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& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | AUGUST 17, 2000 SMART ANSWERS Betting Everything on the Franchise? Not every business is suited to the concept, nor is it meant for the do-it-yourselfer
Q: I run a successful auto-body shop and three related businesses -- car rentals, financing, and auto parts. I'm in the process of expanding my business and am exploring the possibility of setting up franchises. How does the concept work? -- Nelson Goncalves, Ontario A: Franchising is a sophisticated business strategy that, in the U.S. at least, is heavily regulated at both the federal and state levels. In the U.S., there are about 1,500 franchise operations and more than 320,000 franchised small businesses, accounting for nearly $1 trillion in annual revenues, according to the International Franchise Assn. (IFA), which has 30,000 members in 75 industries and 100 countries. Not every business is suited to franchising, and developing a franchise can be expensive, experts say. Owning and operating a company requires management skills that differ from those of a franchise operator -- and a different mind-set. Even your customer base changes: As a franchiser, your customer is not the consumer but the franchisee-entrepreneur who has invested in your concept. You are expected to help your franchisees select locations, negotiate leases, hire and train employees, secure equipment, establish a supply line, and market to local customers. In return, they will pay you a one-time fee, which in 92% of all cases is $40,000 or less, according to the IFA. The franchisees also pay you ongoing royalties for training and advertising that range from 3% to 6% of monthly gross sales. Setting up a franchise system is not for do-it-yourselfers. If you are serious about the idea, the first step should be a franchise-feasibility assessment on your existing business, says franchise consultant Michael H. Seid of Michael H. Seid & Associates in West Hartford, Conn. The assessment will examine such issues as marketing, operational strengths and weaknesses, broad geographic strategy, trademarks and trade-name issues, training requirements to transfer operational knowledge to your franchisees, sources of franchiser revenue, and potential for return on the investment. Seid says the assessment will tell you whether franchising is for you or whether you are better off with a different expansion plan. If the answer is yes and you want to move forward, you will need a professional franchise consultant to design and develop your operation. Such consultants address marketing, management, operations, training, financial, and legal issues. "You must develop detailed operating manuals, training programs, franchise sales compliance programs, and marketing materials for your franchisees," says Seid. The key to franchising, he says, is continuity and uniformity. Legal agreements such as franchise agreements and disclosure documents will need to be drafted by a franchise attorney. Your consultant should be able to recommend one, or you can search the American Bar Assn.'s forum on franchising (www.abanet.org/forums/ franchising/home.html) for referrals.For more information, check out the Web site of the IFA (www.franchise.org). The ABA has a helpful page of Web links at http://www.abanet.org/forums/franchising/frlinks.html. Have a question about running your business? Ask our small-business experts. Send us an E-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.  By Karen E. Klein  | | |
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