Franchising Your Business: Which Advice Do You Need and Why? (Part 1)

Welcome to the first article in our 3-part series on which advice you need when franchising your business! 

(co-authored by Sue Campbell, Franchise Right)

 

Approaching the mammoth task of franchising your business can seem daunting at first. But, like building a home, it can (and should) be broken down into stages to make sure you’re laying down the correct foundations and building a sturdy franchise model. 

In this first part, we’ll be focussing on the initial modelling and structuring required to get you started on the right foot.  

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Discovery 

 

Franchising is an exciting and dynamic growth strategy that for most is very rewarding.  It is a serious step to decide to become a franchisor, so every consideration needs to be taken before entering the sector.   

Financial performance of the existing business is key to creating a viable, sustainable, scalable franchise model. It must be a well-proven profit-maker with clearly defined objectives and market share opportunities.  Without a proven history of success, it is unlikely that any franchising program would be successful. 

You must be confident that there is enough profitability for the franchisees to make money. Royalty and marketing fees must be measured with a balanced view for both parties to successfully co-exist.  

Franchising your business also creates a new asset. The franchisor’s entity will have franchise agreements attached to it, and the more successful the franchisees are, the more valuable that asset can become. 

Market analysis is imperative to determine the customer appetite for the product or service. Franchise agreements can last for 5, 10 years or more, so changing economic (and pandemic) conditions can also impact business outcomes.  Thorough research should be conducted into future growth and revenue streams for the model to thrive.  

Be very clear about what the franchise offer is and what value it provides to the franchise partner. Determining the selling proposition, the value equation and what stands it apart from competitors is really key. 

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Case Study: David’s Doggy Daycare 

David has been operating his doggy daycare business for 4 years and is searching for a “growth strategy”. He is restricted by growth capital and finding it difficult to identify sufficient and suitable key staff personnel to support a growth plan. He is looking closely at franchising. 

David makes contact with a Certified Franchise Consultant who has assisted him with the required foundational analysis. 

The determinations for the business are: 

• A healthy gross profit margin 
• A systemised business operation 
• Strong marketing capability and USP 
• Identifiable market share opportunities 
• A distinctive Brand name. 

At this point, the business looks very suitable for scaling into a franchise model. 

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Structuring 

 

It’s important for you to think about how you will set up your franchise’s corporate structure, for a couple of reasons: 

1. Asset protection  

1. Tax implications 

Keeping your franchise’s assets (like franchise agreements and intellectual property) in separate ownership structures means that if anything goes wrong with one asset, the other assets remain protected.  

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Case Study: Corporate Structure

Below is an example of David’s corporate structure. In this scenario, as the intellectual property is owned by a separate IP holding company, then in the unfortunate event of the franchisor company failing, the IP can be sectioned off and potentially sold. David’s Doggy Daycare will hold all the leases for its franchise sites, so has set up a separate leasing company for further protection. 

It’s essential to speak to a lawyer and accountant about the best structure for your franchise, so that risk (and tax!) can be reduced as much as possible. 

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Intellectual Property 

 

Another essential piece when embarking on franchising is making sure your intellectual property is protected and, where possible, registered. After all, franchisees are buying into a brand, so it makes sense to make sure the brand IP is protected. 

One of the most important aspects of IP is your trade mark. 

A registered trade mark gives you the exclusive right to use that name or logo in your industry (or in the IP world, your “class of goods and services”). 

This will ensure that copycats can’t use the same name and logo in your industry – and leverage off your good reputation. A lawyer will make sure your trade marks are registered in the right classes of goods and services, after taking into account your short and long term plans for the franchise. They can also advise you on how ‘registrable’ your name is, which might depend on whether there are already other registered trade marks similar to yours or whether the name is one that should be used by other traders. 

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Case Study: Trademark

David sets out to register his business name, David’s Doggy Daycare, as a trade mark. 

After speaking with his lawyer, he finds out that you sometimes can’t register first names as trade marks. Even though his name is combined with “Doggy Daycare”, this is too descriptive and IP Australia would reject the application because other traders should be entitled to use “Doggy Daycare” in their name. 

David would really like a unique business name, so this advice motivates him to engage a brand specialist to help him come up with a new, uniquely identifiable name which he can trade mark.  

In Part 2 of this series, we’ll be covering the all-important topic of system design and the customer experience. Watch this space!