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by Michael H. Seid

For those of us experienced in franchising, we are often amazed when companies considering the establishment of a new franchise system, even large, well established, international companies, begin the process at the end - the development of the legal agreements. Presented with a lengthy questionnaire by their legal counsel, they are asked to provide information necessary to prepare franchise agreements and disclosure documents. The problem though is that the questions are often their main guide to how their franchise system should be structured.

As a potential franchisor you may not fully understand all of the questions or have an independent frame of reference to know what all your available options truly are. The attorneys, knowledgeable in the law and prior agreements often will provide you with advice and direction. However, without the benefit of being able to evaluate business alternatives, conduct research and fully explore the strategic considerations that most of these decisions require, the franchise system will often end up operating as a legal vehicle for expansion rather than what it truly should be, a business structure for expansion.

Since the franchising process began with the development of legal documents, new franchisors may view their franchise system as a legal devise governed primarily by the rule of law. Experienced franchisors understand that while the law is an element of franchising, it truly is a minor portion of the way franchisors manage their business, make decisions on its direction or how they interact with their franchisees.

If you think about legal agreements taking the lead in the franchise development process, it would be similar to an attorney asking you questions necessary to draft leases on a residential building before the market studies are conducted, the location is selected, the engineers have completed their site review, the building is designed, the financing is in place, the permits are obtained, the builder has been selected or even the costs for construction and management are known. Only in franchising, especially if it is your first time developing a system, the issues are more complex and the risks extend not only to your company and its stakeholders, but your future franchisees

Keep in mind; while you may have an operating business with a long history and experienced management, you are developing a new business - a franchise system. It should be the structure of that business that you focus on first, not the structure of the legal agreements. Therefore, before you begin to develop your legal agreements, before you invest in the creation of a franchise system, before you print brochures, hire your franchise staff and start selecting franchisees, the first thing you need to do is understand that franchising is a business. All the legal documents should do is describe the business and the terms you are offering to your franchisees.

The process of basing your business strategy on legal questionnaires is simply insufficient for the design, development, long-term growth, management and financial well being of your franchise system.

In the beginning

So, where should you begin?

The first issue is to determine if your business is ready to expand and whether franchising is an appropriate strategy for your company. Before a single franchisee exists, there has to be a franchisor. And before a company begins what can be a costly process of developing a franchise program, it's prudent to have a franchise feasibility conducted.

Only after the feasibility examination is conducted should you begin the work on developing the franchising strategy. The development of the legal agreements is one of the last elements of that process.

A franchise feasibility examination measures a company against recognized benchmarks typically used in franchising. It is designed to assist a company's management in making a determination whether they are ready to expand and whether franchising is the correct growth strategy. It also explores other methods of expansion that may be available and better suited for the company.

But, even before conducting a feasibility examination there is a simple test used to determine if a business is not franchisable or ready for expansion. If the existing business:

  • Is only a concept and has not commenced operations;
  • Has only a limited operating history;
  • Is not profitable at the unit level; and,
  • Does not currently achieve a reasonable return on investment, at the unit level

It's not franchisable - at least not yet.

To be franchisable, the business has to be a business and that business must at least be profitable and achieving a reasonable return on investment.

Think of the elements in a franchise system that you should be offering to future franchisees. One of the principal elements is your experience in operating the business to be franchised. If that experience doesn't exist, or is so minimal as to be negligible, all that you are really offering potential franchisees is the opportunity of being a guinea pig. While legal counsel could develop franchise documents sufficient to offer franchises for a business that never existed, and, you might even find individuals willing to buy your franchise, the risk of failure for both the franchisor and franchisee will be high. Unfortunately, with the abundance of franchise packaging firms (both consultants and attorneys) existing in franchising today, those "opportunities" exist.

When conducting a feasibility examination we review business and financial benchmarks. The benchmarks used depend on the industry segment, the company and other determinants but broadly fall into a few interrelated and interdependent buckets including: the underlying business; its products and services; how well the business can be systematized for new and existing franchisees; the skills required by franchisees to operate the business; the organization and support required to manage and grow the system; the potential for expansion; and, the underlying business economics.

It's not possible to discuss in depth here all of the elements that require review in a feasibility examination. Even in Franchising for Dummies, we touched on the issues of feasibility only in one chapter. But, let's examine some of the highlights.

The underlying business

As we said before, you need an operating business before you begin to franchise. But, is it really enough to have only one location before you begin to expand? In a practical sense, two would be better but probably more are required.

Several locations in different neighborhoods or areas will give you an indication of whether your business is a single unit local market phenomenon or something that has wider consumer appeal. Possibly more important though is how long you have operated the business. Understanding how it operates in different seasons, whether it can be successful against the competition, who its customers are and what they really think of the concept may be more important than the number of locations you presently operate. Keep in mind that others are going to have to follow in your footsteps - will they be able to based upon your experience and knowledge of your industry?

What you are trying to develop is a chain of businesses using the same name, usually the same look and almost certainly the same methods of operation. To secure and maintain a "brand personality" that consumers recognize and can rely upon every time they hear your brand mentioned requires consistency. Having a business that you can model for successful duplication is essential in determining franchisability.

Let's not forget about the product or services your franchisees will be offering to the public. Are they any good? Are sales based upon a well-established consumer demand or only a passing fad? How are your products and services different - and hopefully better - than those offered by the competition?

Understanding who your competition is, and what actions they are likely to take in the marketplace not only allows you to make a determination of whether your offering is sufficiently competitive, it enables you to begin to be proactive in responding to the expected market changes. You will also need, in examining your options for expansion, to determine whether consumers will want or need your product or services tomorrow. Understanding their buying patterns and changes in the marketplace is essential in understanding the long-term popularity of your product or services.

Do you understand the competitive landscape? Is it likely that other companies will be able to absorb your product and services into their consumer offering? If you don't think it is possible, look what happened to the frozen yogurt market when every ice cream stand and green grocer added frozen yogurt machines. Notice the impact on the bagel franchises when Dunkin Donuts added bagels? Do you wonder about the future strength of the smoothie market as other chains add it to their menus? They will likely have to change from a single product offering simply to survive, but will that cause them to lose their competitive distinction.

What will changes and improvements in technology do to your consumer offering? Will it make your product or service unnecessary or necessary less often? Remember when cars needed a tune up every 15,000 miles? Well today, it's closer to 100,000 miles and requires equipment and expertise not thought of 15 years ago. Notice the reduction of specialized tune up shops. Remember when the automotive dealers did a poor job, had miserable service and charged more for an oil change than you paid for the car? More customers today are going back to their dealer for routine maintenance. Improved technology and changes in customer service certainly had an impact on the franchised automotive aftermarket and many franchise systems had to evolve from their original concepts.

Understanding your true competitive position, not only against other franchise systems but also against everyone who offers your product or service is critical. Understanding how market conditions will affect your offering is essential in looking at the feasibility of expansion and franchising.

The systematization of the business

When consumers walk into any branded location, they have expectations of what their experience will be like. Interesting thing about branded locations. Before consumers ever walk through the door, based upon their experience at other locations or based upon recommendations of others who have shopped at other locations, they have expectations about how you operate. Making their expectations into a shopping reality requires that the business operate consistently from location to location. on »

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Michael H. Seid
Michael H. Seid is the founder and Managing Director of Michael H. Seid & Associates, LLC (MSA Worldwide), a domestic and international franchise consulting firm. For more than 30 years, Michael has served as a Senior Operations and Financial Executive or Consultant for companies within the franchise, retail, restaurant, hospitality healthcare, education and service industries as well as having been a franchisee.

Together with the late Dave Thomas, Founder of Wendy's International, Michael is the co-author of Franchising for Dummies, published by Wiley Publishing, now in its 2nd edition.

He is on the Board of Directors of the William Rosenberg International Center of Franchising at the University of New Hampshire and serves on several other boards, including public corporations

MSA Worldwide
MSA Worldwide is the nation’s leading franchise advisory firm providing guidance to new and established franchisors in the U.S. and globally.

Michael H. Seid
MSA Worldwide
94 Mohegan Drive West Hartford
U.S.A 06117

Tel: 1-860-523-4257
Fax: 1-860-523-4530


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