The Next McBusiness
Franchising may be a viable growth strategy for your business.

By Charles Zarter

If you have been operating a business successfully for several years and have maxed out the growth, you may want to open additional company stores, expand the business by franchising or a combination.

The Franchising Option
In the decision-making process, you must evaluate the profitability of the existing operation (the prototype) by closely analyzing financial statements over a number of years. One or two years of operation may not be sufficient to allow you to judge the long-term growth potential of the business. In addition, assuming the prototype has been profitable for a sufficient period, the costs of establishing additional company stores and expanding through continuing operation of these company stores may be prohibitive. Under these circumstances, franchising may be a viable alternative.
    To fully evaluate the franchising potential, you must consider a number of questions:
•    Does the prototype have a unique location or unique managers that, in combination, contribute to the financial success of the prototype?
•    Is the prototype successful because of other factors that are unique to the market where the prototype operates?
•    Can the prototype business be successfully and easily duplicated?
•    Does the prototype have a registered trademark?
•    Is the product or service susceptible to quality controls?
•    Does the prototype have trade secrets that can be protected?
•    Will the existing corporate culture of the prototype promote or impede the success of the franchise system?
•    Is the prototype’s current staff capable of conducting franchise sales, franchise training and administration of a franchise system?

Assuming qualified franchisees can successfully replicate the model at numerous locations, you must address other issues as well. For a franchise system to be successful over the long haul, it must depend on operational profits and not primarily on revenues generated from franchise sales. Franchise operators must be able to generate sufficient profits to warrant the payment of an initial fee and royalties, as well as provide a reasonable return on the franchisee’s investments in capital assets.

Special Management Needs
When you decide to expand by franchising an existing business, you must decide whether to use current employees or bring in new management to run the franchise operation. This issue is important because running a franchise is different than running the initial business, and the skills of existing management may not transfer to franchising.   Franchisees become another customer group for the franchisor, and any failure on the part of the franchisor’s management to recognize that franchisees have made significant investments in their businesses and are not employees of the franchisor will inevitably lead to conflict that could be damaging to the franchising operation.
Regardless of the type of product or service to be marketed through the franchise, several generalizations are possible. All franchisors will require management capable of:
•    Conducting franchise sales
•    Conducting franchise training designed to adequately implement the franchisor’s system
•    Developing marketing programs and advertising capable of driving the sale of products or services by the franchise system
•    Supporting and servicing franchisees

Franchise Sales
Selling franchises is a process that evolves as the franchise system matures. The relationship between original franchisees and the franchisor may differ significantly from the relationship between later franchisees and the franchisor. Likewise, the franchise system itself may change because of changes in technology, competition or sophistication of the franchisor.

Before selling the first franchise, the sales management teams should attempt to visualize how the franchise and the franchise system could evolve over time. Failure to do so may lock the franchise system into a method of doing business that stunts its growth potential and limits the profit potential of franchisees. The selection of an experienced franchise sales management team should enable the franchisor to achieve short-term sales goals without sacrificing long-term growth potential for either the franchisor or its franchisees.

Selling franchises is a process because of the laws regulating franchise sales and because it involves selecting the ideal franchise prospects. An experienced franchise sales team will be able to design a marketing program that attracts potential franchisees. Sophisticated franchise investors will cull out potential franchise opportunities, just as a franchisor may reject potential franchisees. The mutual “culling out” process may take weeks or months, particularly if the investment required of the franchisee is significant or if a franchisee already in business is being asked to change his or her methods of operation.

From a legal standpoint, the requirement that prospective franchisees be provided an offering circular along with completed documents prior to the execution of a franchise agreement and acceptance of any payments by the franchisor significantly eliminates impulse buying by prospective franchisees.

Franchising may be a viable growth strategy for some businesses, but small business owners should consider both the positive and negative effects that franchising might have on their existing business.

Charles Zarter is an attorney with Martin Pringle Oliver Wallace & Bauer LLP. He can be reached at (913) 491-5500 or .