An essential guide to making informed decisions and setting your franchise up for success
By Daniel McIntosh
As a business owner, you probably spent a lot of time preparing the tools you need to build a successful business. The same goes for converting your business into a franchise. Although the gears of your business are already turning, franchising involves some additional parameters that make it different from simply managing a small business. Here are five examples of things business owners should consider before franchising their business.
- Is this business scalable?
One of the fundamental traits that separates a franchise from the average small business is its ability to be duplicated in different markets. The ability to replicate results needs to be established before the business is offered as a franchise investment to others. In addition to being replicated, the business should also have established and clearly defined standard operating procedures. The system should be able to adapt its outlets to several locations, sectors, and perhaps even store types, while maintaining profitability. Moreover, if prospective franchisees have more touchpoints with your brand—inside a mall, on a street corner, or even as a smaller kiosk location—it makes it more recognizable and familiar. It also demonstrates the adaptability that’s a crucial factor in long-term growth.
- Do you have the finances available to franchise?
As franchising requires significant investments, from both the franchisor and the franchisee, understanding where the investment is going is as important as knowing where the funding is coming from. Although franchisees provide investment fees, there’s a significant contribution that potential franchisors must make before they even think about signing someone on. On average, the expenses can run from $25,000 to $100,000, covering everything from registering trademarks, developing manuals, and hiring lawyers, accountants, and other franchise professionals
to make sure your franchise is starting on the right foot. Business owners can research lines of credit or traditional loans to fund the development of their franchise systems but should be prepared to closely monitor their cash flow to ensure that the system has a fallback in case of decreased profitability.
Resources must go toward supplying marketing materials, developing training procedures, and hiring support staff. For example, if your business requires you to act as a dispatcher, like in some home- or mobile-based businesses, how do you intend to hire and pay staff when the number of calls coming in becomes too overwhelming to handle on your own? While franchisors must cover the costs of the development of the system, the franchise fees and royalties that come from franchisees can go back into the business. In addition, pooled money from franchisees, such as in the case of an advertising fund, gets cycled back into developing new marketing materials.
It traditionally takes new franchises two years to become profitable which can lead to stress in the early stages of franchising. Potential franchisors should have the leadership abilities to keep franchisees focused on the right goals through any issues in these early stages.
- Are you aware of regional legal requirements?
As a business owner, you probably have big visions for the future of your franchise system, with plans of expanding far beyond your own city, or even country. Regardless of how grand your ambitions are, every region has its own legal and regulatory rules that you as a business owner need to adhere to.
In Canada, six provinces—Alberta, British Columbia, Manitoba, New Brunswick, Ontario, and Prince Edward Island—have their own franchise disclosure legislation. Quebec does not have franchise-specific legislation, but the Civil Code of Quebec governs many aspects of the franchise relationship including contracts and the duty of good faith. The remaining provinces and territories must abide by traditional federal business laws and any fair dealing or ethical regulations in their respective region. Failure to regard the laws can result in legal challenges, extra litigation costs, or even tarnish your reputation as a business owner.
Franchisors are required to provide franchise disclosure documents (containing necessary information for potential franchisees) which detail the financial performance of your franchise system. This transparency is crucial, not only to ensure a harmonious relationship between franchisor and franchisee, but to keep you legally protected. The franchise agreement—a legally binding contract—is similarly important as it outlines the rights and responsibilities of each party. These documents are vital to protecting your interests and avoiding potential disputes down the road. When it comes to legal issues, consulting with experienced franchise attorneys and professionals will help ensure that your franchise operations are fully compliant with relevant laws and regulations.
- Can you provide effective training materials to new franchisees and their staff?
Maintaining a cohesive brand image and consistent service across units and locations is an essential part of growing a franchise system. That relies on having well-trained staff at all levels that can effectively promote the brand and fulfill its promises. Effective support and training are essential for ensuring that your franchisees can operate their businesses efficiently, maintain brand standards, and deliver a consistent customer experience.
Make sure the training materials you provide to your franchisees emphasize your brand’s values, mission, and standards. Training in quality control ensures that customers will have similar positive experiences in every franchise location they visit. Franchisors should create operations manuals to standardize training processes.
- Is there strong demand for your product/service in other regions?
You should determine whether your concept will thrive in new locations and if there is a sufficient audience to consume your products and services. Before franchising, business owners should evaluate whether the concept is suitable for the target market you plan to enter. Does your product fit with the local audience’s preferences and cultural dynamics? Entrepreneurs need to be aware of potential challenges and competition for their business. Investigating these measures before starting your franchise can reduce your risk of failure in the long run.
While this may seem like a daunting list, the reality of franchising is that you are not alone, and there have been many successful franchisors who started in the very same position as you. Before diving into the world of franchising, consider seeking guidance from experienced franchise consultants or professionals to ensure that you’re making informed decisions and setting your franchisees up for success. Additionally, remember that franchising requires effective communication from you to your franchisees. Communication, in the form of sharing best practices and regularly gathering feedback, is the cornerstone of maintaining a strong relationship with your franchise network.
The CFA’s Franchise Your Business hub is an essential starting point for any business owner looking to expand. Get all the information you need to scale your business concept to new heights at cfa.ca/franchiseyourbusiness.