by Harold Kestenbaum, Esq.
Before deciding to franchise an existing business it’s important to answer some key questions. Veteran franchise lawyer, Harold Kestenbaum, presents five tips that need to be considered before franchising a business.
Representing franchisors for the past 35 years, I have observed various degrees of franchise success. I have witnessed the successful, the mediocre and the failures. The question to ask is what sets the successful start-up franchises apart from the rest of the pack? While there is no simple answer, there are guideposts that one can look for when answering this question. In my book, So You Want to Franchise Your Business, I spend several chapters describing what a company needs to do in order to become a successful franchise company. Suffice it to say, there is not enough space on this website to give all of the details; however, here are five tips for those aspiring to be a franchisor.
- First and most importantly, you need to have an operable business. The notion that an idea can be franchised is not one that I advocate and one that does not make for a successful rollout. There needs to be an operating business model that the franchisee can see and touch. Try convincing someone to buy a yogurt shop franchise if you don’t have one in operation and no one can actually taste the yogurt! No matter how good a salesman you think you are, that is not going to happen.
- Second, remaining on the prototype theme, it should be operating for a minimum period of time. My recommendation to potential franchisors is that the prototype should be operating for a minimum of six months, however, one full year is more desirable. It is a tough sell to convince someone to buy your franchise if you only opened your business two weeks prior. Next, the prototype must be profitable. You should not consider franchising your business if you cannot earn a profit from it. This is a recipe for disaster. I had a client who sold franchises in a business model that was not thoroughly tested out and not a single franchisee made money, and ultimately, they closed. This is critical: nobody wants to invest into a money losing venture. The business must be capable of being duplicated and modeled as a franchise. It cannot be a one-of-a-kind operation, like a gourmet restaurant that requires unique hands-on control. If there are adjustments to be made to get the location profitable, then wait before launching the franchise program.
- Third, you need to have a capital reserve in order to roll out the franchise program successfully. Franchising a business is not an inexpensive proposition and you should not consider doing it on a shoestring. There are professional fees, attorneys (me), accountants, consultants and marketing people who need to be involved, and if you do not have a minimum budget of between $75,000 and $150,000, you could be headed for trouble.
- Fourth, although you are the driving force behind the franchise opportunity, you cannot do it alone. In fact, don’t think that you can operate your existing business and roll out your franchise program at the same time. It becomes overwhelming and impracticable. You cannot be in two places at once. Either you are running your existing operations, or you are running your franchise company, but don’t try to do both at the same time. If it means hiring a manager to run your unit, or bringing in a professional franchise person to run the franchise system, that’s what it will take to successfully launch and operate your franchise company.
- Fifth, you need patience. Franchise success does not happen overnight, and it may take a few years to achieve the success of a new franchise roll out.
These are my five tips. They may sound simple, but trust me, they are critical to the success of a new franchise operation. Here is a link to my franchise book “So you want to Franchise your Business” which may help you decide if you want to franchise your business.
Harold L. Kestenbaum is a franchise lawyer who has specialized in franchise law and other matters relating to franchising since 1977.
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