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Growth: The 10 Rules of Franchising

Got growth? If so, odds are you’re getting it through franchising.

The simple concept of using other people’s money to expand your chain and reduce your risk has become the modus operandi for restaurant companies on the move. While the concept of franchising may be simple, it’s not for the unprepared. “It’s a complicated business with a lot of moving parts. And it’s a business that’s very different from running restaurants, which is a tough transition for a lot of new franchisors,” notes attorney Brian Schnell, a franchising specialist at Faegre & Benson, Minneapolis, and co-author of 5 Habits of the Highly Successful Franchisor.

With that in mind, here are 10 rules to keep in mind as you go down the franchising road.

1. Be sure it’s franchisable. Obvious, perhaps, but often ignored by would-be franchisors. “You need a concept and a system that you can replicate many times over. If it doesn’t have a proven history, you have to lay that foundation in the very beginning so it’s the right system whether you have one store, 10 or 100,” says Dale Nabors, ceo of franchise consulting firm Fransynergy and owner/ceo of Cuppy’s Coffee, Smoothies & More.

And just because you have one location that works doesn’t mean it will travel well. “Some products and concepts are very regional, or their success is tied to their original location and market,” adds Patrick Calloway, president of Francorp franchise consulting. “It’s critical that your first franchises are successful or you’ll have a hard time selling more.”

2. Hire expertise. “Don’t try to do your own brain surgery,” Calloway advises. “Franchising is a highly regulated industry. There are requirements and procedures that have to be followed.” He suggests tapping a consulting firm or assembling your own team, starting with a strategic business advisor, then adding a franchise lawyer, an operations person, a marketing person and a sales person.

3. Recruit, don’t sell. The best franchise companies don’t sell franchises but recruit ace franchisees, says Schnell. Where sales is the emphasis, the franchisor sells to anyone willing to buy, regardless of quality. In a franchisee recruitment process, the franchisor selects only candidates who match the profile of a successful franchisee and whose objectives can be met with a high degree of probability. Quality trumps quantity, risk is reduced, the brand is protected. Getting there means paying sales people salary plus commission. “If they’re only on commission, that’s in direct conflict with the goal of creating successful franchisees,” Schnell says. “You need to pay them to walk away from iffy candidates and to have some accountability for the success of the franchisees they bring on.”

4. Mandate legal review. Part of the process of selecting ace franchisees should include mandatory legal review of all documents and agreements by the candidate. Schnell says this often doesn’t get done—potential franchisees sometimes don’t even fully read the documents. “[New] FTC rules mandate that better information be provided in the Franchise Disclosure Document. Candidates now have consistent, complete information with which to make informed decisions,” he says. “But if they don’t read it and have it reviewed by a lawyer, you’re asking for trouble.”

5. Understand, balance competing interests. As franchisor, your role is to develop, evolve and enforce the system. The franchisees’ role is to provide capital, provide unit management and play by the rules. “Good franchisors create a culture of voluntary compliance in which franchisees see value in following the system. But they also vigorously enforce compliance,” says Schnell. It’s management by relationships; government by contract. Building key enforcement provisions, such as the right to make system changes, termination provisions, post-term noncompete requirements and conflict-resolution procedures, into the franchise agreement is critical. “You also can’t let things go,” he says. “If someone’s not paying their royalties on time or otherwise taking a free ride, you have to act quickly.”

6. Make franchisee profitability an obsession. Franchisees typically pay royalties on total revenues. As such, franchisors focus on the top line. But franchisees worry more about the bottom line. If their profitability doesn’t drive the system, the system breaks down, Schnell says. “Unprofitable franchisees go out of business, they create conflict, they badmouth the franchisor to prospects, they file lawsuits,” he says. “Everything the franchisor does must be driven by an obsession with the franchisees’ bottom line.”

7. Make specific promises and deliver. In their eagerness to get franchisees to sign, franchisors often promise the world. But problems arise later when promises made or the perception of promises made aren’t delivered on. Be as specific and clear as possible upfront and err on the side of under promising and over delivering.

8. Train aggressively. “If you think you’re going to sell a franchise, train someone for a week and expect them to be successful, you’re wrong,” Calloway says. Expect to spend 14 to 16 weeks training, arrange for them to work in existing franchisee operations and plan on spending a lot of time at new units until they’re running smoothly. After that, he says, someone from corporate still needs to go back in at least monthly to provide coaching and monitor compliance.

9. Practice controlled growth. Too many franchise companies worry about hitting a certain number of units—no matter what. Growing slowly allows time to tweak the system and develop the ideal franchisee profile. It also helps ensure that growth doesn’t outstrip your ability to handle it.  

10. Empower franchisees. You don’t need to give up decision-making authority, but you do need to involve franchisees. Franchisee advisory councils, regional advertising cooperatives and targeted franchisee/ franchisor committees are embraced by successful franchisors. Other forms of empowerment, Schnell says, are giving franchisees the tools needed to get things done, being open to changing parts of the system, providing resources to help them find ways to grow their own businesses and creating a culture of cooperation.       

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