BWSmallBiz -- Franchising December 5, 2008, 5:00PM EST

The Franchising Way to Grow

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Roeber franchised the family business Steven Bloch

Klinger and Runyon have more than 850 franchises Steven Bloch

FIND GOOD ADVISERS

Many would-be franchisors hire consultants to help them think through the business plan and outline the details. Your best bet is to work with consultants with experience in your industry. You can search for one on the Web site of the International Franchise Assn., at franchise.org. Most consultants prefer to work on a retainer, but Shay says many will work on an hourly or project basis, particularly with new companies.

You'll also need good legal help. An attorney who specializes in this area can put together the franchise agreement and the franchise disclosure documents. The former spells out details such as the up-front fee, royalties, and other financial details. It also outlines what you must provide your franchisees, and exactly what you'll get in return. While many parts of the contract are standard, your attorney can help you add key contingencies. Flynn, for example, can specify which props can be used in photographs and monitor the final photos sold to customers.

The Federal Trade Commission requires that you provide prospective franchisees with a disclosure document containing a summary of the franchise agreement, background information on the corporation, financial statements, and details on how the company operates. "It's a 'warts-and-all' portrait of the franchisor," says Dennis Wieczorek, partner at DLA

Piper, a Chicago law firm. Some 14 states require franchisors to submit one before selling franchises in that state. The document needs to be updated annually, and also when there are significant changes to the company. If you haven't already, you'll also need to make sure the franchise name can be trademarked, and file for federal trademark protections.

As your attorney draws up the necessary documents, you'll be writing your business' operating manual. The goal? "If I got hit by a bus, someone could run the business smoothly," says Flynn. The manual must spell out the mundane—finding the right location, working with approved vendors, and pricing—as well as the idiosyncrasies that make your business unique. Flynn decided exactly what needed to go into each location, from the camera equipment to the M&M's in the waiting area, and spelled it out in a manual titled, "Now what? Everything You Need to Know to Open Your Store in 1,127 Easy Steps."

You'll need similar attention to detail. "The No. 1 cause of the demise of chains is lack of consistency," says Heidi Neck, an associate professor of entrepreneurship at Babson College. If the quality of just one location is subpar, that can hurt the brand across the board.

Even the most meticulous operating manual doesn't provide you with 100% insurance against bumbling or corrupt franchisees. That was a serious consideration for Country Place Living, an Irving (Tex.) company founded more than 25 years ago that runs assisted-living residences. In 2006 the company, then operating five homes with 40 employees, started franchising. "One of the things we really had to think about was whether we could keep our brand integrity and ensure that the quality of care was as good as at our corporate residences," says Cynthia Gartman, the company's president and chief operating officer. The company took many steps to maintain control over the brand, adding a clause to its franchise agreement that allows Country Place to take over an operation if anything goes seriously wrong. The $4.5 million, 60-employee company now operates eight company-owned residences and has sold three franchises.

CHOOSE WITH CARE

Of course, the best way to protect your company is to make sure nothing goes wrong in the first place. That means finding franchisees who understand your brand and are committed to running the business the way you've outlined it. In most cases, the one-time franchise fee will cover only your initial costs, plus training and support of the franchisee. Most of your profit will come from royalties, says Franchise Developments' Franklin. Flynn is charging a $45,000 fee and 6% in royalties. Franchisees also pay 2% of sales into a Whippersnappers advertising fund. But she doesn't expect the franchise operation to make money until at least 15 locations are up and running, which means she, like other entrepreneurs, needs to be careful about who she chooses.

While some franchisors hire brokers to match them with franchisees, many do the marketing on their own, using the trade show circuit, advertising in related publications, through their Web sites, and in their stores. Many of Anytime Fitness's franchisees have been clients or acquaintances of other franchisees. Orange Tree Hot Dogs was an established brand in Jacksonville with many loyal customers; some jumped at the opportunity to buy in.

As eager as Flynn is to sell Whippersnappers franchises, she is taking her time to find the right partners. "I want franchisees who are passionate about the concept, but capable of following a system," says Flynn. She turned away several prospective buyers before selling her first franchise in August, to longtime clients who are moving to Fort Collins, Colo. These people really "get" the business, says Flynn: They worked in the Bend flagship for a couple of months to "test drive" the studio before buying. Now they're sure it's a great fit, says Flynn, and they have a head start on the 1,127 steps it will take to open their own Whippersnappers Studio.

Back to BWSmallBiz December 2008/January 2009 Table of Contents

Gunn is a contributor to BusinessWeek SmallBiz.

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