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Green lights and stop signs to consider before franchising your business

Written by Kate Legg on Friday, 10 February 2017. Posted in Legal

Franchising is an incredibly versatile model but that doesn’t mean it will work for every business. Learning to read the signs can help you assess whether your business is franchiseable

Green lights and stop signs to consider before franchising your business

Franchised businesses come in all shapes and sizes, covering a wide range of industries and investment levels from a few hundred pounds to several million. Given the sheer variety out there, you would be forgiven for thinking that all businesses are franchiseable. Not so. Franchising can be a great way to grow a company but it’s not suitable for everyone and it’s important to make sure that it’s right for you. Here are five signs that show your venture is franchiseable – and three that will reveal it definitely isn’t.

Complete business system

The first sign that your company is fit for franchising is that you have a complete business system you understand inside and out. It’s not enough to have sold a few products to a few people. You must know every element of your business. For example, do you know who your ideal customers are, where to find them and how best to target them? Can you clearly articulate why your customers would choose you over the competition? And do you have a clear pricing strategy – are you aiming for high volume, low price or do customers pay a premium for something exceptional?

The business is replicable

Since the basis of a franchise model is that a network of franchisees all operate businesses that look, feel and operate in an identical way, it’s important the original model can be taught and replicated by someone else. If the business is one that depends entirely on the charisma and personal connections of the individual owner, then it may not be suitable for franchising.

Benefit of being a franchisee

When a person considers starting their own business, they will weigh up the benefits of operating independently against those of joining a franchise network. This means there must be benefits to being part of the franchise. Typically, these include use of a well-known brand, having a tried-and-tested business system and ongoing support and training from the franchisor. Would-be franchisors need to consider what benefits they can offer to the franchisee, particularly if the brand is new and less well known or if the business is relatively simple to operate and requires little in the way of support and training.

Enough profit margin

This one is key. There must be enough of a profit margin in the business for both the franchisor and franchisee to be able to take their share and still be able to offer goods and services at a competitive price. If franchise fees are too high, then the business won’t work for the franchisee; if fees are too low, then the franchisor won’t be able to provide all of the support and structure that’s needed for the network to operate effectively.

Relatively stable industry

A franchise is a network of identical businesses. If the industry is rapidly changing, it may be difficult to make sure all franchisees are changing fast enough to stay up-to-date. Generally, businesses based in stable industries are more suited to franchising than those based in rapidly changing ones.

While there are plenty of green lights that will let you know whether you can hit the accelerator on your franchise operations, there are also some serious stop signs you need to keep an eye out for.

You don’t have a business

This may seem obvious but only a business can be franchised – ideas can’t. Often entrepreneurs try to launch a franchise too soon before the core business has been established or they try to franchise the business idea. This won’t work. The only way to launch a franchise is by creating a functioning business that can be replicated. Franchising shouldn’t be considered until the core business has been operated and tested for at least a year.

You don’t own the rights that you want to franchise

In the same way that you can’t sell something you don’t own, you can’t franchise a business unless you have the legal rights to do so. Usually this means owning the trademark and other intellectual property in the business outright – although in situations where a master licence has been granted, the franchisor will be a licensee of the rights that they grant to their franchisees. There’s no legal requirement for a franchisor to register the trademark before starting to franchise but it is good practice. Even if a potential franchisor chooses not to register the trademark, they should still carry out trademark and other searches to ensure that no one else has any competing rights to the brand.

The business isn’t successful

People sometimes think they can save a struggling a business by franchising it but this is a flawed approach. Given the whole purpose of franchising is for franchisees to create a business that’s a copy of the original, if you try to franchise a loss-making business you’ll just end up with a network of loss-making businesses. Sooner or later that will come crashing down like a house of cards.

Franchising can be a great way for existing business owners to step up to the next level but anyone who thinks it’s a quick fix will be sadly mistaken. Creating a successful franchise takes as much time and effort as setting up the core business. But if your company has the characteristics described above and you’re prepared to put in the work and money needed, then it can be a great way to grow.

About the Author

Kate Legg

Kate Legg

After more than a decade advising other business owners, Legg has recently fulfilled a long held ambition and become one herself. Now the founder, director and CEO of Komerse, a legal practice specialising in commercial law and franchising, Legg is clearly practising what she preaches.

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