If you have a successful business and would like to grow it, one option available to you is to franchise your concept and sell franchises to other would-be entrepreneurs. Franchising potentially allows you to add revenue through moneys paid to you by purchasers of franchises and through royalties received by you from franchisees from their operations.
The franchise model makes sense if you have developed a business formula that you believe is “portable”. It also makes sense for businesses that are best run by “owner-managers” as opposed to professional managers (i.e. hired help). For example, a professional services business or a restaurant business are often more successful if run by an owner-manager. Other examples of such businesses that have been successfully grown through franchising include drivers education, fast-food outlets, coffee shops, computer repair outlets, car repair shops, gyms and training institutes. The logic goes something like this: A franchise owner will “care” more because they have a vested interest in the success of the business. Put simply, unlike someone who is hired to work for a business, a franchise owner has real skin in the game – they’ve put some hard-earned money down to purchase the franchise and they’ll want to make sure the business succeeds.
From a franchisee’s perspective, purchasing a franchise is often very appealing than starting a business from scratch. Statistacally, franchise businesses are more likely to succeed than new businesses. In addition, many would-be entrepreneurs like the idea of purchasing a “turn-key” business.
Establishing a Franchise System
There are generally four steps to setting up your franchise system:
- Organizing Your Business For Franchising
- Developing Your Franchise System
- Marketing and Selling Franchises
- Operating Your Franchise Business
In addition, not only are these four steps applicable when you start your franchise system, but as you operate your franchise system you will likely continually engage and revisit each of these four steps.
Organizing Your Business For Franchising
Your first step is to determine, and then establish, the appropriate structure of your franchise system. Note, the structure you will want in place for franchising is likely different than the structure you may have in place for your existing business operation. To determine the best structure for your franchise system, we recommend you consult with your legal and tax/accounting advisors. The reason being, the best structure for your franchise system will be the one that protects your intellectual property, limits your liability (including shielding your existing successful business from the liability associated with operating a franchise system), complies with all applicable legal and regulatory requirements and, wherever and however possible, minimizes your tax exposure.
Developing Your Franchise System
Once your “house is in order”, your attention will turn to developing your franchise system. Put simply, this is the package you will be offering to franchisees. What will they contribute? What will they receive in return? What are the rules franchisees must follow?
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