional expenses that a franchisee could face:
- The money needed to purchase or rent a site
- The hiring of personnel
- POS setup, inventory acquisition, security, etc
Despite these expenses, opening a franchise is much less costly than launching a brand-new company from the beginning in the same sector.
Franchise Disclosure Document (FDD)
The franchisor provides a document known as the FDD, or Franchise Disclosure Document, if the franchise owner and franchisor decide to engage into a formal business agreement. The FDD often includes details on the franchisor, any bankruptcy history, investors, profit margins, working conditions, income streams, as well as the expected earnings of a prospective franchisee. The FDD also lists all of the agreement’s terms and conditions, including the price, charges, and expenses. To prevent any errors that might wind up costing you significantly in the future, it is advised that you contact a franchise consultant to review the FDD.
A brief examination of several franchise business models
There are several ways to franchise because of the diverse nature, complexity, margins, and operations of various enterprises. The company structure, product distribution, and management models are the three most common types of franchising. Let’s quickly review each of them:
This is a standard franchise business model whereby the franchisor grants the franchisee the use of its trade names, operational procedures, and trademarks in exchange for a fee. There is a legally binding agreement between the two parties that stipulates that a portion of the sales or profits must be given to the franchisor. The franchisor establishes the brand guidelines and standards for the franchise unit and owner. This format is used by F&B industry brands including Dunkin’ Donuts, KFC, and Starbucks.
This franchising model is comparable to the supplier-distributor arrangement. The distributor or franchisee moves the merchandise; the franchisor is only responsible for delivering inventory. Compared to the business arrangement, the franchise owner often has greater liberty with the sole limitation being product exclusivity. Additionally, there is frequently a charge for utilising the trademark. For larger-ticket purchases, such in the auto sector, this structure is favoured. Ford and Coca-Cola are examples of companies who like this structure.
In a management franchise, the franchisee manages the company rather than taking part in day-to-day operations. For someone with prior business expertise who can successfully guide the franchise business, this form of franchise is appropriate. The majority of B2B franchise firms use the franchising management model.
How to Start a Business Franchise
The franchise market in India is believed to be worth between $47 and $48 billion, and it is anticipated to develop rapidly in the next years. Depending on the type of business you run, you could think about growing it using the franchise model, but only if you’ve answered these two crucial questions:
Is your company franchisable?
Is franchising the best course of action for growth?
If you answered yes to both of these questions, you should be aware of the following information concerning franchising:
Understand your company inside and out.
Can you succinctly summarise your company’s mission and goals? If so, you are aware of every aspect of the industry. You must have a good understanding of your company concept as a franchisor in order to attract investment for a successful franchise. If not, be ready by reviewing your finances, analysing your company, and selecting the franchise model that would work best for you. Learn about the many franchise models to choose the one that will work for your company.
Learn about the laws that are applicable
Discover everything there is to know about franchise law. To assist you with navigating the process’ legal complexities, a franchise consultant is strongly advised. The FDD (Franchise Disclosure Document), which would include all relevant information about the company for potential franchise partners to analyse, would be helpful.
Develop a franchise model
Do you wish to expand across the country or only in one state? In the upcoming year, the next five years, and the following 10 years, how swiftly do you wish to grow? Designing a strategic growth strategy is essential if you want to come up with answers to these issues. You must select one of the formats from which your firm would most benefit in order to create a franchise model for it. Additionally, it’s crucial that you establish brand standards and the appropriate franchisee limits.
The devil is in the details when it pertains to franchising. Finalize crucial elements like:
- Franchise fee
- Royalty fee
- Franchise agreement terms
- Size territory
- Areas where you want to expand
What kind of instruction and assistance you’re prepared to provide?
- Supplier-Distribution relationships
- Business experience required
- Marketing and advertising
Assemble a network of allies
As a franchisor, it is your responsibility to make sure that franchisees and your company develop concurrently and harmoniously. The majority of franchisors have specialised teams to assist franchisees. These teams are in charge of managing new franchise applications, developing teams, offering continuing support, launching promotional efforts, and even aiding in the setup and opening of new franchise outlets. To ensure elevated amounts of trust and confidence from your franchise partners, develop a support network for all of your business partners.
Create instruction manuals
Not only will you need training manuals to transmit your expertise to new franchisees, but you’ll also need them to assist them in training their workforce. With the aid of this training booklet, franchise owners will be able to find answers to common business queries including what to do when out of stock, how to bargain with a new supplier, and how to handle negative customer reviews. Remember that the training materials should cover all likely real-world scenarios.
Examine franchise applications
To achieve more profitability, you must make sure that your franchise partners are committed and passionate about operating their company. Keep in mind that the entire system and brand will suffer if one franchise finds up in trouble with the police or receives several customer complaints. Therefore, it is crucial that franchisors thoroughly vet prospective franchisees to make sure they are qualified to manage the franchise successfully.
Buying a Franchise Business: A Checklist
What you need to keep in mind before franchising your business is as follows:
Assess your readiness for franchising
When it comes to franchising, businesses sometimes act hastily and assume that it is the natural next step after seeing just modest success. Franchising, though, might not be the best course for you just now. If your company is tremendously successful and has a simple business strategy, you should consider franchising. If not, keep in mind that you need to design a model that is simply scaled and assembled. Be aware that nobody will want to invest in the franchise if all the bugs haven’t been sorted out.
Don’t undervalue costs
To cover costs like engaging a franchise solutions firm, hiring an attorney, submitting the necessary legal paperwork, and setting up your team, you will need a sizeable sum of cash and resources. Additionally, a portion of this expense will be ongoing since the FDD and other papers could need to be updated frequently and because your team might eventually require more personnel. Additionally, there will also be market expenses related to marketing your company to clients and investors.
Create a solid strategy
Before beginning the process of franchising your business, ask as many questions as you can. How do you plan to expand the company? Whom are you seeking as franchise partners? In exchange for the setup charge, what will you provide them? How will you offer assistance? How are you going to look for fresh business partners? All of these inquiries demand specific responses and appropriate plans of action.
One outlet pilot
It is frequently advisable to establish a single franchise first and evaluate if any issues arise before expanding to other outlets. This experiment could also assist you in changing the franchise screening procedure, operational support, training, and marketing plan based on actual business data.
All things considered, opening a franchise can be the greatest move for your company—providing you have the resources and professional support to support it. You can rest confident that, if done correctly, franchising your company may be a sure-fire strategy to ensure that it expands rapidly, has tremendous success, and becomes a leader in its field.