🍟 10/9/2023 – Five Steps to Franchising Your Business

DEEP DIVE 

5 Steps to Franchising Your Business

So you wanna franchise your business? 

I get asked often how new entrants to franchising should go about this process. This is not a fully comprehensive guide, just the quick & dirty basics. 

Before you set off on this path of franchising your business, consider 3 things first:

  • This is not a get-rich-quick scheme, selling and supporting franchises is HARD and you likely won’t’ see any major return on your investment for 5-10+ years
  • Your corporate locations should be open and demonstrate the potential for a healthy return on investment before you begin franchising*
  • Your operations should be absolutely dialed in before you think to begin selling franchises – if you can’t transfer the knowledge of how to run your business then it’s going to fall apart

*Top franchises show profitability at ⅓ the high end of the investment, and sometimes better

Very rarely, there are exceptions to the above where it still may make sense to franchise your business. Note those are exceptions, not the rules! Assume you are not exception. 

In the event that you do check the above boxes, then here’s how I’d go about franchising my business… 

To legally register as a franchise with the FTC, get an FDD, etc. you’re going to need a lawyer. There’s plenty of attorneys out there that specialize in franchising. Some charge a lot more than others. 

I’ve gotten to know Adam Wasch who is a partner at Greenspoon Marder. He primarily works with emerging franchisors, is honest, and does things the right way. 

I don’t want to speak for his pricing, but other attorneys will charge well over $100,000 just to give you a cookie cutter FDD.

Whether you work with his team or someone else, you need to register as a franchise and get an FDD.

2. Competitive Analysis

Even if your concept is the greatest thing since sliced bread, you want to know where you stand in the pecking order. 

What are other franchises in your industry charging for a royalty? For a brand fund fee? What are the unit economics relative to yours (or are they even showing anything in item 19)? 

It’s good to understand these details as intelligent franchise buyers will evaluate multiple opportunities at once.  You may get asked about your competitors because of this, so you’d rather have an answer if your royalty happens to be higher than the brand offering a [seemingly] similar business opportunity.

3. Operations Manual

Similar to legal partners, this is an area you can quickly spend an arm and a leg on before you know it.

There’s a major company in this arena that starts out with a $100k+ quote for operations manuals….for the love of god, do NOT pay that amount. 

Attorneys like Adam Wasch typically have add-ons where they can offer this service too. 

Between FDD registration/creation, and operations manuals, you should be under $40,000 invested. Some will scoff at that number, but guess what, you should be scrappy in the beginning before you even understand how the market receives your franchise offering.

If the first few years go fantastic, and you’re selling franchises right and left, then great…you’ll have the funds to invest to create the world’s best FDD and operations manual. But on day 1, it’s overkill. And note that the companies stating why you “need” the worlds best FDD and operations manuals from day 1 also happen to be the same people who profit off of it (coincidence??!).

Also a side note – it’s 2023, savvy franchise buyers aren’t impressed by multi-hundred page operations manuals. Many brands use that as a point of pride, but to me it just shows how out of touch with reality they are. 

The whole point of a franchise is that operations are simple enough that you can train people in a matter of weeks to run the concept. Literally nobody is reading a 752 page operations manual.

4. Franchise Development Strategy

Think long and hard about this one. Many new franchisors think they’ll be able to sell dozens to hundreds of franchises like clockwork from day one. The reality is, you’re trying to convince people to make a multi-hundred thousand dollar investment (or more), and also a massive time investment that will likely dominate their “40 hour workweek” for at least the next 3-5 years of their life. Said differently, successfully awarding a franchise is not easy.

There a few basic things you should be doing from day one:

  • Create a franchise website and link to it from your consumer facing website
    • A simple “Own a Franchise” header in the navigation bar can yield surprisingly impressive lead results
  • Develop a franchise sales process – a little structure and tact with franchise buyers is needed
  • Define your target franchisee – if you don’t know who you’re looking to attract and what kind of franchisee will work best for your business, you may make mistakes and struggle to award franchises (or worse, award franchises to the wrong people) 

Outside of the basics, you have a few big decisions to consider about how to build out your development strategy over time. 

Broker Networks – some view them as a necessary evil. A quality broker can deliver many qualified franchise buyers to you, but because of the high commission structure, you as an emerging franchisor are left with very little capital from the franchise fee to reinvest in your support team, in that franchisees training and grand opening, etc.

Brands that go all in on broker networks (and by all in, I mean they attend their conferences, schmooze / wine & dine certain brokers to get them to give them lead flow) are banking on opening enough units quick enough to hit royalty self-sufficiency. 

Bottom line: if you aren’t well capitalized as a new franchisor, broker networks aren’t a good option.

Franchise Sales Organizations – FSO’s are different from broker networks as they are companies that are effectively your bolt-on franchise sales department. The good ones only work with a select number of brands, and they can be a huge benefit to new franchisors as you don’t need to pay for franchisee marketing, lead gen, development employees (that’s a big one as a good fran dev employee requires six-figure compensation). 

The kicker is they usually take ~50% of the franchise fee as well as a percentage of your royalties in perpetuity. It’s usually 15%-25% of your royalties (aka for every $100k in royalties you generate, you may be sending $15k-$25k to the FSO). Their contracts are also typically 5-10 years. 

Top FSO’s can create a ton of economic value for their franchisors, so royalties are a way they get to share in the upside if you end up getting acquired. I personally have no issue with FSO’s looking to align long term incentives via a minority royalty split, but there is definitely a limit on what is a fair amount. 

If you make the wrong decision here, it can cost you quite a bit down the road – but there are certainly ways to make this option work!

Internal Development – the last option (and in the long-term is the most ideal), is to do development in-house. You get to keep 100% of your franchise fees and royalties. However it is difficult to get the flywheel turning in the early days, which is why many brands opt for brokers and/or FSO’s. 

As stated earlier, quality development employees can also be more expensive than you can afford. However, giving an employee performance based compensation, and a bit of equity, can be a hell of a lot cheaper than paying out brokers/FSO’s. 

Note: If you’re an emerging franchisor who could use a boost but doesn’t want to give up your upside, reply to this email as I have a program in beta that is doing this!

5. Franchise Tech Stack

Lastly, you want to set-up your tech for your franchisor operations and development. Focus on keeping it simple, and setting yourself up for scale. Having a system in place from day 1 means you don’t need to train a bunch of franchisees down the road on a new software. 

A few areas to focus on:

  • Point of Sale: the POS system for your corporate store may work for 1 location, but make sure you’re using the best one for your business if you were to grow to hundreds of locations. Switching this down the road is a massive headache and can be difficult for your franchisee base
  • Franchise Management: DelightTree enables you to train and communicate with all your franchisees, and enables franchisees to train and manage their frontline employees. They charge per location, so you only pay when you grow your franchise. It’s a much needed modern solution to franchise management 
  • Financial Reporting Consolidation: Our solution at Krokit enables you to aggregate your franchisees accounting, point of sale, and banking information, becoming the financial hub for your franchise. You need standardized reporting to be able to understand the health of the franchise at large, and on a per location basis, so setting this up from day 1 sets you up for a culture of transparency and ensures data integrity (the longer you wait, the messier your system gets over time!)
  • CRM for development – ClientTether is a franchise specific CRM, but you can also use horizontal CRM’s like HubSpot, Salesforce, etc. The bottom line is, you want to be have a home to house all your leads, and set-up automated emails to stay in touch with each one

That’s my quick & dirty guide on franchising your business. If you have any questions, don’t hesitate to reach out to me by replying to this email!


FRANCHISE HEADLINES

Cookie Co. has hired Pamela Fazio as CEO as part of plans to continue growing the emerging franchise.

Fazio has previous experience in the food industry, having held positions as CEO of Duff’s CakeMix as well as president and CEO of Beard Papa’s. She also owned Fazio Restaurant Group in Arizona. Other senior leadership roles in Fazio’s resume include Papa Murphy’s International, J&A Food Service Inc. and Kahala Brands.

The new Cookie Co. CEO also specializes in creating strategic systems for rapid expansion which aligns with the franchise’s latest ambitions. Cookie Co. currently has 25 locations in the US and is projected to open another 25 branches this year. The franchise now hopes to open 100 locations within the next two years under the guidance of Fazio.

Port of Subs entering Colorado with 20-unit deal

Port of Subs, a 50-year sandwich brand founded in Nevada, has signed a deal to bring 20 units to the Denver area. Having recently been acquired by a Colorado-based private equity firm, Area 15 Ventures, the chain has set an expansion plan with Angad Singh, 21, spearheading the regional initiative. 

Singh’s immediate focus includes seeking potential franchisees to carry out the regional development agreement. The 20-unit deal will eventually bring Port of Subs to all of East Denver, specifically toward the Denver International Airport and down through the Centennial community. 

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