Things Every Business Must Do Before Franchising
Whether you’re just starting your company’s expansion or you already have multiple corporate-owned branches, the decision to start franchising is a turning point for your business. Whether it’s a turn for the better or worse depends on how well you prepare.
1. Consider a consultant
Franchise consultants are experts who help businesses launch successful franchising programs. Their services can be costly – prepare for a price tag of $50,000-$100,000 – but they are a one-stop shop for all your pre-franchising needs, such as:
- Developing an expansion strategy
- Putting together manuals and franchisee training programs
- Assisting with your legal documents and registrations
- Preparing pro forma financial statements
- Creating marketing materials
- Preparing you for the franchise sales process
Finding the right franchise consultant is key. Some specialize in franchising within particular industries, such as food service. Most franchise consultants also act as franchise brokers. You want a consultant for whom assisting first-time franchisors is as important, or more important, than brokering sales. And beware of franchise consultants whose primary business seems to be training more consultants.
2. Acquire an attorney
You wouldn’t order pizza at a Chinese restaurant, so don’t trust just any attorney to advise you on the legal aspects of franchising. Franchises are subject to different laws and regulations at the federal, state, and local level than other businesses, so finding an attorney who specializes in franchise law is essential.
Look for an attorney who specializes in advising franchisors, as opposed to a transactional attorney who specializes in overseeing the buying and selling of franchises.
Franchise attorneys have document templates to help you create your FDD and franchise contract—the backbone of any franchise system. Your franchise attorney can also help you with:
- Establishing territory restrictions
- Noncompetition clauses
- Setting a franchise fee
- Determining the length of your franchise agreement
- Creating a tiered system for franchises of different sizes or located in different markets
- Registering with your state, if required
Beware: if you don’t have your manuals, training systems, and other infrastructure in place already, a franchise attorney is going to refer you to a franchise consultant, or offer you their own consulting services. Either way, you could end up paying far more than you expected.
3. An accountant you can count on
Like your attorney, you want someone with specialized franchise experience. Franchises are regulated by the Federal Trade Commission, and are required to prepare special financial statements. Completing these forms incorrectly can cost you tens of thousands of dollars.
A franchise accountant can help you put together a pro forma financial statement based on your company’s past performance. They can also give you advice about disclosing your earnings through an Item 19 in your FDD. It can be difficult for a new franchisor to produce an Item 19, but finding serious franchisee candidates can be harder without one. A franchise accountant can help you navigate this tricky terrain.
4. Get real about real estate
As a franchisor, you will have to find and approve locations that will suit the needs of your business. You may have to convince landlords that they want your franchise as a tenant. You’ll also want to help your franchisees secure favorable lease terms. Be prepared to negotiate the security deposit, especially. Commercial security deposits can go as high as 4-5 months’ rent, and if you’re talking about a $10,000/month space, that’s a substantial amount to put on your franchisee’s shoulders.
Most spaces will require some renovation, and your franchisee won’t be able to see any income until the buildout is complete. Most landlords will include at least a couple months free as a concession, but be ready to fight for it.
Every state has different turnaround times for permits and planning. Local landmark or zoning committees might also give you trouble over signage and storefronts. Do your research before a lease is signed, or your franchisee will run into delays that could bankrupt them before they even open.
5. Connect with your contractors
When it comes to the buildout of your franchises, it’s all about who you know. Hiring reliable contractors can be the difference between a new franchisee getting off to a great start or going bust in their first year. Every month that construction drags on could mean money out of your franchisee’s pocket.
You should be able to recommend construction teams, electricians, and plumbers to your franchisees. Tell your contractors that you’re planning to expand in the area, so doing a good job for you on one store could mean a lot more business. If you’re expanding to an area where you don’t have personal connections to local contractors, use your network to get recommendations before your franchisees sign a lease.
Becoming a franchisor can be a lot like becoming a parent—of quintuplets. Things will get chaotic, you may run into problems you’d never expect, and you won’t be able to be everywhere at once. But if you put in the preparation and surround yourself with the right support, it can be the most rewarding decision you’ll ever make.
(Writing by Anthony Lolli; editing by Amy Canter, Janina Energin, and Hendrik L Clarke) Anthony Lolli is the founder and CEO of Rapid Realty NYC, America’s first rental-based real estate franchise system, currently expanding nationwide.
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