Once you begin expanding your business by using investors you must be careful that you're not crossing the border into franchise territory. The definition of a franchise is an authorization by a company to a third party enabling them to carry out specified commercial activities, use their trademark, and follow their business model. In exchange for that authorization, the third party compensates the company with fees and royalties. If you are intertwined in a business partnership that meets this criterion, you may accidentally have started franchising your business.
While there are many benefits to franchising your business, an accidental franchise could get you into deep water. If you are providing an investor with a 'license' to use your business model and are requiring training and providing support, then technically you are a franchise. There are legal repercussions to operating like a franchise and you could be subject to hefty fines. Franchisees have rights of their own that could allow them to revoke their contracts, as well as the right to take further legal proceeding. You may even be culpable of a felony, in some states.
If you're concerned that you may be crossing into franchise territory and want to make sure you're legally in the clear, follow these simple steps:
If you feel that you have crossed into franchise territory, then you might want to contact your attorney or give us a call. We can provide you with a litmus test to help you assess whether or not you are a franchise.
Franchising offers you the opportunity to grow your unique brand, get your ideas out there to more people, and leave behind a legacy for future generations. Not to mention, with franchisees buying into and growing your brand, you can expand to a national or even global market with considerably less capital.
You may be saying to yourself, “Sounds great! Where do I start?” Well before getting started or going any further, take some time to examine your business for franchise-ability.
According to franchise expert John Batcheller, “Going head-to-head in a saturated market is difficult and costly. Emerging franchise brands with clear points of differentiation increase the opportunity for success.” You need to have a clear idea of who you will be going up against. If your competitors are on every corner in every town, what is going to set you apart? Identifying and embracing your niche market is the key to success in any business, and when it comes to franchising it is paramount.
To build brand loyalty, you need a consistent product. To be consistent, you need to have repeatable processes in place. Baristas at a Starbucks in Texas can make you a drink that tastes exactly like the one you had in Seattle last week. The success of Starbucks depends on this consistency. Understand Your Operational Processes and tweak them if necessary. Once processes are in place, examine if your business will do well in other areas across the nation. Some businesses depend on the local environment, like a river rafting business. Others depend on the specific demographics such as tourism, while yet others depend on the charm and pizzazz of certain individuals working at or running the location. There also may be local constraints that can affect your ability to expand outside of your territory. For instance, if you are thinking of franchising a store selling fireworks, you need to consider the various laws from state to state and even county to county.
If your concept is unique and repeatable, is it also profitable? Potential franchisees will be looking for a proven concept. Low-profit margins will scare investors off from the get-go. If you have consistently increased revenues year upon year you will catch the attention of savvy business people. If margins are low, learn How to Increase Profit Margins to make your business more desirable to potential investors down the road. In addition to numbers, investors will be checking your reviews. Are customers raving about your product, or is there something left to be desired? If people have asked you if you are a franchise or if they can buy into your business, it is a good sign that your business may be ripe for expansion through the franchise business model.
So, you want to franchise your business? That’s great. Make sure you have a unique and proven concept that is repeatable and let’s talk.
With different available routes to expanding your business, you might be thinking, “which path should I take?” Well, it depends on what you are expecting out of your growth, and how far you want to take your brand. When it comes down to the choice between growing organically or through franchising, there are some key points to consider.
Expanding your business can be a costly and time-consuming process. Just finding the right location at the right price can be a headache. To grow a business, an entrepreneur must have time to invest in this challenging search. Once the location is found, large amounts of money are needed to pay for the deposit and lease, store build-out, equipment and products needed to run the business.
While growing organically means you get to keep all the profits, it also means you get to foot the bill for all of this. Not to mention the tremendous amount of time and energy consumed in the process while still overseeing the operations at current locations (props to all business people who have grown this way!). Unless a well-trusted team and plenty of investors (or loans) are involved, this generally means one must expand at a slower rate since one person can only do so much.
In the franchise growth model, investors (franchisees) pay all the costs associated with each new location. What is in it for those who invest in a franchise? Franchisees get the rights to a turn-key business, with an easy to follow plan to guide the way. Everything is meticulously put into place; location requirements are set and expert realtors are ready to help; architects already have a plan to expedite; vendors are secured. As a result, a franchisee can have a new store up and running much faster and with less guesswork.
There are geographic boundaries to consider when expanding your business. What areas do you desire to expand into? How far do you want your brand to reach?
Organic growth often limits expansion to areas somewhat near the flagship location. This limited growth may be desirable for those looking to keep it local. But if you want to reach a broader market, franchising may be a better option. Once your brand is ready to launch, franchisees can open a franchise just about anywhere. This allows for greater brand recognition and larger scale expansion, often reaching a national or even global market.
Those expanding their business organically tend to get caught up in the daily hustle of opening a new store while tending to the needs of the already in operation location. Often much-needed processes are vaguely defined and sometimes just get put on the shelf. With a well-rounded franchise consultant and some dedication to detail, franchisors can protect their brand while providing clear instruction on daily operations and well-defined HR practices. All this is often overlooked by the daily hustle of organic growth, which can expose business owners to possible legal issues.
To grow organically one must hire and train a store manager and staff for each location. Training staff (and management) is not as easy as it sounds if you are expecting uniformity in each location. This will stretch your budget and time (and patience!) even thinner. With franchising, the franchisees often are owner-operators, eliminating the need to hire and train General Managers. The franchisees are incentivized to make a profit and turn their investment into success, inspiring more effort and eagerness to follow proven methods of operation. Franchisors provide training guides and mentoring to the franchisees, allowing for consistent training in all locations. The franchisees, in turn, provide and pay for the training.
Some entrepreneurs prefer organic growth. There are advantages to this style of growth, most importantly keeping all the profits! However, it ultimately requires a great deal of capital and time. The rate at which one may grow as well as the market reached, may be limited. Franchising may not be appealing to some, and others may think it is not a viable path to growth. However, if you are looking to expand at a faster rate and into a broader market, franchising can be a well-paved path for expansion.