Resources for Educators

Basics of Franchising A Business

While some of your students may be interested in one day buying a business and becoming a franchisee, others might have dreams of becoming a franchisor—starting their own business from scratch with a unique proposition, and building growth through franchising!

Franchising is a growth strategy. As a model, franchising allows businesses to expand through franchisee investment. Each franchisee’s investment provides the capital for a new location, and the franchisee becomes a motivated, local owner/operator who has a vested interest in seeing their business succeed. This allows the business to grow faster and with greater success.

Responsibilities of a Franchisor

Not every franchise system looks the same. While the franchise agreement will outline the responsibilities and obligations of the franchisor, each franchisor will operate a little differently.

Some key responsibilities of a franchisor that typically apply include:

  • Providing franchisees with operating systems and support services to help them grow their business effectively, efficiently, and profitably;
  • Continual evolution of the franchise system through research and development (R&D);
  • Brand advertising and providing resources to franchisees for their own local store marketing;
  • Protecting and managing the brand and its trademarks;
  • Ensuring consistency and quality standards are maintained by all franchisees in the system;
  • Providing training and ongoing support; and
  • Working with franchisees who may be struggling and coaching them on how they can improve.

Considerations for Becoming a Franchisor

There are many elements an entrepreneur must consider when deciding if they want to franchise their business. Starting a franchise system is different than starting a business, and while successful franchises operate across all industry categories and sizes of businesses, a potential franchisor will need to carefully consider whether the franchising business model is the right fit for their particular business or brand.

Here are some things a potential franchisor will want to consider.

The role of a franchisor is very different from that of a business owner. When you run your own business, your focus is on the day-to-day operation of that business and may be quite hands-on. The role of a franchisor, however, is all about giving franchisees the training and support they need to help them run their business.

Is the business a successful concept that can be replicated and scaled? A business that’s well suited for franchising must work in different markets and at a larger scale. Successful franchise systems come from a business with a proven track record of success and a concept that can be replicated in multiple locations and across regions. Because consistency is one of the hallmarks of franchising, if a business concept would be difficult to replicate, franchising might not be a good fit.

Starting a franchise system requires a lot of research and a lot of due diligence. This will also mean hiring the team needed to turn a business into a franchise, like professional support and additional head office staff. Starting a franchise system can be expensive, so it’s important to consider whether you can afford it. Some of the common costs associated with franchising a business include: hiring; providing franchisee training and support; developing operations manuals; creating marketing materials; and developing legal documents.

What kind of fee structure and financial model will the system have? The franchisor will need to determine what kinds of royalties and fees the franchisees will pay, and the financial model the franchise system will use. Some considerations at this stage are whether franchisees will be profitable when fees and royalties are applied.

What is the plan for growth? It’s necessary to have a plan for how the franchise system is going to grow. This will include a concrete idea of where the system is growing and who the target franchisee is, including a detailed profile of an ideal franchisee. This plan will help shape the franchisor’s franchisee recruitment strategy.

All of these steps are important to follow to build a strong franchise system. It’s important to note, though, that the process takes time: it may take several years to sell the first franchise, and it can take up to a year or more from getting a franchise lead to opening a franchise location.

Envisioning a Franchise System

For entrepreneurs that decide franchising is the right path for their business, it’s important to have a clear strategy of where to go. Before getting started, it’s important to have the following plans or statements:

  • A business plan
  • An outline of the brand vision, core values, and operating principles
  • The brand promise, organizational core competencies, and key targets

A franchisor needs to have a support system for franchisees, to help them through the key processes of opening their location. It’s important to consider how to guide franchisees through the application process, criteria for site selection, the construction process, purchasing and distribution, and marketing and promotions. This is an essential part of building out an operating system. Keeping track of day-to-day activities and finances will create and understanding of the detailed operations procedures that will be key to creating operating manuals and training programs for future franchisees.

Once the franchisor has developed a franchisee profile and recruitment materials, it’s time to think about how to expand. Here are a few formats that franchised businesses employ:

  • Single-unit franchising: In this model, the franchise agreement is between the franchisor and the individual franchisee. This is the most popular format for new franchisors.
  • Multi-unit franchising: This is another type of system expansion where the franchisor sells several units to a franchisee. Sometimes this is done by giving the franchisee right to a territory where they can open a number of units. This is also called ‘developmental schedule.’
  • Master franchising/sub-franchising: This is when the franchisor signs on an individual or company who takes on the responsibility of being the franchisor in a particular region or country. The master franchisee/sub-franchisor is then in agreement with each individual franchisee through sub-franchise agreements.
  • Area representation: This is another type of franchising where the area rep acts as a broker and has the right to market and support franchises in their territory. Franchise agreements are still signed between the franchisee and franchisor.

Getting a Helping Hand

Future franchisors will need to know all about the practical elements needed to franchise a business, and key to these considerations is assembling a team of professionals to offer support.

In order to franchise a business, a franchisor must have certain legal documents: a Franchise Agreement and a Franchise Disclosure Documents (if franchising in a province with franchise legislation—more on that in the Legal Aspects section). A franchise lawyer is essential to help create these documents and ensure they comply with local legislation. Along with these legal documents, a franchise lawyer can also help with other agreements like applications, leases and subleases, equipment leases, security agreements, and personal guarantees.

In addition to a franchise lawyer, an accountant, a banker, marketing experts, and franchise consultants are all important support service professionals that a franchisor would do well to consult.

Franchising a business is an expensive process, and it’s important for potential franchisors to prepare for the cost. Cash flow is one of the biggest concerns aspiring franchisors face.

Along with the support services listed above, there are many resources within the CFA that can help students that may be considering franchising in the future learn more about what it takes to franchise a business, including educational content on FranchiseCanada.Online and the virtual Franchise Your Business seminar, which is held several times per year.

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