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Establishing a Franchise Program

by Ed Teixeira

In a previous article I presented the key steps to be followed when evaluating a business for a franchise operation. Assuming that you followed my advice and the results were positive, the next step is to establish a franchise operation.

You should have an existing or pilot operation in place. This operation should be used to design your franchise program, establish your training and operations manual and use as a training site. When franchise prospect’s visit your corporate office you’ll have an actual location to show them. Be sure that you utilize the services of a franchise consultant or advisor so that your franchise program is properly constructed.

In order to be in the position to sell franchises and fulfill the basic requirements of a franchisor you need to have a minimum of $75,000 for the project. It’s possible to do it for a less however, to begin your franchise program you should plan on this amount as a minimum. Don’t make the mistake of having franchise documents done and then expect to be successful. There is much more to franchising.

Designing the Franchise Program

The first step in the process is to design the key components of your franchise program. This includes the initial franchise fee, ongoing royalty, territory size, key operational processes, advertising fund, grand opening program and other key components of what will become your franchise agreement. You’ll use the pro-forma financials and actual operations of your location as the basis for establishing these items. Contrary to popular belief a franchise attorney is not needed for this initial step. In fact a highly experienced franchise consultant can work with you to develop these items before “handing off” to a franchise attorney.

Completing the Uniform Franchise Offering Circular (UFOC)

For this activity you’ll need the services of a franchise attorney. Using the results of a questionnaire and/or meeting with your attorney and key items from the aforementioned exercise your franchise attorney will construct the franchise agreement. You and your consultant will provide key input for the business items and your attorney will provide the legal provisions that need to be in the agreement. The cost of a UFOC and franchise agreement will be in the $18,000 -$20,000 range or more! This doesn’t include the filing fees for various state registrations. There are 15 registration states which require that the UFOC be filed and where necessary conform to that state’s franchise regulation. It’s not necessary that the UFOC be registered in a particular state unless the franchisor offer’s franchises from that state or offers franchises to residents of a registration state. If a franchisor is operating from New York they must be registered in New York state but can’t sell to candidates in the other registration states unless the UFOC is filed in that state. Under this example a franchisor could still sell franchises in 36 states. Some advice, don’t have an agreement done until you’ve put your program together and have the capital to start off on the “right foot.”

Operations Manual and Training Program

A simultaneous step during the UFOC process is to write an operations manual and design a training program for your new franchises. This information must be disclosed in the UFOC. The franchise operations manual has a specific format and it will serve as the reference, instructional guide and procedural manual for your franchisees. You should use a franchise consultant or franchise trainer to perform this function. If you already have a manual, you can use your consultant to edit the manual to format it correctly.

You’ll need someone to do the training and you may choose to use your existing location as a training site. At the early stages of a franchise start-up many franchisors will use existing employees to perform the training. This may even include the founder of the company. Training should include operations, marketing and other important components of franchise operations.

Selling New Franchises

All of the work that you’ve done and the initial capital you’ve invested is to bring you to the point where you can start to sell franchises. When clients ask my advice for selling franchises from a start-up operation, my response is always the same. “It’s a function of the capital that you have available for the franchise sales process.” You’ll need to have a franchise response packet which is an information packet that can be mailed to franchise prospects. Be sure you have a web-site that can present your franchise opportunity in an attractive and effective way. Your franchise attorney will guide you in the legalities of using a web-site to offer a franchise opportunity. If you have a limited amount of working capital to devote to the sale of new franchises my advice is to consider existing employees or even a family member who may wish to be one of your new franchisees. Many clients with an existing business tell me that they have an unsolicited network of several people who would like to own a franchise. This can help you start your franchise program without expending a great deal of your capital advertising for leads.

If you have the capital to devote to generating leads for franchise prospects consider the following:

  1. Your existing web-site can be used by increasing traffic on your site
  2. Franchise internet sites
  3. Seminars
  4. Franchise handbooks or directories

You’ll need to have a franchise sales process which will include recording leads, qualifying prospects and working with candidates right up to the franchise agreement being executed.

There are a number of details that need to be completed before a company can start selling a franchise. The above provides the more important steps which need to be taken before becoming a franchisor. The total amount of capital to start up a new franchise operation including the proper staffing and advertising is approximately $150,000-$200,000. However, keep in mind that you’ll be expecting your new franchisees to invest anywhere from $75,000-$150,000+ so the amount I describe for your investment is reasonable.

2010 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com 

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