Patrick Eng
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Week 45 - What I Need to Know About Franchises

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Franchise businesses are nothing new. In fact, they’re actually hundreds of years old, dating back to Benjamin Franklin starting the first printing franchise in 1731. But with a business model as old as franchising, it's surprising how misunderstood it actually is.

In short, franchising is a shared brand between two companies. To get more technical, the franchisor (like McDonald’s) allows the franchisee (like your crazy uncle) to use their brand and establish their own locally-owned business.

Growth in Popularity

In 1946, President Truman signed the Lanham Act, which essentially provided protections and rights to trademark owners and gave them control over who wanted to use their brand.

At this point, it became the job of the brand owner (franchisor) to support and ensure that all goods and services provided by the franchisees to consumers were up to quality standards and provided a good customer experience.

Take your local Chick-Fil-A for example. While each restaurant you go to is actually individually owned by someone (not Chick-Fil-A), it provides a consistent customer experience regardless of if you go to one in Virginia or California.

Chick-Fil-A corporate doesn't necessarily care how each owner of a location runs their business, as long as they abide by a series of standards and requirements that are shared by all locations. Other than that, the location owners have the right to run the business as they see fit.

Because of this consistent and standardized experience and menu selection for franchise locations, many people believe that these locations aren't actually individually owned by your local business person. That's the power of franchises - providing a consistent experience for every customer, regardless of the actual owner.

In 2018 alone, it's estimated that there are over 750k franchises across the United States. It shouldn't be a surprise then to tell you that franchises are a foundational part of small-business growth in America, and were even growing during the recession.

Franchising provides a very unique blend for small businesses - on one hand, you get the quality and guidance of a well-established brand. On the other hand, you get a business that is run by your neighbor, who sends their kids to the same school you send yours and contribute to their local community just like you.

Becoming a Franchise

Let's pretend that you started your own business and have reached the point of expansion. Maybe one of your customers wants to do what you're doing, or even just a family member. At this point, you might begin working towards franchising your business.

What this could actually look like though is hiring a bunch of lawyers, business consultants, accountants, and others to ensure that your business is prepared for a franchising model.

Obviously, with any sort of investment, there is risk involved. What if no one actually wants to become a franchisee? What if the business suffers financially? What if the brand begins to lose consumer trust? What if…and the list goes on and on. Like any smart business, you need to be aware of the risks and be prepared as well as you can, knowing that you'll never be able to account for anything and will have to make some tough decisions.

Assuming the process goes well and your business is ready to start renting out its brand and standards, you now need to begin closing deals. People aren't just going to flock to your business if you just became a franchise, so your marketing team is going to have their work cut out for them (or you if you are the marketing team).

If you have a strong brand and are marketing yourself well, then hopefully you can get some franchise agreements signed in a few months time. Then begins the process of building out the new location (which could take even longer than closing the deal).

Becoming a Franchisee

Let's look at this through the other lens though - that of the franchisee. You've finally signed the franchise agreement and are ready to move forward with starting your new business.

Before you know it, your days are filled with trying to find the best location, coming up with the money, researching the best contractors, interviewing and hiring employees, and so much more.

Here's where the power of the brand becomes extremely important. While you're investing all these resources (your own resources by the way) into just getting ready to open the location, you'll have that fear in the back of your mind that you won't get any customers. Unless of course, you franchised under a well-known brand that is recognized globally (like McDonalds, Taco Bell, Subway, and many others). You're leveraging the reach of that brand for your location and working under the impression that customers will come because they are already looking for you (under the guise of the original brand).

Independence

Again, I can't stress enough how important it is to understand the split between a franchisee and a franchisor. While a franchise location looks like it's owned by the actual company and it just another location, it is actually an entirely independent business. The only connection that the franchisee and franchisor have is the sharing of the brand, quality guidelines for goods and services, and general business practices. Obviously, the parent wants to support the child, but other than that, each franchise location is it's own business entity.

Additional Benefits of Franchising

Franchising is more than just a brand wanting to increase its reach and revenue. It's the practice of creating more business owners, providing more jobs, and empowering the entrepreneurial spirit. Franchised locations could hire employees that go from running the cash register to owning their own location one day.

The unique benefit of franchising is its American spirit - it provides numerous people the ability to start their own business and find opportunity. Just know it won't be easy.

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Let's define some essential terms to know when entering the franchise field:

  1. Franchise - a license that allows an existing company to use another company's name, product, and brand.

  2. Franchisor - the company that is giving (selling) their brand to another company to use and grow.

  3. Franchisee - a company that is buying another company's brand in order to start their own business.

  4. Franchise Agreement - the binding document between the franchisor and franchisee.

Like most things, the process of starting a franchise is simple logically, but complicated in real life. In most cases, when you're ready to start your franchise, you'll go to a company that operates under that model and work under their process.

In general, that could simply look like you as the franchisor researching what you think is the best fit for your business, contacting a franchise, getting approval from the franchise, and end with signing the franchise agreement.

The actual details of the agreement will vary, but unless you were originally a franchise lawyer before you decided to pursue this path, you'll want to hire someone who knows this stuff. You're going to have a lot of obligations by becoming a franchised location, from all the fees, IPs, supplies, training, and length of the agreement.

Make sure you know what you can and can't do as a franchisee - which really means you're going to want to have a lawyer specialized in this field that can explain all the nuances.

Also, side note based on recent conversations, but if you want to start your own franchised location or groupings of franchises, do so under the umbrella of an LLC or Corporation.

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While opening a franchise location can be a great way to open your business, you might want to take a few things into consideration first. Remember, you're starting a business, so be prepared for hard times ahead, especially since your going to be under the thumb of another company.

1. "Trending" and "Franchise" Don't Go Together

Think about it - franchises work best when the parent brand has survived and been through the crucible. The best brands are the ones the thrived and survived in the best and worst economic times. If you want to begin your franchise with a brand that hasn't experienced that, then you're taking quite the risk.

2. Your Not Your Own Boss

Franchising is an interesting mix of a distinct, owned business and bending under the will of another company. Yes, you own the business and can make various executive decisions to run it, but only if they comply with the parent brand's standards. Plus, if you didn't read the original franchise agreement carefully or didn't hire a franchise lawyer (see #6 below) then you might have missed various clauses within the agreement that could allow multiple protections and rights for the franchisor to interfere with your business. And you'll probably not even be able to do anything about it.

3. Franchises Can Fail Just as Easily as Small Businesses

The idea that franchises are more secure than starting your own business is, unfortunately, a lie. You're not necessarily any safer by deciding to pursue a franchising model, which can experience failure rates similar to those of your local businesses. You can look at stats all you want, but in reality, you'll want to focus more on learning from the people who have succeeded in the industry and not so much which franchise by numbers has the most stores open.

4. Don't Rely on the PR Efforts

There are always two sides to the story. In this case, you probably have the franchisor trying to get more people to enter an agreement and other people trying to talk about the dangers of going into business with that franchise. In both cases, both entities are publishing content in favor of their side. The questions are - who has a better marketing team and which one will you believe/find first? Try to see both sides of the story before jumping in.

And remember, its part of the business to get more financing agreements closed. Take that as you will.

5. Read What Critics of the Franchise Say

Similar to above, you're going to want to specifically look out for what complaints people have with going into business with a particular franchise. These people are probably the ones who were in your position a few years ago and can give you insight into what you might not even have thought of until it happened to them.

These people are a wealth of knowledge, as long as you remember to understand the context of where each side is coming from.

6. Hire a Franchise Lawyer

Businesses are complex legal entities. In many cases, you might not understand all the jargon, restrictions, qualifications, and rights that you or the franchisor has. And ignorance is a dangerous weapon that only inflicts damage upon yourself.

Make sure to reach out to a well-vetted franchise lawyer that can guide you through the process and make sure you know what legal rights, protections, and requirements that you are agreeing to.

7. Getting Help isn't always the Best

When first starting out, it could feel like a good idea to talk with franchise coaches and consultants that you find online. The only advice here is to straight out avoid them, as they are most likely biased towards the franchise and trying to get them more money.

8. Understand the Franchisor-Franchisee Relationship

Remember, even though you own that franchise location, you're paying for those rights and are still under the oversight of the parent company. While you'll have various freedoms, you're not part of the overall team and could be required to follow various policies that you have no control over, even ones you don't agree with.

9. Don't Rely on the Government

Again, like most things, don't expect the government to help you out. When you become a franchisor, don't think that you have some sort of consumer protection. You are a businessman or woman who is investing in this effort, and what you agreed to in the original contract will dictate what you can actually do if you feel like you were taken advantage of or wronged. See #6 for best results.

10. Know You're Only a Smaller Piece in a Bigger Puzzle

The success or failure of your franchise doesn't really affect the original franchisor. The franchisor will continue to make money as long as you do, and since you or your company is the one that originally established everything upfront, the franchisor is safe financially from the failure of the franchisee. Remember, your paying fees on fees and percentage of your sales to the franchisor as part of your agreement. They'll always be getting your money, but you might not.

11. Get on the Inside Before You Commit

If you want to franchise with a specific brand, try to get on the inside first. Meaning, work there to see how one actually operates internally. Talk with managers, employees, and the owners of franchise locations. They'll know what to do and not to do when you begin your own.

12. What Happens When You Fail

This is a practice of mental and emotional fortitude. Starting a business, franchise or otherwise, is a stressful and complex process. You need to understand how failure in this area can affect everything else, from your finances to your marriage. If you think that your life can't function if your business dies, then being an entrepreneur might not be for you. But you know yourself best, so prove me wrong if you want.

13. Or, Don't Franchise at All

Franchising isn't the only option. You could have a great business idea or maybe one that's already thriving. Instead of selling your time and energy to someone else, maybe you could franchise your own business. There's freedom in building your own brand, along with a whole cocktail of other things.

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Too Long; Didn't Read

Franchising can be a great way to start your business and leverage the reach and power of a pre-established brand. While you'll be the actual owner of that location, you'll have to abide by various practices, policies, and decisions made by the parent company.

So don't think that opening a franchise location means you're the boss of yourself, because that's just not really the case.

While there are a lot of things that need to be done before opening your franchised location, I find these to be the most important:

  • Don't do it you think failure would ruin you

  • Do research on the type of franchise you click with best

  • Talk with employees, managers, and owners of those franchised locations and hear their story

  • Hire a franchise lawyer to review the franchise agreement and make sure you have protections/understand your limitations

  • Know that your not your own boss

This is not to say that franchising is bad in any way, just that there are lots of tiny details to consider when opening your new business, from legal requirements to financial stability, you need to know that starting a business is never easy.

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Patrick Eng