Franchising Proves Viable Growth Strategy for Many Entrepreneurs

11/30/2008 | Maryland Entrepreneur Quarterly

You have a good business and your customers rave about your product and service. Many of them, in addition to your friends and family, keep asking you when you are going to open other locations.

You know you have a good thing going, the desire to grow is there and you would like to earn more money (especially residual income that comes in whether you work or not). But you don’t have the capital to open another location, you don’t want to incur more debt and you don’t want the stress of operating and managing more employees and locations.

So, you wonder, “Is there another option to expand my business and earn more money without all the risk and stress of managing multiple locations?”

The answer is, “Yes.”

Thanks to the growing popularity of franchising, an increasing number of entrepreneurs are able to grow their businesses with less risk, less stress and less capital investment by becoming franchisors.

Broad Appeal

A growing number of wanna-be business operators are able to pursue their American dream by becoming franchisees. These prospective franchisees see less risk and a faster road to success through operating a franchise, in which they combine their own business acumen and drive with the franchisor’s “system” that should include a tried-and-tested product/service, step-by-step instructions and recommendations for operations.

It’s a win-win that is beneficial not only to the franchisor and franchisee, but to consumers as well. Since many consumers prefer to do business with a small community-based enterprise yet like the consistency of product and service quality that is associated with shopping at a “chain,” franchised operations often have broad customer appeal. This bodes well for the continuation and growth of franchising as a business model.

Take a short drive through any metropolitan area or just listen to the radio and you can’t miss the fact that franchised businesses are everywhere – from oil-change specialists and fast food restaurants to quick printers and IT support providers. Maryland companies that are growing through franchising include Educate Inc. (Sylvan Learning Centers), Choice Hotels (brands such as Comfort Inn and Quality Inn), ATL International (All Tune ‘N Lube car care centers) and Kiddie Academy (early childhood education).

Face the Facts

Now you ask, “Can I, as a successful business owner, make my business a household name through franchising?”

The first thing you must do, if you are considering franchising, is to answer these questions:

Can your business concept be easily cloned?
Will your business concept work in other markets?

For example, an accounting firm would probably answer “no” to the first question, since it basically sells the expertise and talent of select individuals. Yet an organic pet-treat bakery could probably answer “yes” to both questions since the process, recipes and “system” of doing business may be easy to share and replicate in various geographic markets populated with people who have enough disposable income to buy gourmet pet treats for their animals. So the pet-treat bakery probably is a better candidate for franchising than a professional service firm.

Once these questions are answered, the next “self-test” is to examine the consistency of your returns for at least three years, and ideally in three different markets. Whether you choose different target markets or different geographic markets with varying demographics (such as Columbia, Ocean City and Essex), this is a good test to determine if there is enough universal appeal to your business for others to be successful at it.

Put It on Paper

Assuming you meet these criteria and want to continue to explore franchising as your growth strategy, the next step is to analyze and document everything you have done and continue to do to be successful (marketing, management, operations, customer service protocols, etc.). And, while there are consulting firms that help business owners with this process of systematizing their operations (in order to create an operations manual that provides franchisees with clear instructions for startup and ongoing operations of the business), you can keep your costs down by starting the process yourself.

With your drafted “system” details in hand, the next step is to meet with a franchising attorney. According to the International Franchise Association’s web site, www.franchise.org, “It is important to work with an attorney who understands franchising, especially the antitrust laws, the trademark laws, the Federal Trade Commission Franchise Rule, and applicable state laws.”

The attorney will review your drafted franchisee operations manual and your unit-level financial performance information and should advise you as to the viability of your franchising dream. Assuming he or she says your concept is worth franchising, the attorney will advise you of the next steps, including securing a trademark protection for your business name and preparation of required documents – the franchise disclosure document, franchise agreement and registration forms that must be filed with various states’ governments before you can sell to any franchisees.

He or she will likely recommend an accountant to prepare the necessary audited financial statements, and may suggest a franchising consultant who can prepare or finalize your operations manual and assist with the development of the “sales” package to attract potential franchisees.

Once the marketing materials and operations manual are drafted, be sure to have your attorney review the wording one last time to protect you, as the franchisor, from as much liability related to your franchisees’ operations as possible.

Another consideration you will want to discuss with your attorney, accountant and consultant is whether you plan to go outside of the U.S. International franchising raises a host of different issues, including compliance with other countries’ business laws, duties and tariffs, and perhaps adjustments to the business system to account for transportation, language and cultural differences. However, if you successfully develop your franchise in the United States, then the rest of the world may await for your hot business concept.

David Cahn, Esquire, is founder of Franchise & Business Law Group in Baltimore (www.FranBusLaw.com) and can be reached at 410-347-9442. He has been recognized by Franchise Times as a “Legal Eagle” for three consecutive years.