If you’re a restaurateur, you probably flirted with the idea of franchising your concept. Imagine reaping the benefits of owning a large, national brand name restaurant. Best of all, if you execute the growth successfully, you’d have distribution so people nationwide and perhaps around the world could enjoy your food all while helping others to be successful restaurant business owners. There is no downside – or is there? Yup, there is a lot of information to know before heading down the franchise road.
The Miriam-Webster definition of the word franchise is: The right or license granted to an individual or group to market a company’s goods or services in a particular territory; also, a business granted such a right or license (2): the territory involved in such a right.
If you’re thinking about expanding your business to two or more locations, franchising is the fastest and least expensive way to grow your business, in the long run. When a business owner chooses to franchise, they are essentially deciding to use other people’s money to expand their business model. For the franchisee or the person investing in the rights to own and operate your business concept in their area, it’s a business with training wheels. When someone buys into your franchise, they have now have a partner and a coach who wants them to succeed. It’s a symbiotic relationship. You supply them with experience, training, and resources that you have used for success and they pay you a portion of their income in return. Your franchisee gets a fast-track to success without having all the trials and tribulations that are associated with starting something from zero. It’s a win-win for everyone.
So, if you’re thinking about franchising to expand your concept, there are some basic notions that you need to know. Most people do not realize that the franchise industry is heavily regulated by the Federal Trade Commission (FTC) of the United States government. Interestingly though, no laws or regulations exist that dictate benchmarks for a business to become a franchise. Simply said, any business can become a franchise. The regulations that are in place are supposed to protect the franchise buyer against possible scams. Thus, the majority of regulations only govern how franchises sell their units. For example, the government does not want franchise sellers to tell people how much they can make. Back in the 60 and 70’s, there were unscrupulous people who told buyers that they would be guaranteed to make money with their franchise and they didn’t even have a business to sell.
The most significant FTC rule that franchise companies have to abide by is having a Franchise Disclosure Document (FDD). This document must be made available, free of charge, to anyone who is considering investing in a franchised unit. The FDD makes for transparency of the company. There are 23 items that have to be disclosed in the document, and it starts as a boilerplate manuscript and may expand over time for each individual company as they learn the nuances of their franchised model. The document must contain information such as the exact costs to open and operate the concept, whether there is bankruptcy or any criminal convictions in the background of the principals of the franchise corporate offices. Any and all litigation, for the previous 10 years, against the company or perpetrated by the company must also be disclosed. In addition, a franchise must also list any units that have sold, transferred or failed in the previous two years. Because the buyer has all this information and data upfront, franchising in general, is one of the safest investments someone can make, in my opinion. Do you think that your restaurant has what it takes to be the next big, household name? To get started as a franchise from a legal standpoint, you need to begin with a franchise attorney who will develop the Franchise Disclosure Document with you.
Know the pros and cons of being a franchisor.
The advantages of being a franchisor are many. You get to expand your concept for the world to enjoy. You help budding entrepreneurs become business owners so they don’t have to hit the bumps and can avoid the bruises that you endured in the start-up phase. As your company grows, it can make a legendary impact on the franchised restaurant industry and possibly the world. Your current, single unit, today, could grow into an international brand name paying you financial dividends long into the future. Or, at a certain point, a private equity can buy your company giving you enough money to allow you to never have to work again or work only on your terms.
Well, that all sounds great, however, if it was easy, everyone would do it. The downside to turning into a franchise is that you won’t be operating your establishment any longer. If you’re a baker, you’ll have baked your last cake. If you’re a chef, you’ll no longer feel rush of excitement brought on by the hustle and bustle of being in a kitchen. Your new role in the franchise company, for the most part, will become sales and support. In addition, some restaurateurs have complained about losing control over the quality of food, presentation or customer service. You must have superior franchise systems to avoid this. For the first five or so years, it’s all about selling franchises. You will need to have a great, solid business model to be attractive to potential franchisees. In addition, you will need a magnificent sales team to sell your dream to others. As you grow, you’re not making money from the franchise fee as that will go mostly toward new franchisee acquisition and the support and training of the new startups around the country. It’s a long marathon to get to the point where the company is surviving on monthly royalties from your franchisees. However, when you get to that maturity state, all that hard work will finally pay off.
So, the question is not whether you want to franchise your restaurant or not. It’s a question of what you want your life to like for the next 5, 10, 20 years?
About the Author
Tom Scarda is a Certified Franchise Expert. He was the #1 franchisee of the year in one franchise concept and failed in another. The lessons learned from failure is what makes him an expert. Tom is the author of Franchise Savvy. He has helped more than 1500 people figure out if franchising is for them.
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