So you want to franchise your business

AcknowledgmentsForeword by Fred DeLucaPreface CHAPTER 3 Not All Roses The Importance of Personal RewardsThe Opposite of Cushy Brand ConsistencyRecalcitrant FranchiseesLack of Funds Not t

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AcknowledgmentsForeword by Fred DeLucaPreface

CHAPTER 3 Not All Roses

The Importance of Personal RewardsThe Opposite of Cushy

Brand ConsistencyRecalcitrant FranchiseesLack of Funds

Not the Right Concept

In Summary

PART II

Moving Forward

CHAPTER 4 The Right Advisors

The Business of Franchising Is Unlike Any OtherFinding the Right Franchise Attorney

Finding the Right Financial AdvisorThe Real Estate Connection

Procurement Advisors and More

In Summary

CHAPTER 5 An Operations Manual Is a Beautiful Thing

The Value of a Professionally-Prepared Manual

A Lesson in ExcellenceYou Get What You Pay ForDetails, Details

The Best Marketing Tool EverGrassroots Marketing

Public RelationsDirect MailThe Goodwill Advertising BudgetThe Marketing Makeover

Women and MinoritiesInterviewing

The Review CommitteeCommunication

Once You SellFor Those Who Have Made Mistakes in Selling Units

In Summary

CHAPTER 8 Train ’Em

A Numbers GameCritical Training Tips Before a Franchisee Opens a UnitTraining Practices for the Franchisee’s Opening

Best Practices for Ongoing TrainingAvoid These Mistakes

In Summary

CHAPTER 9 A Perusable Website

That Global Presence

A Strong Website Entices both Prospective Franchisees and CustomersWhat Every Website Needs

In the BeginningThe Importance of Working with Someone Reliable

In Summary

PART IV

Keeping It Going

CHAPTER 10 Advertising, Marketing, and Public Relations

Ways to Build BuzzAdvertising

Internet AdvertisingMedia Coverage and Public Relations

A Word About CouponsGrassroots Strategies

In Summary

CHAPTER 11 Online Support

The Intranet as a Training Tool

A Matter of Convenience

A CaveatThe Intranet as a Communications ToolFor Franchisors

If at First You Don’t SucceedAnd Don’t Forget BrandingNot Enough by Itself

In Summary

CHAPTER 12 Fine-Tuning Your Program

Join a Professional AssociationBuild a Team

Consider the Company-Owned StoreIncrease Your Offerings

Evaluate, Evaluate, EvaluateBuild a Culture

Achieve Unit Economics

“Never Sit in One Spot”

In Summary

CHAPTER 13 Dealing with Recalcitrant Franchisees

Different Kinds of Wayward FranchiseesYour Options

Communications Go a Long WayAudits

The Tough QuestionsPrevent Issues Whenever PossibleManage Their Expectations

Reasons to Stay ProactiveWhen Not Everyone Is On Board

In Summary

CHAPTER 14 Best Practices of Top Performing Franchisees

Dr Casey Cooper, Franchisee, It’s A GrindLaurie Baggio, Franchisee, 1-800-GOT-JUNK?

Jim Roark, Franchisee, Mr ApplianceMitch Cohen, Franchisee, Dunkin’ Donuts and Baskin-Robbins

In Summary

CHAPTER 15 Creating an Exit Strategy

Bullish on FranchisingTiming Is EverythingThe Importance of PlanningGoing Public

Other Options

In Summary

APPENDIX A Franchise Disclosure Document

APPENDIX B Guidelines for an Operations Manual

Operations Manual

Table of Contents

APPENDIX C Franchise Resources

Experts

Glossary About the Authors Index

Of course, we would like to thank our families In particular, Harold thanks Felice, Ben,Michelle, Mike, and Nathan, for their support during his many long and arduous years working in thisvery exciting industry, and in loving memory of his sister, Arleen Kaye, a truly inspirational lady.Adina especially thanks Michael, Alyssa, and Ethan and her extended family for their enthusiasticencouragement.

Like most entrepreneurs, we made our share of mistakes We also learned a lot along the wayabout the sandwich business, building up a customer base, keeping vendors happy, selecting the rightlocation, and turning a profit We learned to think on our feet, take risks, and remain persistent Mostimportantly, we learned to think boldly For instance, we opened our second store, even though ourfirst store performed dismally, just to help build our brand And, like most successful owners, wecould not have achieved even a fraction of our success without the support of family—in particular,

my parents who, in the early days, helped with strategy and developed important relationships withvendors

While these ingredients were an integral part of our story, they were not enough to get ourbusiness to the next level Our goal was to have 32 stores by 1975, but by 1973 we were only halfway there So we looked at franchising

We knew very little about franchising at the time But I knew I needed a first franchisee Here,persistence helped In 1974 I asked my good friend Brian Dixon to step up to the plate; I even offered

to loan him the funds to get started Leery of the risks in starting the business, Brian at first declined,opting instead for his 9-to-5 job and the steady paycheck But when his employer went bankrupt a fewmonths later Brian suddenly found franchising appealing

Family members again helped us with our initial growth My aunt and uncle opened our first NewYork store in Staten Island, and my wife’s brother opened a store in Springfield, Massachusetts Withthat came calls from people seeking franchise opportunities, and Subway soon opened franchiselocations in other states

Franchising enabled us to get to 200 stores by 1982, and thinking boldly again, we set anextremely aggressive goal of having 5,000 stores operating by 1994 Many were skeptical of ourability to achieve that goal, but when you have a solid business system in place; when you have happyfranchisees who want to open additional units; and when customers become ambassadors of yourbrand, returning again and again with their family and friends, who in turn become regular customers

at other locations, business flourishes; aggressive goals can be met through the power of franchising.Today, with 85 percent of our 27,500 locations operating in North America, and a growth pace of2,000 units per year, we’re well ahead of our goal of having 30,000 outlets operating by 2010

Simultaneously, we are building the foundation for strong international growth in 85 countries, and, if

we build a good foundation, I believe that Subway will be operating more than 50,000 restaurantsworldwide by 2020

By definition, franchisees contribute greatly to the success of any franchise company Whilerunning their everyday operations they make observations and develop opinions, and it’s important toinclude them in the decision-making process in a constructive setting For instance, we havefranchisees who sit on local and national advertising boards to decide how to spend our advertisingdollars Not everyone in the franchise community would recommend this strategy, but it worked forSubway Many would argue that this level of decision-making should stay only at the corporate level.Yet some of our best ideas have come from our franchisees, including our “seven under six”campaign, promoting seven sandwiches that featured six or fewer grams of fat Another successstory? Jared Fogle, the Indiana University student who lost 245 pounds by eating two Subwaysandwiches a day After the media picked up Jared’s story, one of our Chicago franchisees suggestedcreating an ad campaign around it Jared’s now famous, and the campaign has helped positionSubway as a destination where anyone can find heart-healthy, low-fat food, at great value

Back when we first started, franchising was hardly the phenomenon it is today It has grown into avital economic force, enabling more and more people to achieve the American dream The number offranchisors seems to have grown tenfold since we began franchising in 1975 Even Ray Kroc, whogrew McDonalds into the brand it is today, was a relative unknown back then Things have certainlychanged over the years!

But some elements have not changed at all To make a go of franchising, you need capablefranchisees who understand your product or service, and know how to turn a profit You also needexpert advice

I first met Harold Kestenbaum in 1986 at the International Franchise Association (IFA)

Convention in Maui, Hawaii He was introduced to me by a writer for Restaurant and Institutions

magazine and we got to know each other during the few days of convention activities Harold hasbecome synonymous with franchising: he has advised some of the most popular franchises, from thestartup phase to the established Along with business journalist Adina Genn, Harold has written thisbook, with you, the small-business owner, in mind I wish I had had a similar guide when I first took alook at franchising The wisdom shared inside the pages of this book—spelled out by Harold, alongwith experienced franchisors who reveal their trials and tribulations—might have spared me some ofthose sleepless nights that entrepreneurs encounter whenever pushing on with something new

I wish you every success in your journey—this book will certainly help you

—Fred DeLucaPresident and Co-founder

Subway

Preface

ou don’t know what you don’t know We hear this expression routinely from franchisors, bothnew and established This is because in franchising there are so many critical details, fromdesigning the concept to competing for quality franchisees to training to marketing and much, muchmore Well, you see the picture: It is impossible to know everything

Which is why we wrote this book In our everyday dealings with new and “wannabe” franchisors

we realized where they struggle And in our regular dealings with seasoned franchisors, as well asthe franchise experts well versed in growing a system from the ground up, we recognized a passion tomentor So we decided to bridge that divide by collaborating on this book

This book is designed primarily for entrepreneurs thinking about franchising their business butwho are in need of critical information It is also chockfull of strategies that existing franchisors canapply to their system and help grow it to the next level It also provides useful insights for would-beand existing franchisees who want to know more about the industry so that they can be successful intheir endeavors For instance, Chapter 14, “Best Practices of Top Performing Franchisees,” featuressuccessful franchisees who talk about what drew them into franchising, and how they make the systemwork for them This chapter will also benefit franchisors who are eager to understand the traits of aquality franchisee so that they know what kind of characteristics to look for when awardingfranchises These qualities are important, for as this book demonstrates, in order to grow, a franchisesystem needs so much more than just a franchisee who can write a check

This book is also designed for consultants to franchisors who want to improve their service toclients, whether offering support in marketing, accounting, law, web design, or sales, and more

Once you immerse yourself in the world of franchising, you will see that it is a very tight-knitcommunity filled with a pay-it-forward spirit One person shares wisdom with another and, as aresult, that person, ever grateful for the spot-on bit of business advice, helps the next newcomer to theindustry Speak with experts in California, for instance, and they invariably recommend that you alsocall another expert in, say, Virginia, and to use their name as a referral Sure, this trait exists inindustries everywhere, but it seems especially prevalent in franchising We tried to capture that spirit

in the pages of this book, where you can read about franchising luminaries such as Fred DeLuca andothers who share their stories for the purpose of mentorship

Though franchising is not for everyone, it is a powerful method of distributing goods and services

to both consumers and other businesses In many ways, franchising is a system like no other Yes, youcan make a handsome living, but you will work hard for it And the successes are not only found onthe franchisor side In fact, sometimes, those on the corporate side believe in the system so stronglythat they become franchisees themselves In other instances, franchisees switch sides and join themanagement side of a franchisor Such scenarios are not unusual, and serve as a testament to thepower of franchising: When it works well, it really works

To work, your concept must be franchisable, meaning it can be replicated in a cost-effectivemanner and with consistency from unit to unit To build a powerful franchise you will need to build a

solid infrastructure That means choosing the right advisors to guide you in areas that will sometimes

be unfamiliar It means creating an operations manual that is easy to follow for both franchisees andtheir employees It means developing a business plan and a marketing plan It means learning how tofind the right franchisees to help you build your system, and training them so that customers enjoy thesame brand experience whether they are in Montana or Maine We cover all of these components inthis book

With a solid infrastructure in place and an environment where there is constant support—in thefield, on the phone, via email, and through online training methods that are available to franchisees24/7—you may be on your way toward building a regional or even national or international brand

We wrote this book for two reasons: We wanted readers to understand precisely what is needed

to start and grow a franchise company, and we wanted them to understand if they have what it takes to

do so—before they spent perhaps hundreds of thousands of dollars and years of their life pursuingwhat might be the wrong endeavor

In the following pages we examine the tools needed to start and grow a franchise Part I coversthe reasons for franchising Part II focuses on how to move a concept forward Part III discusses how

to roll out a system Part IV looks at how to keep a system going There is also an appendix thatfeatures the items contained in a Franchise Disclosure Document

As a franchisor you will need to take a proactive stance and keep the lines of communicationsopen with franchisees so that there are no surprises Sometimes this means dealing with franchiseeswho are no longer pulling their weight A difficult predicament, for sure, but not uncommon And,again, no one said franchising would be easy Yet the system offers rewards like no other Read on tosee how you can build what truly may be the next national brand, and one that enables hardworkingpeople who share your mission to become business owners

I

Why Franchise?

CHAPTER

1

The Benefits of Franchising

et’s say you own a gym Not just any gym, but the best gym in town—that’s what your clientsand trainers tell you You aptly named the gym “Fit,” and the moniker doesn’t just describe yourclients, it depicts your business The place is immaculate, well located, and features the bestequipment No wonder the place is humming from 6 A.M to 10 P.M

The gym practically runs itself Your trainers are the finest in the area and they know how to treatcustomers Your services are priced fairly Your programs are scheduled to attract early-morningcommuters, moms, kids, athletes, and the corporate crowd And your marketing plan works likeclockwork, enticing folks to keep their New Year’s resolution in January, shape up for spring inMarch, and take advantage of cool summer specials in June

One day, you have a vision You imagine your gym not just in your town, but in the next townover And the town beyond that And in the next county OK, throughout the entire region Suddenly,you envision going national, even international

For a moment, it all seems possible You could simply duplicate your fool-proof operation so thatthere are hundreds of well-located, immaculate Fit gyms not around the country, but across the globe.Then reality sets in Where would you get the capital? A bank? Maybe a banker would loan you themoney to open a second location But to expand rapidly? Not so likely Venture capital? That couldmean giving away the farm, which is what most early venture firms would expect in return Plus, youwould then need to contend with the hassle of someone looking over your shoulder, telling you how torun Fit Most entrepreneurs would not find that scenario all that appealing We know we wouldn’t

With franchising, people pay you for your proven business model Even better, they pay royalties But you will need a good

concept, good management, and the right amount of capital to be successful A franchise can be defined simply as an entity

that has three factors: 1) the grant of trademark rights, 2) a prescribed marketing plan, or significant control or assistance in the operation, or a community interest, and 3) payment of a franchise fee for the right to participate.

Then it hits you: Franchising By franchising, people will actually pay you for your tried-and-truebusiness model so that they, too, can run a profitable enterprise Even better, they will pay youroyalties based on their sales But does franchising really work? It has for more than 50 years and, forthe most part, successfully

The history of franchising is filled with success stories

Ray Kroc got his start as a mixer salesman whose California clients, brothers Dick and Mac

McDonald, ran a popular hamburger restaurant, McDonald’s Mr Kroc purchased therestaurant and transformed it into today’s giant operation through franchising.

Fred DeLuca, the Subway Restaurant founder, launched his business as a 17-year-old when a

family friend wrote him a $1,000 check so that he could open a sandwich shop in Connecticut.After opening 32 other Subways in the state, the company grew nationally and internationally

by franchising

Tom Carvel, the famous ice cream maker, launched his business with a $15 investment, selling

ice cream from a truck Later, as a refrigeration consultant and concessionaire, he taughtshopkeepers how to create his ice cream for a flat fee and a percentage of the sales—in otherwords, through franchising

William Rosenberg created Dunkin’ Donuts from a small “roach coach” in the Boston area David Sandler, founder of the Sandler Sales Institute, sold his sales training program to

Fortune 500 corporations as well as small- and medium-sized companies

Gary and Diane Heavin, founders of Curves for Women, grew a small chain of women’s only

30 Minute fitness centers in Waco, Texas, to an international chain of more than 6,000 suchfitness centers

Once you begin franchising, you have new responsibilities: namely, selling units and supporting your franchisees.

As the franchisor, you assume the role of working on your business, not in your business (a mantra made famous by Michael Gerber in his book, The E-Myth Revisited) If you are franchising

Fit, the gym we mentioned earlier, your job is no longer the business of running the individual fitnesscenter, but the business of finding others to open and run more fitness centers The beauty is that thesepeople are paying you perhaps hundreds of thousands of dollars in fees and between 4 percent and 8percent in royalties for that privilege—and that they are earning a living as well

In 2006, more than 300 small-business concepts adapted the business-format model offranchising, demonstrating a continued increase in the industry’s growth, according to a report issued

by the International Franchise Association’s Educational Foundation In fact, the 2000s have shownexplosive growth for franchising From 2003 through 2005, 900 new franchise concepts werelaunched in the United States

Quick Stat

Franchise companies added nearly 30,000 new establishments to the U.S economy in 2006, according to the International

Franchise Association.

There are numerous reasons to franchise your business You need additional capital, so why notuse franchisees’ money? You need people to open more Fit centers; who better than anowner/operator who has “skin in the game”? People who buy franchises have their own moneyinvested in the venture, and for this reason you know that they will work harder than if they weremere employees of your business But the rationale doesn’t stop there By franchising, you can opennumerous Fit centers before your next competitor pops up And, though you probably know nothingabout real estate in the next county or state, for that matter, in all likelihood your local franchisee hasin-depth knowledge of the area, or knows the real estate brokers who can assist in finding the rightlocation for his or her Fit center franchise

Then there is your exit strategy Let’s be honest here Owning one or two Fit centers is not going

to provide much of a retirement cushion for you However, going public, selling your chain of Fitcenters to an industry giant, or having a legitimate equity firm buy a majority of your stake, certainlywill Of course, not all franchise concepts make it big, or become huge successes, but if you are not inthe game, you are never going to find out, will you?

Franchising is booming today because it works You are, in effect, providing a turnkey operation

—with all the tools needed to immediately open for business—so that others can emulate your provenmethod and reap the benefits Though food is the fastest growing franchise sector, other segments aregrowing as well Fitness, education, and pet care are all thriving And specific categories within thefood sector are flourishing For instance, Tex Mex shows particular promise Other than Taco Bell,there are few Tex Mex franchises around—yet A savvy entrepreneur could do well by growing thisconcept regionally Indeed they are already doing so: the category now includes Del Taco, Chipotle,Baja Fresh, and smaller players are also getting into the action

Quick Stat

Fast food makes up 19 percent of the franchising sector, while retail and service businesses make up 11 percent each,

according to the IFA.

If franchising sounds like the right direction for your business, congratulations It is a terrificadventure, exposing you to people and potential you might not otherwise encounter But, like anyendeavor, you will want to move forward strategically, armed with an arsenal of knowledge andassisted by professionals who have been in the game for many years so that you have the appropriatetools to reap handsome rewards

IN SUMMARY

Franchising is a terrific way to turn a company into a regional, national, or international sensation But you will need a solid concept, adept management, and the financial resources to be profitable.

By franchising

People will pay you for your proven business model so that they, too, can run a profitable operation People will pay you royalties based on their sales.

Your concept can grow regionally, nationally, or even internationally.

You are creating a viable exit strategy for when you are ready to retire.

You are following a model that has worked for more than 50 years, for the most part, successfully.

be told, you are ready to charge full-speed ahead.

Not so fast There are many factors to consider first Ask yourself if

your business is truly franchisable

you can afford to do it

your personal life can handle the process

A “franchisable” business is one that is profitable, has the ability to be replicated, and has a documented system that is easy

for others to follow.

If you are used to taking entrepreneurial risks, franchising may seem like any other gamble Thinkagain Franchising requires a substantial amount of time, effort, and patience It also requirestraveling to franchisee locations to assist with site selection, training, and support Simply put, thosewho presume they can continue to run their own location and build up a franchise venture are in for abig surprise

For starters, not every business is franchisable You might argue otherwise Even if people arewalking into your place of business and marvel, “This is a great concept!” and beg you to sell it tothem, that is not enough of a reason to franchise your business Ask those prospects to show you themoney, and that is probably the last time you will hear from them

Keep your focus Franchisors who believe they can run their own location while also growing their franchise system invariably find they cannot do both well.

To determine if your business is franchisable, see if the following criteria apply to you:

Do you have a proven operation that is making money?

Have you been in business for six months or longer?

Do you have good management in place?

Do you have between $100,000 and $150,000 in capital to invest in the franchise program?

Do you have in place, or have access to the proper legal representation and advisors who are

well-versed in franchising?

Do you have the time to pursue the endeavor?

Will you find the endeavor fulfilling?

Let’s explore these criteria in greater depth

To determine if your business is franchisable, you need a proven operation Having more than onelocation would be preferable so that you can ensure that you have worked out any kinks, and to helpvalidate that your initial success was not some sort of fluke

There are, of course, exceptions to this rule There have been many franchisors who start out with

a concept, and even though they were not operating for any great length of time were still able tofranchise their business successfully This can be seen in the non-bricks-and-mortar franchise systems

—those where the franchisee can operate from a homebased business or that provide services asopposed to products

Nevertheless, retail-oriented franchises do need at least six months or even a year to determinetheir viability and whether another person (the franchisee) can make a go of it successfully It willtake at least this long, or longer, to make sure that everything works properly, that your product mix isright, that your marketing strategies work properly, that your pricing formulas work correctly for thearea in which you are operating A track record of at least six months is critical, and if you cannotaccomplish this, you are not ready Please do not think that if you are bent on franchising a retailconcept, like a restaurant, and do not have at least one prototype operating, that you can accomplishthe franchise model It is not going to happen, period During the course of writing this book agentleman called Harold and said he wanted to start a franchise program But, he said, he only had aconcept, and did not have an operating prototype Asked what the concept was, he said it was a pizzavenue This prompted a chuckle, because this poor soul thought he could join one of the mostcrowded spaces in the food industry without having an operating restaurant Harold told him that hereally had no chance unless he built a restaurant and actually operated it for at least six months or ayear He was another example of an overly optimistic entrepreneur who wanted to get into the game,but had no real chance of success

Don’t start franchising until you have at least one proven operation that has been in existence for at least six months to a year You will need this time to determine if the concept is viable, and if another person could make a go of it successfully It is very difficult, if not impossible, to attempt to franchise “a good idea.”

If you are not making money—or worse, you are losing your shirt—franchising is, in allprobability, not a good option Unless, of course, there is a good reason for losing money, such asperhaps operating out of a bad location Frequently, a bad location will doom any business, even afranchise operation The old saying, “location, location, location,” is vital for a successful franchiseoperation For example, if your restaurant is not in the right spot in a regional mall, it will make nodifference how many people shop at the mall, they may never walk past your site The same applies towhich side of the road you are located on If you are a breakfast/coffee business and your location is

on the return-home side of the street, you will miss out on a substantial number of potential customers.And if the parking is not easily accessible, you will lose additional customers as well

You will need much more than a good concept before you can safely deem your businessfranchisable Good management is vital If you have never previously operated a thriving business,

you may consider bringing in a person who has successfully operated a franchise chain In fact, youmight even consider giving this person equity in the franchise company in order to help you developthe franchise model Many good business people who have never experienced the franchise model trytheir hand at franchising, only to run into problems later Thus, it is often ideal to bring in a person,whether they be an experienced franchise director or an operations person from a franchise chain, towork with you to help you through the process of becoming a successful franchisor Retaining goodconsultants and other professionals is critical, but they are not going to be by your side each andevery day The hiring of such a person shortens your learning curve and gives you the competitiveadvantage that you will not have if you are not familiar with franchising.

There are at least 20 states with some type of franchise law that deals with selling franchises and a number of states that

have franchise relationship laws.

Additionally, you will need between $100,000 and $150,000 in capital to properly put togetheryour franchised business It will be money well spent It will enable you to hire a franchise attorney(an attorney who specializes in representing franchisors) who will create a Franchise DisclosureDocument (FDD) A document legally required to be given to prospective franchisees, it describesthe offering and the investment that the franchisee must make, and gets filed with a number of stateseven before you can sell franchises in those particular states (See the appendix for what makes up aFDD.) Franchising is a highly regulated industry; if you do not have the proper legal guidance, yourisk exposing yourself to serious trouble, trouble that could be very costly and time consuming torectify

The initial capital will also cover expenses to hire an experienced franchise consulting companywho will produce an operations manual, a brochure, a website to help you market your franchisedbusiness to both consumers and potential franchisees, and a franchise-knowledgeable accounting firmbecause your FDD must have an audited financial statement, which must be written on an annualbasis

You will need between $100,000 and $150,000 in capital to properly put together your franchised business.

There is no question that franchising requires a sizeable investment, which will not typicallyshow any return for up to three years while you are ramping up the system For many, this is a difficultamount of money to raise So weigh your options carefully Banks typically are not interested infinancing such speculative ventures Some would-be franchisors look to venture capitalists but keep

in mind: with VC money, you will have to give away a great deal of equity, including control of thecompany, at the inception Most likely, this is not what you want to do If at all possible, try to raisethe funds through family or a second mortgage on your home, or take it out of your existing business.Always keep in mind that if you are not successful, this money cannot be recaptured, and if borrowed,must be paid back Although rare, some newer franchisors who lack sufficient capital to develop aworthwhile franchise program will find an equity partner to fund the project That equity partner willtypically receive a percentage of the newly created franchise company The percentage can vary, butHarold has seen as much as 50 to 60 percent of equity given up for this seed capital It is veryexpensive money and many young franchisors are reluctant to give away so much of their company.Although not very common, some investors will agree to permit the franchisor to reacquire the equity

in the future, at a significant premium This is a risk for the franchise company since the premium can

be very high On occasion, and again, rare, Harold has heard of young franchise companies findingsomeone with a particular expertise in franchising also who can invest capital This is not commonand no company that has done this successfully comes to mind Since the end of this last recession,many venture capital firms have made a conscious effort to seek out new and emerging franchisors toinvest in or acquire They realize the enormous growth potential of the franchising industry, and havemade sizeable monetary payments to founders of franchises

Sometimes the cost alone is enough to deter an entrepreneur from franchising For instance, aninterior designer who specialized in Feng Shui received numerous calls from other designers eager tobuy her concept She thought that franchising was the way to go, so she called for advice Weexplained to her what the costs would be to start the franchise process She did not have sufficientmoney and passed on the idea The fact that she did not have the start-up capital does not underminethe integrity of her concept, but this particular would-be franchisor decided that the circumstanceswere not favorable

Aside from a solid concept, and the required dollars, you will need to dedicate yourself full time

to the business of building a successful franchise system Don’t let anyone tell you otherwise.Franchising is a lot of work, and you cannot grow a franchise on a part-time basis Franchising is aseparate business from the one you currently operate You need to be able to devote full time to thefranchise business and hire a manager to operate your existing units—it is virtually impossible to doboth As we said in Chapter 1, you want to work on your franchise business, not in it

Franchising is a full-time endeavor Do not make the mistake of thinking you can grow a franchise on the side You will be

pulled in too many directions and not only will your franchise suffer, but also, in all likelihood, you will have wasted your

resources.

Simply put, if you are growing a donut franchise, you cannot be up to your elbows in batter at yourflagship location and expect to find quality franchisee candidates and support existing franchiseeswith training, site visits, and troubleshooting to ensure a viable enterprise There just aren’t enoughhours in the day

Imagine yourself as a full-time franchisor, where your priorities are devoted to supporting thesystem This means you will no longer spend your days working on the business on which you basedyour system So, if you are an auto mechanic considering franchising, recognize that you will nolonger spend your workday fixing engines If your true passion is auto repair, franchising may notreally be right for you, no matter how franchisable your business really is We will examine thisphilosophy more fully in Chapter 3

Life can be complicated Perhaps you are consumed with the birth of a new baby, caring for aloved one, or putting all your resources into saving up for your child’s college tuition Maybe yourattention is diverted because you are dabbling in another career, such as selling real estate part-time.Plain and simple, if you cannot personally devote your time to building up a franchise, you may want

to set the idea aside

Perhaps this sounds harsh, but it is reality, anything less than your undivided commitment willinevitably cause your operation to suffer You want to make sure your franchisees are successful sothat they will “sing” to prospects about their experience If they are not singing, you will have aproblem Good prospects will walk away and your venture will not live up to its full potential You

want your franchisees to tell prospects that if they had it to do all over again, they would still buy thisfranchise, or that they want to buy additional units Those are the testimonials all franchisors strivefor.

A thriving franchise system requires a good concept, proper capital, and good management But ifthe good concept is all you have, you probably can find the other two Still, you must weigh youroptions—and the potential risks—very carefully

IN SUMMARY

Even if you are sold on franchising, your concept must be truly franchisable in order to succeed Before you move full speed ahead,

be sure that you have the time, money, and advisors to see the endeavor though Read as much as you can on the topic, and speak

to existing franchisors to understand what it takes to build a solid system.

To franchise, you will need:

To ascertain that your company is indeed franchisable.

Between $100,000 and $150,000 in capital to properly put together your franchised business.

At least one proven operation that has been in existence for at least six months to a year.

To devote yourself to the venture or it will never reach its potential.

To hire an experienced franchise expert who can help you get your company off the ground.

CHAPTER

3

Not All Roses

our concept is solid, you are properly capitalized, and you have put together a smartmanagement team But that does not put you on easy street Far from it Even franchisors whohave sold thousands of units run into their share of trials and tribulations

Put a group of franchisors in a room together and you might be surprised to discover the number

of challenges they face on a continual basis Here is what you will likely hear:

Grumbles about finding quality franchisees in a sea of interested, though in all likelihoodneither qualified nor properly funded, prospects

Growing pains from new franchisors who must adjust to the role of selling franchises, asopposed to their former roles running a business that sold a product or service

Complaints about renegade franchisees who think they can run the operation better on theirown rather than by following the tried-and-true methods that really work

Laments about the business lessons learned the hard way, including the level of handholdingnecessary to get a new franchisee up, running, and ultimately thriving

Gripes about discovering franchisees who are not functioning as owner-operators but areinstead, hiring incompetent people to operate their franchises while they continue workingtheir day jobs

Complaints about listening to franchisees who complain that they are not making enough or anymoney in their operations, and blaming you for the failure

In short, some people make the mistake of thinking that franchising a business will put them onEasy Street But, as you will learn from this book, nothing can be further from the truth; and whilecollecting royalties and enabling franchisees to make a handsome living is indeed gratifying,franchisors must align themselves with experts who can help them on the right path Otherwise, as oneexpert put it, “they wind up with so much litigation,” and perhaps in the end, with no business at all tospeak of

The Importance of Personal Rewards

Plain and simple, franchisors must build and protect their brand So it is important to understand theprocess, and decide if the process is, indeed, for you—ideally, before you invest your hard-earned

In so doing, they asked her about her financials and her operations, but no one ever asked her if franchising would be something she would personally find rewarding Now she wishes they had.

As Pollack became more immersed in the process, she discovered aspects that she did not like.

For starters, what had always given her the most pleasure at Not Just Art, and a major reason for starting the company, was mentoring young children and staff, helping them to discover and express their unique selves As a franchisor, rather than encouraging the franchisee’s creativity, she found herself having to make them into little clones of herself, which went totally against her nature and her purpose An added pressure was that if the franchisee didn’t do things the “Not Just Art way,” and their experiences as a franchisee did not work out favorably, it was her name that would be associated with failure.

There were also added costs associated with franchising besides the initial startup phase For instance, she discovered, once she got into the game, that there were filing fees in many states and ongoing legal fees to a franchise attorney who tracked updates within each state as laws changed.

“If I had paid $2,000 to an advisor” who would have provided a more honest picture about what it means to franchise, “instead of the $100,000 it took to put the franchise together, I would have been very happy,” she notes.

Pollack did sell a franchise unit, which helped her recover some of her costs, but she decided to cut her losses completely and get out of the franchise business Today, in addition to running her Oyster Bay facility, she also serves as a consultant to like-minded entrepreneurs who want to run a similar operation And, she says, there is a silver lining to the franchise experience: It prompted her to put together the training materials she now uses as a consultant; had she not pursued franchising, she might not have put those materials together Still, she says, she would have much preferred to find that advisor whose sole purpose it would have been

to give her all the necessary information to make a truly informed decision.

To the best of our knowledge there is no personality test available that helps would-be franchisees analyze if franchising actually coincides with their personal goals Personality tests do exist for franchisees who want to know if franchising is right for them or if the system is a good fit for them, and if so, which concepts would make the best match So, what is a would-be franchisor to do? Speak with other new franchisors and ask about their day-to-day experiences, their challenges, their likes and dislikes Harold holds franchise forums around the country where seasoned franchisors, as well as those just starting, speak openly and ask questions about best practices The International Franchise Association also provides opportunities to rub elbows with veteran franchisors and talk strategy Talk to as many experts as possible Generally speaking, they like to help.

Most franchisors agree that moving into the business of selling franchises is a tough transition.Like any field, it can have its highs and lows So the more you know about the difficulties, the betterequipped you may be at overcoming the challenges ahead

The Opposite of Cushy

Consider this perspective from Chris Goebel, chief operating officer of TheHomeMag, a franchised

advertising publication for the home improvement sector, headquartered in Cape Coral, Florida.When he asks people why they want to franchise, they often say it is because that regular royaltycheck sounds so enticing And enticing it is But as Goebel points out, a franchisor has to work hardfor it “You have to give them cause every day” to pay that royalty, he says That means providingconstant support and value-added services to your existing franchisees—as well as finding new andinnovative ways to attract additional qualified prospective franchisees

It is not unusual for nascent franchisors to feel frustrated in the beginning Many clients are impatient and look for instant

gratification, wanting to sell franchises as fast as possible What they often fail to realize is that franchising is a marathon, not a sprint: It takes time and patience Harold tells new franchisors that they will sell five to seven franchises in the first year they

are legally eligible to do so A good franchise attorney will slow franchisors down to control their growth—rapid first-year

growth is not only unrealistic, but also unsustainable.

Many say that in franchising they work harder than they ever have before So if you have an image

of lolling about, collecting royalties—forget it As Goebel notes, “You get out of it what you put in.”

Brand Consistency

One of the big challenges in franchising is maintaining a brand consistency Without consistency fromunit to unit, from neighborhood sistency Without consistency from unit to unit, from neighborhood toneighborhood, across state lines and regions, the product suffers Once that happens, the strength ofyour franchise declines Building the brand has become an essential byproduct of the franchisingmodel Brand awareness, to cite an often-used cliché, has become very important for franchisesystems and their success People who travel will, more often than not, gravitate towards a brand they

how good they may be Still, an E coli outbreak or rodent infestation—the kinds of incident to which

any restaurant franchise may fall susceptible—can really hurt the reputation of even the most standardbrand

Being a franchisor is truly hard work and the royalty checks must not be taken for granted Franchisees work hard and expect the franchisor to do the same.

PROFILE

ary Occhiogrosso is diligent about protecting his franchise brands, Naked Chicken, Ritters Custard, and Wall Street Deli, concepts that are headquartered in New York City, with units on the Eastern Seaboard, and new markets developing in the Midwest and Texas Occhiogrosso understands all sides of the franchise equation, having assisted in launching the original grilled

chicken concept known as the Ranch*1 franchise system with the company’s founders, as well as serving as a franchise consultant for launches of several national franchise brands A former Dunkin’ Donut franchisee during the mid 1980s, Mr Occhiogrosso also served on its franchisee advisory council and its advertising committee.

“There is nothing more important than the integrity of the brand,” Occhiogrosso says, citing the philosophy of the legendary Ray Kroc, who built McDonalds into the multi-billion-dollar operation that it is today Still, franchisees may unwittingly sabotage a brand

“for a host of reasons,” he says.

It cannot be said often enough: You cannot afford to let your franchise decline A thriving unit isthe most powerful way to sell those highly desired additional franchise units The more units you sell,the more potent the brand—and the more royalty fees you stand to collect As a franchisor, you are inthe business of building and expanding a system, and helping it to thrive So do not be surprised if thisnew role means being on the lookout for potential problems, and putting out lots of fires before theygrow unmanageable

Recalcitrant Franchisees

How can the actions of a franchisee cause harm to a brand? They may choose to build a location thatdiffers from the original plan without recognizing that they are adding unnecessary construction andoperating costs A franchisor must address such incidents early, before they become costly issues,Occhiogrosso warns Many profitable franchisors dedicate a consultant or employee whoconcentrates on the site selection and build-out process in the earliest stages, preventing suchproblems from ever happening in the first place

Other times, franchisees may doctor recipes, making up a menu item to please one customer, orbecause they are convinced that their new creation is “delicious.” What they do not understand is thatthe new item “may be so complicated that not every franchisee can make it,” Occhiogrosso points out

Or the item may contain high-cost ingredients that compromise the brand’s profitability structure Inany case, a franchise brand becomes diluted when a visitor can find one specialty in, say,Connecticut, but not in Pennsylvania

Of course, you do not have to be in the food industry to encounter franchisees that think they knowbetter than you, even after you have labored to develop a business model that truly works Take MarcShuman, president and founder of GarageTek, a national concept headquartered in Syosset, NewYork, that provides garage organization and storage systems Shuman has met all kinds of franchisees.Fortunately, the majority has followed the franchise model to the T But he has encountered his share

of franchisees who believe that their ideas will deliver better results than his method

“They will say, ‘you’re in New York, I’m in LA You don’t know my market,’” Shuman says.That kind of thinking can lead to trouble, especially when these franchisees go ahead andindependently hire an agency, for instance, to create a separate marketing campaign

There are times when it is appropriate to be flexible, but this is not one of them This kind ofsituation is one that threatens the very strength and fabric of your brand Remember, your businessmodel is already proven That is why franchisees buy into it They do not have to waste their time andmoney building a model that works You have already done that for them If they still want to strikeout on their own, they probably are not destined to become top performing franchisees, and maybeshould not be franchisees at all!

Still, as Shuman discovered in the early years of his operation, people may not take the franchiseagreement seriously Or for some reason, are convinced that their actions are acceptable Or, perhapsthey forget or do not understand that the franchise agreement clearly spells out how to handle allaspects of the business In fact, Shuman says, franchisees have gone ahead and spent tens of thousands

of dollars creating websites, advertising campaigns, and hats adorned with logos—all of which, ifimplemented, would have compromised the brand Shuman told these franchisees in no uncertainterms that such collateral materials may not be used under any circumstances, and if they were used itwould be in violation of the franchise agreement “We own the brand,” Shuman points out.Franchisees “are licensed to use it in our approved manner.”

Do not permit franchisees to use the brand in any way other than the franchisor’s approved manner Otherwise you will

compromise your system.

The Unhappy Franchisee

Often, franchisees who stray from the approved methodology believe they are doing so in the bestinterest of the company But there is another kind of potentially dangerous unit owner: the unhappyfranchisee Shuman says he wound up shutting down one individual who tried to sabotage theGarageTek brand by bad-mouthing Shuman and his management team, as well as criticizing thecompany Word got back to Shuman, who recognized that such slander could set a climate where “youcan’t expand and build a brand,” he notes In these situations, communications help Shuman dealtwith this person individually and was able to diffuse the potential crisis

Learning from the Past

Shuman says he is now experienced enough to recognize and discourage the potentially problematicfranchise candidate from ever purchasing a unit To uncover the gems, he has developed a rigorousscreening process

Lack of Funds

Most small businesses that fail do so because they are undercapitalized As a franchisor, you mustmake certain that the franchise company is well capitalized, and you must make certain that yourfranchisees have the financial wherewithal to stay in business In the beginning, it is quite possiblethat both franchisor and franchisee are pulling themselves up by the bootstraps—and if neither of you

is well funded, it can serve as a recipe for a disaster

In addition, franchisors may accept a franchisee simply because they can write a check; they see it

as a quick way to becoming that national brand—a very seductive notion Tempting as it is, do not getblind-sided—start working with the wrong franchisee candidate, and your plans to expand maybecome quickly derailed

Do not enter this venture if you lack the capital and make certain that your franchisee hassufficient funds so as not to wind up in over his or her financial comfort level Yes, this might mean

putting plans on hold while waiting to find a better-suited franchisee, but in the end, patience isusually a good thing.

Any new franchisor who believes that he or she will fund this venture with initial franchise fees is headed for failure There

are many new franchisors strewn all over the roadside who tried to fund growth this way It is not the way to succeed and not the way an entrepreneur should view franchising.

Not the Right Concept

It is entirely possible that the concept may not be the right one after all Consider the experience ofDina Dwyer-Owens, chief executive and chairperson of The Dwyer Group, a Waco, Texas,organization that owns six franchised companies providing residential and light commercial services

At one point, the company tried its hand at a karate concept that seemed very promising, given thecurrent fitness trend The idea was to provide a professional environment in which families wouldlearn Tai Kwon Do The concept, which was targeted at black belts, “did well for a period of time,”says Dwyer-Owens But, as it turned out, the black belts were “great at instructing” and not all thatbusiness minded “They wanted to teach,” she recalls “It was not a good business for us We’re good

at home service franchises.”

Franchising—even for wildly successful franchisors—is not always a rosy path So do yourhomework and proceed with caution

When considering franchising, make sure the concept works Prove it first before taking someone else’s money If you

cannot make it work, why would you believe that a franchisee could?

IN SUMMARY

If you have never franchised before, you will find that it is an industry like no other The rewards are certainly attainable, but you will have to work hard for them And because there can be so many unpredictable aspects—from wayward franchisees to challenging yourself in a way you never have before—you must analyze the next step objectively The best way to do that is by understanding what you need to know before you begin franchising.

Fortunately, there are plenty of seasoned franchisors and experts in the field who are happy to share their wisdom so that newcomers can succeed Throughout this book, we will continue to examine the strategies of experienced franchisors and other experts so that you can avoid mishaps and approach franchising proactively rather than reactively: As anyone who has run a business knows, a proactive entrepreneur is much more likely to grow an organization, while the reactive business owner spends far too much time putting out fires.

Would-be franchisors must bear in mind that

they must be 100 percent satisfied that their system works before selling a single unit.

they will work very hard for the royalties they collect.

they must be patient and sell only to those franchisees who are indeed truly qualified.

both the franchisor and franchisees must be well funded or the system as a whole will be on shaky ground.

they must make sure that franchisees follow the system precisely or risk compromising the brand.

II

Moving Forward

CHAPTER

4

The Right Advisors

nce you decide to franchise your business, the hurdles may seem overwhelming Take ourexample of Fit, the gym described in Chapter 1 Suppose you’ve done your due-diligence, anddetermined that this business is franchisable Now the real work begins There are all kinds of factors

to consider Going forward, for instance, you must comply with existing franchise laws This maycome as no surprise, but compliance can be more complicated than expected For instance, did youknow that franchise laws differ from state to state? A general practitioner would never know what thecurrent state of franchise law is In fact, when would-be franchisors opt to meet with non-franchiseattorneys, the advice they receive is generally incorrect, often so wrong that it puts the potentialfranchisor in jeopardy

Why seek out a franchise attorney? General practitioners typically know nothing about existing state and federal franchise

laws Some attorneys even claim they are franchise attorneys because they have represented one franchisor or franchisee, but

in reality they are not knowledgeable about various franchise laws If you needed open-heart surgery, would you select a

surgeon who has done five or six, or one who has done 500? The same axiom applies to selecting a franchise attorney.

When it comes to finding qualified franchisees—another hurdle to overcome—well, join the club.You will find yourself competing with literally thousands of other concepts to attract would-befranchisees who have the money to invest and the will to follow your business model to the T

To franchise properly, you will need the following advisors:

A franchise attorney who understands the model as well as federal and state franchise laws

A franchise consultant who understands how to grow a system, create documents, sell units,and more

A financial expert who understands the particulars in franchising so that you comply withregulations

A real-estate consultant who helps you with site selection and realtors so that your brandenjoys a positive impact

You will also need to ensure consistency from unit to unit, in order to effectively protect yourbrand Overwhelming? Absolutely You are bound to make mistakes—most entrepreneurs do But, ofcourse, the fewer the slip ups, the stronger the footing for your firm This is why it is critical to planyour franchise strategically To do so, you will need a host of resources In this chapter, we will look

at what kind of resources can help you start and grow your system, as well as the mindset needed to

succeed in franchising.

The Business of Franchising Is Unlike Any Other

There is one rule of thumb in franchising that cannot be stressed enough: When you begin franchising

a business—whether it is a pizzeria, a bakery, home health care agency, or other enterprise—yourfocus changes As we have mentioned earlier, if you are franchising a pizzeria, for example, you are

no longer in the business of making pizzas You are in the business of franchising—a theme that bearsrepeating because franchising really does require an entirely new mindset and a different set of skills.For instance, you will need the guidance of experts who are not only well versed in the latestlaws but also with deep expertise in accounting practices as they pertain to franchising You willneed advice about how to procure resources, leverage marketing tactics, and in some instances, scoutreal estate and design and construct sites on a larger scale—a scale that you most likely have neverworked with before

Franchising is a business unto itself, so do not think that you can effectively run both your existing operation and your

franchise company Instead, hire a manager to run your operation so that you can concentrate on the franchise company.

Failing to do so will inevitably lead to failure.

Of course, many of these initiatives will not come into play in the initial phases of methodicallyplanning a franchise system In the beginning, you likely will not be running to scope out sites withone new franchisee while also trying to the balance training of another In fact, most would-befranchisors are not capable of handling an onslaught of new franchisees at the very beginning, and noknowledgable advisor would recommend large-scale growth in the early stages Still, it is alwaysbeneficial to understand what to expect in the future so that you can plan for growth This is criticalbecause if you have franchisees but do not have the appropriate infrastructure to handle them, it canlead to disaster Franchisors who fail to anticipate rapid growth invariably find themselves in serioustrouble because they cannot handle the training responsibilities nor can they assist new franchisees insite selection, in-store training, and so on

Advisors Help You to Stay Focused

The kinds of experts you will come across are generally fee based and will initially meet with you at

no cost However, they usually will require a retainer to begin the process; no reputable firm willwork on a commission basis Unless you already have in-depth experience in franchising, it isvirtually impossible to master all its complexities on your own—even the most seasoned franchisorscannot; there are just not enough hours in the day Try going at it alone, and in all likelihood, you willquickly find yourself pulled in too many directions

Simply put, you cannot afford to lose site of the big picture—growing your franchise Too manyconcepts have been undermined because the franchisor was distracted from running and nurturing anoperation, and keeping it financially sound Also, you risk spending hundreds of thousands of dollars,especially in advertising, in an ongoing attempt to recruit qualified franchisees, only to discover yourapproach is not netting strong results At some point you will have to seek out the experts

Starting Off with the Best Foot Forward

A great place to begin is the internet Input key words such as “franchising,” “franchise consulting,”and “franchise attorney,” and you will discover hundreds of possible leads As anyone that has surfedonline knows, there are a mind-boggling number of experts and advisors from which to choose Youwill even stumble upon do-it-yourself templates that enable you to create agreements with franchiseprospects But a word of caution: There is a great deal at stake when starting up a franchise So besure to begin on the right foot, which means:

Securing a team of advisors from franchise consultants to lead generators to attorneys whohave a track record in developing a franchise from its earliest inception to a thriving entity.Avoiding canned documents, which may leave you vulnerable in the eyes of the law,potentially costing you big bucks down the road

Consultants: Honing Down Your Search

The primary reason you need consultants? Quite simply, you need your ducks in a row The legalstructure of your entity must be solid, your marketing material must comply with federal and state law,those qualified would-be franchisees must know about your franchise, and much, much more Mostentrepreneurs start by looking for a consulting company who will then recommend a franchiseattorney There are many franchise consultants operating within the United States, but not all arereputable or good at what they do Choose carefully

Franchising is an enormous endeavor Find consultants who can help you grow your operation A good place to start is the

Washington, D.C.-based International Franchise Association.

A good place to start is the International Franchise Association based in Washinton, DC This is avaluable resource for franchisors, franchisees and vendors, but when you come across promisingconsultants through the IFA put them to the test

Finding the Right Franchise Attorney

Many of the questions you ask potential franchise consultants should also be asked of any franchiseattorney you are considering You want to know how long the attorney has been practicing in thefranchise area; who are his former and current clients; who in his or her office will be working withthe client; and whether the fees being quoted are competitive Again, pay attention to your comfortlevel with this attorney Sometimes the little things, such as how quickly he or she returns phone calls

or emails, may play a big role in your working relationship

PROFILE

Mark Siebert is chief executive and founder of iFranchise Group, a Homewood, Illinois, company that has assisted Ace

Hardware, Amoco, and more than 30 Fortune 1000 companies, as well as more than 200 startup franchisors He says that a franchisor interviewing consultants must ask questions specific to the breadth of their offerings and the depth of their expertise He offers the following guidelines to consider before starting a project:

• Be sure you know who will be working on your project Be sure that your consultants have hands-on experience and are not just recent college graduates filling in templates.

• Be sure to understand the scope of the consultant’s offering If the consultancy cannot meet your full range of needs, your company may outlive the consultant’s usefulness too quickly This could result in the need to start the process all over again as you seek out and educate additional consultants—a time-consuming proposition and one you may not be able to afford Consultants should be proficient in all aspects of franchising—strategy, finance, quality control, franchise marketing, and franchise sales and implementation.

• Be sure that your consultant knows where consulting leaves off and franchise law begins There should be a clear distinction between the two roles Consultants who provide legal documents cannot represent you, and thus will have inherent and significant conflicts of interest The franchise consultant and the franchise lawyer should work hand in hand, but should not work under one roof.

• Be sure the consultant’s expertise is, in fact, a good match for you For instance, if your entity is a startup, you would be well served by an expert who has built organizations from the ground up, rather than a consultant who has only worked for larger franchisors.

• Be sure the consultant’s personality and fees are amenable You will be working closely with this individual so make sure the comfort level between the two of you is evident.

• Be sure you can trust your consultant Ask around for recommendations and ask your lawyer what they know about a particular firm You do not want to get mixed up with a firm that is not held in high regard “If someone is pushing you into franchising without asking detailed questions about your business, think twice about going into business with them.” Another warning sign: Consultants who pressure you into moving too fast.

• Be sure to check the references from your consultant to gauge customer satisfaction.

Siebert’s advice is sound, and the potential franchisor should attend the initial meeting with a list of these and other questions that they must pose to the consultant The reputation and experience of the consulting firm is critical to the future success of the franchisor.

Their Franchise Expertise—A Critical Factor

Quite often franchisors mistakenly believe that their business attorney—who may not be all thatfamiliar with franchise law—can advise them properly But there is a danger here: Attorneys wholack experience in franchising do not know the specific laws of their states or of the FTC ConsiderNew York, which has a franchise law that defines a franchise more broadly than any other state.Inexperienced attorneys may unwittingly believe that the way you conduct your business is not afranchise and that the New York law would not apply; but in the eyes of other states, you are afranchise and are required to comply with certain regulations This mistake can turn out to be quitecostly, particularly if you have sold a number of these “non-franchises” or “hidden franchises.” In

fact, some wind up offering ill-advised licensing agreements prepared by an unknowledgeableattorney; it is important to note that the law typically does not look upon such agreements favorably.Never select an attorney because he was your college buddy and may have handled one franchisematter or none at all It could be the biggest mistake that you make in the selection of the rightadvisors.

Ask your business attorney to refer you to a reputable attorney who specializes in franchising.But, while there is nothing more assuring than a personal recommendation, your business attorney maynot be able to produce a quality referral Take heart; there are other directions to pursue For

instance, Franchise Times, a trade publication, produces a “Top 100 Franchise Attorneys in

America” list Read the list carefully and see if an attorney strikes a chord with you Or visit the IFAwebsite and click on their Supplier Forum, which features a list of qualified franchise attorneys

How do you choose the right attorney for you? Consider location and industry specialty Manyentrepreneurs value working with an attorney who is close to where they do business Others preferretaining an expert in a particular industry—for instance, the food service industry

Technical Information You Need to Know about the Law

At this point, we think it is essential that you understand the legal complexities involved infranchising your business so that you understand the laws with which you will need to comply

Franchising is a highly regulated method of distributing products and services to the public.Regulation began in the early 1970s when the state of California passed the first state franchiseregistration law This law, known as the California Franchise Investment Law (CFIL), required thatany franchisor who wished to offer franchises in the state of California submit for approval his or herUniform Franchise Offering Circular (UFOC) The state would review this UFOC to make sure thateach franchisor complied with the requirements of the state law The result was that it was not easy tofranchise in California But it created a safe harbor for potential franchisees so that they would not get

“ripped off” by unscrupulous franchisors Such dishonest franchisors did, indeed, exist in the 1970s

In fact, CBS News’ 60 Minutes conducted an exposé of such a franchisor—Wild Bill’s Barbeque,

based out of Seattle The company was duping unwitting franchisees by selling them a franchiseopportunity that basically did not exist The principals stole the would-be franchisees’ money andgave them nothing in return Not surprisingly, such incidents made some people wary of the franchiseindustry But new regulations served to protect franchisees so that they fully understood what theywere buying into Such transparency can only serve to help all parties involved—but to fully comply,you need to understand the law

The Regulatory Push.–As stated, Wild Bill’s Barbecue was not the only franchisor behaving

unscrupulously, which is why the Federal Trade Commission (FTC) became involved In 1979 theFTC promulgated the FTC Rule on Franchising (16 CFR Section 436) This rule was similar to theCalifornia registration law in that it required franchisors to provide prospective franchisees with theUFOC or FTC Rule disclosure document prior to the purchase of any franchise Over time, similarlaws were passed in other states Be sure to check with your attorney before doing business out ofyour own state

This meant that a franchisor simply had to provide the UFOC to the prospective franchisee prior

to purchasing the franchise, but did not have to register or have the FTC approve it first The UFOC,which has since been amended (on July 1, 2007, with the rule taking effect July 1, 2008), provides thefranchisee with information about the franchisor, the franchise offering, the investment requirements,the obligations of the franchisor, information about the principals of the franchisor—which includeslitigation history, criminal activities, bankruptcies, trademark ownership—and other relevantinformation, including the financial statements of the franchisor and if the franchisor providesearnings claims (For more information about earning claims, see Chapter 7.)

The amended FTC Rule becomes mandatory on July 1, 2008, and all franchisors, old and new, must adopt this format or else not be in compliance—this is not something that a general practitioner or nonfranchise attorney would necessarily know.

The contents of this disclosure document, now called the Franchise Disclosure Document (FDD),can be found in the appendix of this book As a result of the 2007 amendment to the FTC Rule, therule has been updated and finally brought it into the 21st century and the world of cyberspace

Here again, if you do not have the right professional advising you, you would never know aboutthe rule change So, when an attorney says he or she has “done some franchising,” in all likelihoodthis is an attorney to avoid Instead, seek out an attorney who specializes in franchising You will gainthe protection you need now, as well as in the future when laws change and the industry moves indifferent directions

A Word about Prepackaged Programs

Sure, you can print out documents that seem to spell out your intentions, but more often than not, suchagreements are risky because typically they are not prepared by franchise legal experts and are

“canned” agreements Worse, most well-meaning franchisors who work from a template wind upestablishing their ventures illegally All too often companies take the short-cut approach and preparedocuments that are not compliant with state or federal law, and wind up getting sued by thefranchisees or becoming the focus of an investigation by the state agency charged with protectingfranchisees in their particular state In certain states these agreements may not hold up in court and insuch instances franchisors face significant monetary consequences—the court or state agency maythen order them to give back the franchise fees to the franchisee

Using a canned or off-the-shelf FDD will only lead to expenses that are bigger than anticipated because, typically, it will only

be a matter of time before you need the expertise of a true franchise attorney This expert invariably will trash the canned

document and implore you start from scratch You will then have paid twice for a document for which you should have paid

only once.

Where does this leave the franchisors? They will have given away trade secrets to the verypeople who are now their competitors, or they will be bankrupted by the amount of money they areordered to return In some of the worst-case scenarios, franchisors have been ordered to refund tens

of thousands of dollars to harmed franchisees, basically putting the franchisors out of business Thus,while you may be tempted to spend less on the upfront legal fees charged by experts in the field andopt instead to work with canned documents, in the long run you may pay dearly and even run the risk

of losing the very business you worked so hard to build The saying “you get what you pay for” is

ever so true when it comes to the preparation of franchise documents.

The Importance of Staying Informed

Once you select your franchise attorney and your documents are drafted, your work is certainly notfinished Though it sounds obvious, you need to understand the content of your agreements anddocuments so that there are no surprises later Further-more, it is not a bad idea to periodicallyreview your documents and agreements Unfortunately, people have a tendency to forget what theyhave signed and, as a result, are caught unaware by some of their legal obligations Because thefranchise relationship is an ongoing one you, as the franchisor, must know what the agreements andmanuals say and how you need to enforce them

All too often, entrepreneurs who elect to franchise their businesses do not read the documents that their franchise attorneys

prepared Many of the answers to questions are right there in the documents Think of your documents as an automobile

manual—most drivers never read it, but they all should.

Finding the Right Financial Advisor

You will also need to find a financial advisor who can help you grow from a small business entityinto a franchise Simply put, the accounting and tax rules for a mom-and-pop store do not cut it in theworld of franchising Franchisors must prepare audited financial statements on an annual basis, asmandated by the FTC Rule and the various state franchise registration laws State attorneys generalinspect these financials, as do franchisees and prospective franchisees, so you want to make sure youare in compliance It is also advisable to select an accountant who has prepared audited financialstatements for other franchisors This is no different from making sure you select an experiencedfranchise attorney In addition, different states have different income tax rules and capital investmentrequirements, so you will need an expert who is up-to-date with the various rules and requirements

Howard Tatz, a certified public accountant and a partner who specializes in franchisor services atRaich Ende Malter & Co., a regional accounting firm with offices in Manhattan and East Meadow,New York, says that, from the beginning, you want to protect the financial integrity of your company

“You shouldn’t give away your equity,” he warns “The potential value of the company is in youridea.” Often he points out, novice franchisors give away percentages of their company to people whohave more franchising expertise, thereby running the risk of not receiving the appropriate return oninvestment—it is preferable to wait until you have the financing than give away the equity

A financial expert who is well versed in franchising can bring added value to your enterprise.Tatz, for instance, coaches new franchisors to measure the financial performance of its franchisees bysomething outside typical financial records In the case of a hotel franchise, for example, he pointsout, “If we could review the chambermaids’ records of making beds, we should be able to determinethe occupancy revenue for the hotel.” In addition, he advises franchisors to protect their trademark,service marks, and other intellectual property so that unscrupulous people cannot take for free whatthe franchisor worked so hard to develop

The same principles apply to selecting an accountant as to choosing an attorney Find an accountant who has audited

franchisors before This expert will know the correct footnotes, how to recognize revenue, and more Selecting an accountant with franchising experience will save you time and money.

Tatz also recommends creating a separate company when franchising a business A separatefranchising company requires less time to audit than a company that combines franchising andoperational activities, and it exposes the franchisor to fewer questions by franchisees and stateattorneys general

The Real Estate Connection

If your concept requires a storefront or other separate location outside a home office, real estate willplay an important role in your franchise You will need to develop a prototype so that all yourfranchise locations maintain a consistent look and feel Equally important, they must offer optimumfunctionality

If your concept requires a physical location, you already understand what goes into selecting theideal site Retail franchises are especially concerned with foot traffic and visibility For otherconcepts, square footage and access to certain energy configurations or drainage systems may be key

Do you remember how much time you spent scouting out the right location for your business?Many entrepreneurs spend months—sometimes even a year or more—in search of the ideal spot toestablish their operation Imagine that two-fold, five-fold, and more as franchisees sign up and moveforward toward their own grand openings

Most heads of fledgling franchises scout out locations with their franchisees so that the real estateand business communities know they are planning to enter the market, and so that their configurationhelps them achieve maximum profitability But if you are new to a territory, you will find yourself at adisadvantage You will not know the area, its demographics, or zoning rules and regulations

However, do not imagine that you must go this route alone Most franchisors, of course, wouldnaturally start with a commercial real estate broker But you can take that initiative a step further byintegrating the broker as an extension of your team, says Andrew Moger, president and chiefexecutive of Branded Concept Development, a New York firm that helps restaurants and retailerswith their real estate, design, and construction needs This is good news for franchisors, especiallywhen money is a big concern “Working with brokers doesn’t cost you anything,” Moger points out

“They collect their fees from co-brokers or landlords.” And if they are good, and can prove to youthey can be unbiased and truly work in your company’s best interest, they can act as your point

person, or even as your de facto director of real estate.

Moger recommends working with brokers who know the local market and who specialize intenant—rather than landlord—representation Many brokers, he says, collaborate with both, but beclear from the beginning that the broker you sign up with will represent your interests

Ideally, Moger recommends signing an exclusive agreement with a broker This way, there is oneconcise and cohesive company message delivered to the market, which will serve the brand well.Otherwise, he says, landlords will get the sense that the franchisor does not have his act together As

it is, “landlords are skeptical about franchisees,” he says This is because landlords are not signing alease with a national brand, but rather “Joe Franchisee,” who may or may not have much of a track

record or significant assets

When interviewing a real estate broker, especially in the restaurant or retail sector, Mr Mogerrecommends

asking candidates about the differences in their local market versus the franchisor’s homemarket

asking if the broker represents clients who may pose a conflict If it seems there is a conflict,

go ahead and dig further If the conflict is by category, see if it is also by concept If, forexample, there is another Fresh Mex game in town, see if you have the same square-footagerequirements By posing the right questions, you may learn that there is no conflict at all

seeing if the broker is willing to share commissions (co-broker) so that you are not shown alimited number of properties

asking if the broker would visit your home location, even if it means hopping on a plane, inorder to better understand the operation and precisely what kind of site you are looking for.finding a broker who specializes in your needs Do not settle for an office or residentialbroker if you have a restaurant or retail need

ensuring they have the ability to provide demographic data needed by the franchisor

As your system grows, real estate becomes a critical component, even more so than at inception For this reason, you must

establish an in-house real estate department.

While this advice works for smaller franchisors, larger franchisors have their own real estatedepartments whose function it is to help franchisees select their sites

Procurement Advisors and More

Now that you are running a franchise business, your system can leverage economies of scale withgreater buying power Your franchise consultant should be able to help you select and evaluatevendors—whether it is buying food, equipment, paper, printing, or more Those economies of scaleare part of what makes franchising work and what prospective franchisees want to see As inselecting any other advisor, you will want to conduct due diligence—check references and be surethat your vendors are able to deliver under agreed upon terms so that there are no surprises later on

PROFILE

hile many franchisors swear by their advisors, others like to go internal when they can Consider The Crack Team, a St Louis-based business that specializes in concrete repair Bob Kodner, the company’s president, prefers to use his internal staff “We use no outside salespeople Our publicity is done in-house We’re controlling the brand,” he says “We have the right