Franchising 101

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Franchising seems like a pretty straightforward concept. We all know about McDonald’s, Subway, Grease Monkey, and other famous franchises. Even in the adventure industry, some are marketing franchising as a viable business option. But there are levels of complexity that can make it difficult—even dangerous—if a franchise opportunity is not approached intentionally by both the franchisor and the franchisee.

In the U.S. today, one out of seven businesses is a franchised operation. This is an incredibly popular business model, and one that we are sure to see more of in our industry in the years to come.

But before I get too far ahead of myself, we should probably outline the basics of franchising. Here are five terms that you must know before thinking about either offering or buying into franchising opportunities:

Franchisor
The franchisor is the person or company that grants the license to a third party, allowing that party to conduct business under the franchisor’s brand and trademarks. The franchisor owns the overall rights and trademarks of the company, and allows its franchisees to use these rights and trademarks to do business in a predefined territory.

In other words, the franchisor is the owner of the parent company.

Franchisee
The franchisee is a business owner that purchases the right to use an existing business’ trademarks, associated brands, and other proprietary knowledge. The franchisee pays an annual franchising fee plus a portion of its profits to the franchisor.

This fee is called a royalty, and we’ll dive into this more in a minute. If you’ve ever watched Shark Tank, it’s a term that you’ve probably heard before.

Franchise Agreement
This is a legal contract that lays out in detail the duties each party needs to perform, and what compensation is expected. In the U.S., this document is regulated at the state level.

Royalty Fees|
Royalty fees are paid to the franchisor, by the franchisee, based on the gross sales of the franchisee’s business. Often, there is an upfront payment, followed by monthly payments that typically range from 5 to 8 percent of the overall revenue. These fees comprise the franchisor ‘s profits and support its marketing and operational efforts.

Franchise Manual
This is the operating manual furnished by the franchisor to the franchisee. It provides the knowledge needed to operate the business. This reference guide establishes the rules, standards, and specifications regarding day-to-day operations. The manual typically includes:

  • opening and closing procedures
  • accounting practices
  • OSHA routines
  • standards of employee dress and conduct
  • emergency procedures
  • interactions with the franchisor
  • operating systems
  • and possibly much more

The franchise manual is essentially the operations guidebook for running a successful franchise.

BECOMING A FRANCHISOR

Think you’re ready to offer franchise opportunities? There are both benefits and pitfalls involved.

The Benefits
Successfully franchising your business can fast-track several benefits that would take significantly more time to achieve organically, without establishing a franchise:

  • This business model enables your brand to build equity and increase  market share.
  • Customer loyalty builds through brand recognition in multiple locations.
  • Your business is able to enter new markets, at a lower cost and faster rate, than you could otherwise.
  • Motivated owners and operators will take on the role that is often reserved for high-level internal personnel. These business owners are likely to bring a different level of energy and care to the company, given that they have “skin in the game.” This also decreases payroll costs significantly.

The Challenges
Before you roll up your sleeves and launch your new franchise business, you should be aware of the following:

  • States often have different regulations for the registration and sales of franchise opportunities.
  • Compliance files must be maintained to help prevent franchise law violations.
  • You must be very careful in making claims about how much money a franchisee can make as a result of going into business with you. While the income potential is generally a selling point, anything that is perceived as overpromising could be interpreted as “false advertising.”
  • Communicating material changes in operations, the corporate structure, financial statements, or relationships with your franchisees must be handled with care.
  • How you advertise your franchise  opportunity depends on the regulations of various states. For example, in Indiana, a copy of the advertising you intend to use in the state must be filed with the office of the Indiana Securities Commissioner at least five days before publication. If you use the internet as part of your advertising effort, this may trigger regulatory requirements from multiple states at one time.
  • At a minimum, you will spend tens of thousands of dollars to ready your business to be franchised and to comply with state and federal regulations. Enlist the help of a franchise-savvy attorney to review your situation.

BECOMING A FRANCHISEE

Are you looking for an easy way to start your adventure business? Franchising could be your ticket.

Benefits
Overall, being a franchisee lowers the barriers of entry relative to starting a traditional business. Some other benefits worth considering:

  • The franchisee obtains operating efficiencies and economies of scale at the start of operations—benefits that often take years to develop if operating solo.
  • The franchisee gets the support of a larger enterprise, with everything from operational infrastructure to marketing and branding.
  • Historically, franchises have a higher rate of success than other types of startups.
  • Depending on the strength of the franchisor, it may be easier for the franchisee to obtain startup financing.
  • The franchisor should offer in-depth training in all areas of the business.

What to Look for in a Franchisor
While the benefits are abundant, selecting a franchisor should not be taken lightly. There are plenty of factors to consider, from operational success to sufficient funding. Here are some key considerations:

  • The franchisor should have a proven prototype location, and the success of the existing business should not depend on the presence or specific expertise of the founders.
  • Look for a strong management team that understands the industry as well as the legal and business aspects of franchising.
  • Make sure the franchisor is sufficiently capitalized to launch and sustain the program, cover regulatory fees, hire training staff, develop marketing materials, and maintain the overall operation.
  • You must receive proprietary and proven methods of operation and management that are simple enough that they can be captured and relayed in an operations manual.
  • Any franchisor worth its salt will have strong relationships with suppliers and other key, relevant resources.
  • The franchisor should be available to assist and answer questions, particularly during the startup phase of new franchise locations.

WHAT COULD GO WRONG?

Both the franchisor and franchisee must be in sync about making the opportunity work. If the process is done correctly, both parties can be successful. But when things go wrong, it is often due to one of the following factors:

Entering saturated markets. This can stem from either too many branches of the same franchise, or too much direct competition in the target market. In the aerial adventure industry, it is likely the latter. But consider existing franchise locations if you are looking to open a new operation in a nearby city.

Lack of adequate support or controls. Franchisors who provide weak support, or offer little guidance over how the franchisee represents the overall brand, often see their franchisees fail. When in doubt, it is worth visiting other existing locations and talking to current franchisees about their experience.

Insufficient due diligence. This issue can affect both sides. The franchisor might fail to ensure that the franchisee is capable of running the business. Or, the potential franchisee might not talk enough with the franchisor, or other current franchise operators, to reveal weaknesses in the franchise agreement. Set clear operational and financial expectations in advance to help determine whether the franchise agreement is the right fit for all parties involved.

Poor market research. If you do not understand the conditions of your target market and whether they are favorable for a particular business, any new venture can fail. If you don’t know the market well enough—either as a franchisor or a franchisee—you should consider hiring an industry consultant to explore the feasibility of your idea.

Not understanding the finances. You may be surprised by the cash flow needed to keep your operation going. This is especially true in a seasonal market. From a franchisor’s point of view, you must understand the cost of starting and supporting a franchise operation, especially if other franchisees open businesses in seasonal locations.

FINAL THOUGHTS

If done correctly, franchising can present a great opportunity for all parties involved. That said, it should be treated like any other new business venture, with the correct financial, legal, and operational procedures in place. If you are thinking of starting a franchise, either as a franchisor or a franchisee, be sure to consult with a subject-matter expert (and your attorney!) who can help determine if this type of business structure is right for you.

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About Author

Paul Cummings is president of Strategic Adventures, and has been offering business development services to challenge course programs, zip line/canopy tours, corporate teambuilding centers, summer camps, and outdoor education programs for nearly a decade. For more info, contact paul@strategic-adventures.com.

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