Editorial

Planning Ahead: Advice for the franchisor of the future

Every month at the iFranchise Group, we receive several hundred inquiries from companies who think they “have the next McDonald’s.” And while most of these inquiries have successful businesses, only a handful will have what it takes to make it as a successful franchisor.

So what sets these few apart from the rest? And, if you are just starting a business with the hopes of franchising, what do you need to do to get there?

Start with Your Most Valuable Asset
The single biggest mistake we see when it comes to new franchisors is the failure to protect their trademark. When a potential franchisee looks to purchase a franchise, a large part of that value proposition is the brand. And the bigger the company, the more important the brand becomes. Yet, many companies often overlook this vital and inexpensive first step. The end result: these companies may spend tens or even hundreds of thousands of dollars promoting a brand that they cannot protect or even keep. When these companies decide to franchise, the choices are limited and often difficult: change the name, buy it from the trademark owner, or go home.

To avoid these problems, the future franchisor’s first step should be to develop a name that can be protected with a federal trademark. In the excitement of creating a new business, this can be a tedious process – especially when you find that the name you loved so much initially is already registered. But without this step, you are simply throwing your advertising money away – and throwing a monkey-wrench into your future Franchise plans.

The future franchisor may also find that the process of coming up with a great name can be harder than it looks. Names that are generic or descriptive are difficult or impossible to protect. You can start this process by searching the U.S. government’s trademark database (TESS) at www.uspto.gov. With more than 3 million registered, filed, or dead trademarks, finding a name that is unique and protectable can be more frustrating than you might first imagine. As a part of this process, of course, you will also want to ensure that an appropriate top level domain is available on the Internet as well.

Once you have several names that you like and feel you may be able to protect, it is important to engage the services of an experienced trademark attorney. The trademark attorney may recommend a more thorough search (which will include other public uses of the proposed trademark including derivatives) using specialized services like Thompson CompuMark. They can then complete the registration process – often for as little as a couple of thousand dollars – assuming, of course that the trademark is not contested.

The process of obtaining a trademark involves several steps, including the publication of the trademark in the Official Gazette of the U.S. Patent and Trademark Office. This can take several years to complete – so the process should be started as soon as possible. That said, it is worth noting that you do not need to have a federally registered trademark to franchise. Your rights to that trademark vest on the date you file your trademark application. With this in mind, many of our clients will begin Franchising once this process is underway but before it is completed.

Next, The “Value Proposition”
In order to be a successful franchisor, you must first sell franchises. And in order to do this, the company contemplating franchising must create a business that people will want to buy, own, and operate.

Called a variety of things -- from marketability to sex appeal -- a franchise should have some quality that makes it appealing to the potential buyer. Sometimes, value proposition is created by marketing campaigns, sometimes by the look of an operation, and sometimes by rapid growth of the market. It can be created based on the nature of the work involved (like the flexibility offered by a home-based business), the taste of a recipe at a restaurant, or by pure return on investment. Oftentimes, it is created by the nature of the prospective franchisee (like the appeal an Optical franchise has to an Optician or a sales franchise to a salesman). But regardless of how you create it, the future franchisor must develop a business that people want to purchase.

In order to have an adequate value proposition, a business must also be unique – or at least well differentiated from its major franchised competitors. This can come in the form of a differentiated product or service, a reduced investment cost, a unique marketing strategy, or different target markets. But however it is achieved, it is imperative that your franchise stands out from other competing franchise systems. Without this differentiation, it will be impossible to succeed in today’s competitive franchise marketplace.

Success is Not Enough
The next thing that the future franchisor needs to take into account involves the unique financial characteristics of franchised businesses in general. A franchised business must, of course, be profitable. Even if you are not going to franchise, profitability must be a top priority. But if you are going to be successful as a franchisor, the business model itself must have even more profitability. The relative amount of profitability a franchised business have, must be higher because a franchise must allow enough profit to give the franchisee the ability to earn an adequate return on their investment even after deducting its royalties and fees.

Profitability, of course, is relative. It must be measured against the capital invested to provide a meaningful number. In this way, the franchise investment can be measured against other investments of comparable risk that compete for the franchisee’s dollar. To be competitive in today’s franchise marketplace, the iFranchise Group looks for the franchisee to achieve a Return on Investment (ROI) of at least 15-20 percent by the second to third year of operation. This return must be calculated after deducting a market-rate salary for the owner-operator franchisee.

All other things being equal, the future franchisor will want to focus on lower start-up costs. The lower the start-up costs for a future franchisee, the more franchise prospects will be financially qualified when the company does start to franchise. At the same time, by focusing on the denominator of the ROI, the franchisor can have the greatest impact on franchisee returns. Future franchisors with physical operations should generally avoid expensive materials and custom design work, and instead spend more money with a designer who knows how to create unit operations that will be duplicable at a low cost and with readily available materials. That said, the future franchisor must also bear in mind that his physical unit will act as a “showroom” for franchise prospects.

The Key is Cloneability
The final, and perhaps most critical element for the future franchisor, involves the ability to duplicate the success you achieve in your first business. If a business only succeeds because of your unique skill set, a one-of-a-kind location, or another factor that is impossible to replicate, it is unlikely that you will ever be able to franchise it.

Assuming that the business can be cloned, the future franchisor must focus on making the cloning process as simple as possible. Start by documenting everything – the factors that went into your site selection process, unit build-out requirements, key suppliers, advertising…everything – as everything that you do to get into business will need to be duplicated by your franchisees in the future. Develop systems and forms that help you track your own internal performance. And know your numbers – including every key driver of unit profitability. All of this information will be essential when transferring your formula for success to your future franchisee.

The bottom line is that the best franchisors have the strongest value propositions. Just as your job as a businessman is to create value for your customer, your job as a franchisor will be to create value for your franchisees. And while some of that value will come from the support you provide as a franchisor, much of it is designed into the franchise from day one.

Mark Siebert is the CEO of the iFranchise Group, a management consulting firm specializing in franchising. During his 20-year career, he has consulted with some of the world’s most prominent franchisors. He can be reached at 708-957-8875, via fax at 708-957-2395, or via e-mail at msiebert@ifranchise.net.

To learn more about iFranchise Group on Bison, click here.

Submitted to: YourOwnFranchise.Com
August 30, 2005 Reprint Rights