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The dos and don’ts of creating a franchise business

The dos and don’ts of creating a franchise business

Adopting a franchise model doesn’t simply mean expanding the scale of your business. Here’s what budding franchisors need to know before they take the plunge

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Entrepreneurs are constantly looking for ways to scale their business and/or expand their profile by creating a new business. Creating a franchise out of a current business is too often top of mind – and the first choice – for the entrepreneur who wants to scale. The reality is creating a franchise actually means creating a new business, and – spoiler alert! – this may not be the best idea.

Before creating a franchise as a means for expanding, consider the facts:

FACT: One option for creating a new business is for entrepreneurs to start a franchise.

FALLACY: An entrepreneur needs an existing business to create a franchise.

Creating a franchise does not require an existing business.

When deciding on a business/ business model, you start from scratch. The same is true for creating a franchise. A franchise is a business in itself. A lot of people mistakenly assume creating a franchise is the decision to expand your business by means of offering extensions of your existing business – that has never been true, despite many franchisors and founders perpetually argue the opposite.

The truth is, a franchisor and/ or founder that made the decision to franchise, made the decision to start an additional business, and the additional business was the business of selling franchises. Arguably, the decision to start a franchise that replicates a model, industry, or system the aforementioned founder already created and follows, is an easier choice – seemingly, than creating an entirely new business model to franchise – as the effort to create the franchise will be significantly reduced. Having an existing business and successfully working business model makes for a more credible franchisor.

Important and often confused terms

Franchise: An authorization granted by a company to an individual or group enabling them to carry out specified commercial activities.

Franchisor: A company or individual that allows another company or individual to run, own, and operate a business to which the aforementioned retains all ownership of the rights to intellectual property, trademarks, and trade secrets.

Franchisee: The company or individual that opts to pay the company or individual a negotiated amount, plus additional ongoing amounts to use the name, trademarks, model, trade secrets, and intellectual property of the latter.

The term franchising is frequently misused grammatically. Implicitly franchising has multiple meanings. Grammatically, franchising is the present participle of franchise, a verb assuming many meanings largely due to misconception. Franchisees will improperly state they are franchising–franchisees are a franchised location of a franchise.

A franchisee is not franchising. People who work in the franchise industry will often say they work in franchising (grammatically correct, definitionally incorrect) – people who work as professionals in the franchise industry are franchise professionals.

Franchisors are franchising, and people who work for the franchisor are franchising. Franchising means supporting the growth of a franchise, selling franchises, and maintaining a franchise system.

Terms aside, a franchisor is an entrepreneur creating a business to sell to others. Even when a franchisor owns and operates 100 locations of the same business, the idea to create a franchise and sell franchises to franchisees is the idea to start an additional business.

“Having an existing business and successfully working business model makes for a more credible franchisor”

Before starting any new business, most people consider the risks, rewards, obligations, and a variety of other factors. Starting a franchise business means considering everything you would normally consider before starting a business and more. Franchising will require – in most countries – a higher level of accounting for the franchised business. It involves believing in, working with, and training people to manage your brand the way you intended, and creating, updating, implementing a system/method of operating a business.

Additionally, franchising creates a legal and ethical obligation on a franchisor to deliver to the franchisee the tools for success and, vice-versa, the franchisee to succeed while following the system and operations provided. All of the legal and procedural parts of the franchise business model are in place to protect both the franchisee (potential franchisee) and the franchisor. When every part of the franchise business model comes together, great relationships are formed, partnerships are built, brands grow, and people make money.

Ready to start a franchise? Here are some dos and don’ts to consider:

A FRAN-TREPRENEUR IS NOT AN ENTREPRENEUR

As a general rule, do not consider a franchisee or franchisee candidate a full-fledged entrepreneur – for lack of an official term, franchisees are fran-trepreneurs. A fran-trepreneur is looking for secured risk and is willing to pay for security, for a number of years. Fran-trepreneurs buy opportunities. Franchisors create opportunities, which means they inherit all the risks from conception to completion. Every franchisor should adopt this mindset before creating and selling a franchise.

DO: recognize the difference between an entrepreneur and a fran-trepreneur.

DON’T: expect a fran-trepreneur to have the same level of risk-taking, tolerance, stress, and handling skills as an entrepreneur.

TAKE YOUR CURRENT METHOD OF ACCOUNTING AND MAKE IT BETTER… A LOT BETTER

Accounting of a franchise business means people (customers, potential franchisees, auditors, government agencies, banks, and a number of other people who would likely not take interest in a non-franchise business) review finances with a microscope.

DO: find a knowledgeable accounting partner who understands local (and global, if that is part of the growth strategy) franchise accounting laws.

DON’T: assume a franchise business follows the same accounting as other businesses.

START A FRANCHISE BECAUSE YOU LIKE THE BUSINESS MODEL

Franchising for any other reason begs the questions: is a franchise the right choice? People often insist creating a franchise business will expand a brand or increase revenue. Though possible, the fact remains: focusing on those goals outside of creating a franchise business will accomplish the same outcome with less risk and scrutiny.

DO: start a franchise because of a passion for the franchise business model.

DON’T: start a franchise to increase revenue of a current business.

TEST THE FRANCHISE CONCEPT BEFORE SELLING THE FRANCHISE

A franchise concept needs to work. Test it with the first franchisee, or be the first franchisee; either way, ensure it works. Then familiarize the areas and the requirements of an area to make the same model work there. If there are areas it will not work, be aware of those areas and proactively avoid them.

DO: create a franchise that is successful and sell it in regions that the success can be duplicated.

DON’T: create a franchise hoping the concept will work. Creating a franchise business creates liability. It also comes with a higher level of responsibility and governance. To create a franchise is to create a new business. Becoming a franchisor is a multi-faceted business and a decision that should not be taken lightly.

THE AUTHOR

Ryan Bernal is co-founder of LAR Enterprise, an agency focused on helping businesses succeed.

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