Ready to Franchise? Here's What Your Business Must Have First

A business must demonstrate success before franchising. A proven track record of profitability, consistency, and the ability to replicate the model are fundamental prerequisites.

"While franchising is a powerful strategy for business expansion, it is not suitable for everyone. As a result, several key indicators point to franchising needs. They include viability, scalability, and profitability of the business,” says Jason W. Power of Franchise.Law.

You need to check if you are prepared to relinquish a certain level of control and provide ongoing support to franchisees. Most successful franchises are operated by third parties known as franchisees.

This article explores the essential criteria for setting up a successful franchise, potential challenges, and the support needed for franchisees to thrive.

When Should You Consider Franchising?

Knowing when not to franchise is as important as knowing when to franchise. Typically, when your business model relies on unique market conditions, a prime location, or personal expertise, franchising may not be ideal. Also, franchising might not appeal to you if you do not want complete control.

On the other hand, when a business runs under standardized procedures, has strong customer demand, and has scalable operations, you should seriously consider franchising.

Capital problems are one of the common reasons for franchising. Most entrepreneurs choose franchising when they cannot expand their business. So, they allow franchisees to come in with their funds and grow the business.

However, if you already have access to enough capital and a strong network, you do not need to franchise. You have to share profits with your franchisees. If you generate $2 million in revenue with a 25 percent profit when franchisees enter the frame, you may have to give a five percent royalty on the profit.

Another major reason for franchising is brand awareness. Franchisees provide an expansive network that helps with the market presence. By expanding through a network of franchisees, businesses can increase their market presence without bearing the full cost of new locations. 

However, you must be willing to invest in brand protection and quality control to ensure consistency across all franchise units.

Criteria to Meet Before Franchising

To build a successful franchise, you should meet these specific requirements. They include the following:

• Business Model: The business should have at least three profitable locations demonstrating consistent success, preferably in different markets

• Registered Trademark: A registered trademark indicates brand awareness in the locale. It is also crucial to prevent unauthorized brand use. Generally, this suggests the potential of the business to be successful

• Operational Manuals and Training Programs: Franchisees require clear guidance on business operations, product or service delivery, and customer experience standards. There should also be provisions for ongoing assistance, including training, marketing support, and operational guidance

• Strong Leadership Skills: Franchisees like experienced leaders run the business. If that's missing, they need to know the team is willing to learn and grow

• Enough Capital for a Start: Although franchisees invest in their own units, you are also expected to have enough capital to develop the franchise program and create marketing materials. They can attract franchisees in the future. But this is not a deal-breaker. After all, you are considering franchising partly because of a lack of capital. So you can still get franchisees without a lot of capital

• Legal Compliance: You must comply with franchise laws, including creating a Franchise Disclosure Document (FDD) that outlines fees, obligations, and operational details.

Before you step into franchising, you should assess your willingness to manage franchise relationships. The transition from direct management to overseeing franchisees requires a shift in mindset, prioritizing support, compliance, and brand consistency rather than direct operations.

How to Protect the Franchise System

Legal and operational protections are vital to franchise success. One of the most significant aspects concerns trademarks. Registering trademarks ensures control over your branding and prevents competitors from exploiting similar names or logos. 

You shouldn't stop at domestic trademark protection. You should also secure international trademark protection if you plan to grow globally. Beyond trademarks, you must take operational integrity seriously. 

Franchise agreements and operation manuals should clearly outline business procedures, marketing, and product or service quality expectations. Regular audits and mystery shopping programs help ensure compliance and maintain your brand reputation.

Non-compete agreements are another essential protection. These prevent franchisees from leaving the system and starting a competing business using proprietary knowledge gained through the franchise. Confidentiality agreements also safeguard trade secrets, recipes, or unique processes from competitors.

You should also ensure that the contract reflects branding and marketing control retention. Franchise agreements should also define dispute resolution processes. 

There are typically three ways of resolving disputes: negotiation, mediation, or litigation. The agreement must specify which of these should be used to settle conflicts.

Why You Should Engage an Attorney

Engaging a franchise attorney before starting the process is essential. They help structure the franchise program, provide legal guidance on complying with regulations, protect intellectual property, and establish clear rights and responsibilities for you and the franchisees.

They can also help with conflict resolution and advise on expansion strategies. Their role in ensuring sustainable franchise relationships makes them invaluable. They do this by ensuring that the agreements they draft balance the interests of both franchisors and franchisees. This will contribute to long-term success, and reduce conflicts.

Concluding Thoughts

When done right, franchising can catapult a business to unprecedented success. However, you need to plan for it and consider all legal considerations carefully. Much more important is asking yourself what you want from franchising and if you are interested in it.

It is also crucial to involve a local franchise law attorney in the process. They will help you break down the complex law and streamline the process to the desired result.