Starting a franchise is a thought many business owners have, especially when they have a flourishing business. Why wouldn’t they? It’s an exciting business model that provides many benefits, not mentioning the fact that it can be extremely lucrative if successfully executed. The question then becomes: how do you start a franchise? What are the steps involved? At the very least, grasping an understanding of what is involved will help you to determine whether it is the right step for your business. Below we’ll provide a step-by-step breakdown of how to start a franchise in Australia.
1. Understand Your Business
Although franchising your business can be a great way of expanding, unsuccessfully franchising can be very detrimental to both your reputation and your wallet. Before blindly attempting a franchise expansion, take a step back and think about how your business will work in an expanded scheme. Questions to consider include:
- How can I replicate my supply chain network?
- How can my franchisees implement my marketing strategy?
- What business structure best suits my franchise network?
- Where do I want to expand? Will my business model work there?
- How will the franchise work?
Asking yourself these questions will allow you to establish some guidelines for preparing your expansion plan. It may highlight that success may be due to certain features of your home location, which you might not be able to replicate. Alternatively, it might highlight that franchising makes complete sense when factoring the unique features of your business.
2. Understand the Costs Involved in Franchising
As mentioned, franchising can be an extremely costly exercise. Depending on the professionalism of the organisation, developing a franchising network can cost anywhere between $25,000 to $100,000. The costs are largely determined by what documents you have in place, what processes you have in place, and what extra resources you may need. For example, if you have put the effort to write your business’ operations manual, even if it is a pilot manual, this will significantly reduce the costs later down the track. Similarly, if there are significant gaps within management that you need to fill with consultants, this can raise the costs too.
3. Put Together Your Operations Manual
The Franchise Operations Manual is your business’ bible. It is a detailed explanation of all your systems, processes and operations. Put simply, your franchisee should be able to look at the manual and run your business. Some of the most common elements of an operations manual include:
- System of operations (e.g. how to cook a specific dish or how to turn off a machine);
- Legal requirements (e.g. council restrictions and licences required);
- Opening and closing procedures;
- Stock (e.g. how to order stock and who your suppliers are);
- Security procedures (e.g. how to turn the alarms on and off and emergency exit procedures);
- Cleaning processes (e.g. how to clean your equipment);
- Personnel matters (e.g. how to hire staff, how to train staff, wages and payment formalities); and
- Franchisee/franchisor liaising procedures (e.g. method of contact)
The businesses that have taken the effort to develop robust manuals are inevitably more successful as they have standardised a system. Therefore, you might begin by preparing an operations manual yourself as a pilot edition to save costs, but develop a more in-depth edition with a franchise consultant when finalising your expansion plans at a later period.
4. Run a Pilot
The whole purpose of running a pilot is to test your business model as a franchise. Set up a pilot operation that your management or in-house team will manage, and operate the business at arm’s length. You can do this at one or several locations. It is an excellent opportunity to address any issues that arise, test out new concepts, and understand the complexities of managing a franchise network. It is here that you can make mistakes and adjust your operations manual before taking it full scale.
5. Seek Proper Advice
Franchising can be a lengthy exercise, and it helps to get an expert perspective on your business. Seeking advice will give you access to a wealth of experience relevant to your franchising plans.
Franchise consultants can help you identify the risks with your business model and determine if franchising is right for you. They can help with:
- Feasibility studies;
- Operation manuals;
- Business plans;
- Funding; and
- General advice on how you can develop a master franchise system.
Accountants can help mitigate the financial risks involved with expansion. In particular, they can help you determine your fee structure in line with your financial goals. Further, they can also help with the financial planning aspect of your franchise system.
A franchise lawyer is essential in the franchising process. Not only can they assist with drafting and reviewing the relevant legal documents required when franchising, but the right lawyer will also be able to help with employment, intellectual property, disputes and commercial and retail leasing matters.
6. Determine Your Fee Structure
There is no single way to develop your fee structure. There are many fee structures you can choose from which cover the ongoing and initial costs of your franchise. However, the fee structure you choose should be a reflection of your goals and objectives. For example, you could choose from any combination of the following fee structures:
- Fixed fees;
- A percentage of total revenue on a weekly or monthly basis;
- A percentage of total profit on a weekly or monthly basis; and
- A percentage of particular items sold.
How you determine the amount will be entirely arbitrary. Although, for obvious reasons, it must be within reason. For instance, you could ask for a much larger upfront payment to cover for things like training, franchise fees and development costs. You could then ask for smaller royalty payments in the future. Conversely, you could also ask for a smaller upfront payment in return for larger ongoing royalty fees.
Whatever structure you choose, it is advisable that you consult with your accountant or franchise consultant, so you align you fee structure with your business goals.
7. Determine Territory and Site Selection Policies
Territory and site selection policy is an important consideration for both franchisors and franchisees. For franchisees, territory policies can have a direct impact on their earning capabilities. It determines where they can do business, who they will be competing with, and whether the franchise agreement will exclude or include them from certain areas. For the franchisor, this impacts how many franchises they can open and will consequently impact on their earning capability too.
Likewise, the site selection policy will also directly impact both parties. For franchisors, the type of stores the franchise opens will impact on the brand’s image whether it is successful or not. For the franchisee, this will limit where they can do business. Considerations include:
- Access; and
Further, you will have to determine whether you will have the sole discretion to choose sites, whether it will be a joint effort between the franchisor and franchisee, or whether the franchisee can choose sites.
8. Determine Your Criteria for Selecting Franchisees
Determining the criteria for your future franchisees may be one of the most important exercises you undertake. Who you choose as franchisees will ultimately determine the success of your business, and it makes sense to invest the time into choosing franchisees who you can rely on to grow your business. At this point, you should create a profile of your ideal franchisee. What qualities should they possess? What experience are they required to have? What skills do they need?
9. Determine Your Training Plan
You will not be able to create a franchise without passing on your knowledge to your future franchisees. You need a robust training plan which you can rely on to train franchisees into your system. You can develop this plan yourself, or with your consultant. However, at a minimum, it should cover:
- Who will teach the future franchisees;
- What the franchisees need to learn to be successful;
- Where you will teach them; and
- How long training will last.
10. Determine Your Approach to Management and Support
As you expand your business, your responsibilities will inevitably multiply too. A reliable management team can help alleviate some of this pressure – as they are usually responsible for things like:
- Selecting new franchisees;
- Providing ongoing support to the franchise network;
- Monitoring franchisee performance;
- Reporting; and
- Managing finances.
You should consider what positions you need to fill, how many people you need to hire and how you can best manage your team. It is important you build a team you can rely on as your business grows.
11. Draft the Necessary Franchise Documents
At this point, you will need to speak with your franchise lawyer. The core documents your lawyer will need draft for you include the franchise agreement and the franchise disclosure document.
The franchise agreement determines the relationship between you and the franchisee. It covers everything from:
- The obligations of the parties towards each other;
- The fees the franchisee will have to pay to the franchisor;
- The term of the franchise and if there are any renewal rights;
- The territory and site selection policies;
- The franchisee’s rights concerning the intellectual property of the franchise;
- Training and support as well as the management structure;
- Dispute resolution processes; and
- Termination, assignment, transfer and sale of the franchise.
The franchise disclosure document is a mandatory document which the franchisor must give to the franchisee at least 14 days before they sign the franchise agreement. The franchise disclosure document should allow the franchisee to make a well-informed decision about whether they should join the franchise network. There is some overlap with the franchise agreement. However, some clauses are exclusive to the franchise disclosure document and include information about the franchisor’s business history, details of any litigation, and the financial details of the franchisor.
12. Attract and Find Franchisees
There are multiple ways of finding franchisees. You can advertise in franchise websites, magazine, newspapers or even attend franchising exhibitions. As part of this process, you should consider creating summary collateral for potential franchisees so they can evaluate whether they wish to join your franchise network. You should also decide on a process to filter and approve franchisees. This step is one of the most important steps of starting a franchise, and you should take care not to rush and select the best franchisees.
13. Help Your Franchisees Open Your Franchise!
Once you have selected your franchisees, implemented your training and management and support team, you will need to ensure that your franchisees are successful. In particular, ensuring a smooth opening should be one of your highest priorities. For instance, you should help them with their stock, employee hiring and local area marketing.
Do you have a successful business which you think you can turn into a franchise? Want to learn more about how you can start a franchise? Speak with our expert franchise lawyers today! Call LegalVision on 1300 544 755.