For businesses with a unique brand or business model, franchising may be a solution that allows rapid growth. Franchising is when you legally turn you business into a brand and allow people, or franchisees, to buy your brand. The benefit of franchising a business is that you maintain creative control of your product, but you are not financially responsible for the business of the franchisees. That means that if a franchise in a given location fails, you do not lose any money other than a stake of the potential profits that would emerge from the franchise’s potential business endeavors.
Instead of making profit directly from the business, as a franchisor you make money by selling franchises. Seems obvious doesn’t it? This has serious repercussions on your profit channels because your business isn’t your business, but your brand remains your brand. Therefore, you make profits on your business in the form of royalties and by selling franchise units.
Despite the fact that franchising seems like an inherently good idea for any business that wants to grow quickly, there are a few hurdles which must be considered before franchising your business.
A critical part of being a franchised business is selling your brand to franchisees. Franchisees agree to maintain the terms of your brand with respect to the products they sell, the logos they use and other desired legal terms, however they take home most of the profits of the franchise unit they operate. For a franchise to be successful, franchisees must be confident that their franchise will be successful; otherwise no one will want to buy your franchise. For this reason, a normal requirement to turn your business into a franchise is long term net profitability.
Product and business model
Franchising a business also relies on the fact that your product is sufficiently unique or your business model is desirable enough that people want to buy your franchise. If your franchise is not unique in a way that profits the franchisees, franchisees may open a competitor business that threatens your franchise. For example, franchising a coffee shop that only sells generic coffee in a generic format is not an advisable franchise business. You will not entice franchisees to buy the franchise because they can just as easily open a coffee shop with a different name and avoid having to agree to the terms of running your business. This can be done provided their competitor business does not violate trademark infringement law, which is normally avoidable if your product is not distinctly unique. If you do not have a unique brand or business model, you can still open a franchise if your business possesses name brand recognition.
Starting a franchise is expensive. For this reason, your business must have enough capital to finance your franchise. Although profitability is a key feature of starting a franchise, profitability does not necessarily equate to sufficient capital. Not having enough capital is not necessarily a no go for franchising your business; it just means you need to make other arrangements. This often means getting a loan. However, a loan will not be provided if you and your business do not have a solid track record. Income, net worth and credit scores will be considered for the purposes of acquiring a loan to finance your franchise.
In Canada, franchises must be registered with the Canadian Franchise Association (CFA). The CFA acts as a brand of legislation that monitors and registers franchises on the open market. In addition, you need to consider the legal terms of your franchise business which often demands that you enlist legal assistance. For instance, you will need to decide what legal terms maintain the integrity of your brand, whether the franchise will be sold in one payment or numerous payments and what stake of the franchise profits you will take as capital gains (i.e. % royalties).