How To Franchise A Business - Strategic Planning & Management of Franchise Systems
By Franchise Foundations, APC - Kevin B. Murphy, B.S., M.B.A., J.D.
Franchise Attorney and Expert Witness
Franchise Attorney and Expert Witness
A company planning to franchise a business must realize it is entering a new business, offering an entirely different service (training & support) to entirely new customers (business owner-operators). This new business requires different skills, abilities and expertise. In the new business of franchising, it is critical to develop effective evaluation, documentation, training and consulting skills.
Entering a New Business
Since these new skills are rarely present within existing personnel, an outside franchise expert is needed to plan the transition. The first step involves determining whether or not a business can franchise, and if so, what needs to be developed. Next, strategic franchise planning is necessary to create a "blueprint" for successful expansion efforts. Experience shows that, just like a building, the foundation developed at the beginning will create lasting consequences affecting the relative success (or failure) of the entire venture. Legal (franchise offering circular, franchise agreements) and operational documents (franchise operations manual, franchise training program) are prepared and drafted and finally a franchise registration process is required in some 14 states, depending on which state(s) the company sells franchises. These phases are discussed below.
The Franchise Feasibility Phase
An indispensable step before any franchise development program gets underway is an analysis of the concept and business model. Has the concept been sufficiently proven in the marketplace? How profitable are existing prototypes or company-owned outlets? Franchising will not solve existing problems, it will only intensify them - and usually at a serious cost to franchise investors. Franchising should not be viewed as a method to raise capital, expand a business that has existing problems, or a way to get rich quickly. There must be sufficient profitability in the business model so that royalty and other payments can be made and leave the franchise investor with a sufficient profit. With a franchise feasibility analysis, a determination can be made about:
(a) whether franchising or licensing expansion ideas should be pursued, postponed or abandoned; and
(b) assuming a positive result in (a), what needs to be fine-tuned or developed from scratch for the franchise program.
Besides determining if and when the business can franchise, the analysis should also include providing guidance and direction so as much of the groundwork as possible can be done by existing personnel. This has proven to be a very effective approach and significantly reduces franchise development costs. If the feasibility analysis is positive, the other phases discussed below follow.
The Franchise Strategic Planning Phase
A successful franchise development program begins with a solid plan - a foundation for franchising. The long-term goal is to establish balanced, integrated, successful business relationships with qualified individuals who support the company's goals and image. Creating an enduring relationship requires a comprehensive strategy that addresses all aspects of the franchise endeavor.
The starting point is a detailed analysis that covers:
(1) identifying profile characteristics of who will be the best franchise owners for the particular business;
(2) competitive positioning to make the franchise stand out from the other 3,000+ franchise companies;
(3) geographic scope - where and when will franchises be sold;
(4) analysis of the company's organizational strengths and weaknesses relative to franchising;
(5) identifying the appropriate franchise organizational structure as well as staffing requirements and responsibilities; and
(6) structuring the franchise relationship for a balanced, win-win scenario.
What should emerge from this detailed analysis is a specific strategic plan and framework for guiding virtually all franchise efforts. Despite the long-term importance of the franchise planning step, too many emerging franchise companies enter franchising with no plan or planning - other than "let’s try and sell a lot of franchises." They rush through (or neglect entirely) the strategic planning process, thereby creating future franchise litigation land mines that are ticking franchise lawsuits waiting to happen.
Often, this is because they only utilize the services of a franchise consulting firm or franchise attorney, where little or no attention is paid to critical strategic planning, operational and organizational issues. Normally, these firms draft "boilerplate" franchise offering circulars, franchise agreements and franchise operations manuals based on a questionnaire completed by their client, who is presumed to have made all strategic decisions. The franchise documents are presented, along with an invoice and a handshake - hardly the ingredients for success in the new business of franchising.
The Franchise Documentation Phase
If the company has made doing a good job at the planning stage the number one priority, franchise documentation goals will be apparent. Proprietary and intellectual property assets (like operating techniques, customer information, recipes, formulas and methods) need to be identified and protected. A trade secret protection program is developed and implemented. The name, logo and tag lines should have been previously registered as trademarks or service marks.
Franchise operations manual and training programs are developed, often from scratch, to impart business operating skills to the franchise owner as well as ensure uniformity of products and services. The franchise operations manual and training program curriculum must be drafted with a particular focus. Certain topics, chapters and policies found in manuals for a company-owned chain, for example, are entirely inappropriate in a franchise environment, creating significant liability issues for the franchise division. The support aspect of the franchise relationship needs to be carefully considered and then structured.
Finally, and only after all of the above are underway, a Franchise Offering Circular (Franchise Disclosure Document), similar to a securities (stock offering) prospectus, is prepared by competent franchise counsel and registered with various regulatory agencies to comply with applicable federal and state laws. In addition, a franchise registration process is required before any franchises can be advertised or sold in those 14 or so states having a franchise registration requirement. Having one firm author, edit and review all documents is not only cost-effective - it also avoids inconsistencies that can plague the franchise company as franchise legal pitfalls in the future (see discussion below).
My twenty-eight years of experience has demonstrated that in order for a franchise company to get off to a good start, a heavy emphasis should be placed on strategic franchise planning to manage future franchise relationships. Then, before the franchise program begins, management needs training in how to effectively operate a franchise organization. At a minimum, the following programs should be in place before franchise marketing efforts begin:
1. Franchise Lead Processing System:
Two key considerations for all franchise companies engaged in franchise marketing are the careful screening of franchise applicants and adopting the proper media plan, schedule and budget. Only the cream of the crop should be allowed to join the franchise network. Eliminating applicants at the entry stage is far easier than waiting for inevitable and costly problems later on. An examination of franchise networks plagued by troublesome franchise owners (who often ripen into future lawsuits) shows a lack of planning and attention to this relatively simple concept. Given the unlimited personal liability risk inherent in franchising, companies neglecting this important concept, or those using franchise brokers, are simply asking for trouble.
Before franchise marketing efforts start, a company should adopt a customized Franchise Lead Processing System that includes instructing key personnel in:
(1) adopting the proper organizational structure;
(2) defining the appropriate profile characteristics of prospective franchise owners;
(3) developing effective interviewing techniques, marketing materials, procedures and checklists;
(4) using a series of tests and other measures to ensure that inappropriate candidates are disqualified before joining the franchise network;
(5) detecting (and then avoiding) red flags that arise in the franchise marketing cycle; and
(6) adopting the appropriate media plan, schedule and budget.
2. Legal Compliance Program:
A franchise lawsuit can result if inconsistent or misleading communications occur when a franchise is first sold. Defending any franchise lawsuit, even a frivolous one, can be enormous. Franchise companies involved in franchise litigation are shocked to discover they have fallen into a quicksand that swallows up time and money without limit. The cost of prosecuting even a "small" franchise lawsuit can easily exceed $100,000, and up. Exposure can run into the millions. It is almost impossible to avoid potential franchise liability unless a genuine program of education and instruction is conducted with marketing personnel as well as middle and executive franchise management.
An integrated Disclosure Compliance Program that specifies rules and expectations, manages disclosure documents and controls the dissemination of all information is absolutely essential. It is also one of the best investments a franchise company will ever make. For all of the above reasons, the use of franchise brokers is definitely NOT recommended. Their statements (or other actions) made to "close the deal" will make the franchise organization (and the personal assets of its officers) liable for violations of federal or state franchise laws. This also explains why the overwhelming majority of successful franchise organizations set up their own in-house franchise marketing department so that actions and statements made during the franchise marketing cycle can be monitored and controlled within the framework of a Franchise Sales Control System.
3. Franchise Sales Control System:
Franchise Sales Control is the other half of the entire compliance equation. While legal compliance specifies rules and expectations, franchise sales control is the mechanism for detecting gaps and inconsistencies. When detected, their causes can be identified and corrected before injuring the franchise effort. A Franchise Sales Control System should be designed with this in mind, and should include a variety of feedback mechanisms to monitor performance and retrieve pertinent information for review by management. This not only increases the effectiveness of franchise marketing efforts - it also greatly reduces the likelihood that sales personnel will deviate from established procedures in selling franchises. Finally, a well-designed Franchise Sales Control System creates a complete back up file for every franchise sold that will qualify as business record evidence in the event of a future franchise dispute. It also satisfies the legal requirement of various states that franchise companies maintain a complete set of books, records and accounts of franchise sales. Since most of the legal risk in franchising arises during the franchise marketing cycle, a comprehensive Franchise Sales Control System is the company’s best protection against the quicksand of franchise litigation.
4. Managing Franchise Relations:
As franchises are sold, the communication lines that develop between the parties will have a major impact on the success or failure of the ongoing franchise relationship. Controlling who is brought into the network through the steps outlined above is the critical first step. Once inside the franchise network, franchise owners must be taught to realize they are members of a system of mutually dependent outlets, each working for the better of the entire network. Developing an awareness of this concept early in the relationship and implementing a franchise feedback system will create a positive attitude, encourage innovative ideas from franchise owners, ensure timely royalty payments and prevent franchise relationship problems later on.
Copyright 1982-2008, Kevin B. Murphy
ABOUT THE AUTHOR: Kevin B. Murphy, B.S, M.B.A., J.D.
Mr. Murphy, a San Francisco franchise attorney is an internationally-known franchise expert, author, and instructor - known in the industry as Mr. Franchise. For the past twenty-eight years he has specialized exclusively in the franchise industry and owned a very successful franchise in the home improvement field. He has written over 30 publications, including four books on franchising and one book on trade secrets. He instructs franchise company personnel in best franchise practices and teaches franchise, licensing and intellectual property courses to attorneys. Mr. Franchise is a franchise attorney and Director of Operations for Franchise Foundations, a San Francisco-based professional law corporation.
Copyright Franchise Foundations, APC - Kevin B. Murphy, B.S., M.B.A., J.D.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.