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10 questions you need to ask before franchising your business

May 12, 2020

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Your company is doing well, its model is easy to replicate, and it is ready to grow. You also always dreamed of expanding to new locations. You are about to make an important decision: make the leap and the franchise.

10 questions you need to ask before franchising your business10 questions you need to ask before franchising your business

As if it were a marriage to become a franchisor It is not an easy decisionto. With so many ways to fail, it is important that you are completely sure before you say “yes” how to take the right step.

Make a budget for the initial cost, provide all the necessary legal documentation, investigate the background of potential franchisees, make payments for rights … there are few things to do. But if you play your cards well, your brand could be the next subway.

Here are 10 important questions to ask before franchising your business:

1. Who can advise me to start?

Joel Libava, a professional franchise consultant based in Cleveland, USA, suggests that before you franchise your business, you should contact a company that is dedicated to franchise development, or a consultant that specializes in this topic Has. A specialist can help you with the basic issues and contact you potential franchisees once you’re ready. Please note, however, that there is a fee for this advice, usually a fee. These are the consultants certified by the Mexican Franchise Association.

2. What are the start-up costs?

The initial cost is usually over a million pesos. This includes legal and operating costs. Before you make a decision, you should know that franchising is not cheap for your business. If you want to be successful, you have to make some expenses.

Consider the expenses for the whole process: from consulting fees, franchise design, researching potential franchisees, construction, equipment, inventory, insurance … The list of expenses is long.

3. What percentage of the profit should you ask for?

In general, if you charge your franchisee a fixed percentage of royalties, you can make money from a franchise company. This is a predetermined gross sales quota – typically between 4 and 6 percent, although some royalties increase up to 25 percent. According to Libava 5 percent is an understandable percentage to collect for using your brand and everything that goes with it.

The fees are usually calculated monthly. You must also charge the franchisees a one-time fee of at least 300,000 pesos. This is a kind of registration for your franchise and a license to operate the company. For larger franchises, these costs could go up to a million pesos.

4. How much can I earn?

There is no number that is suitable for all cases. The profit margins vary depending on how successful your franchise is. However, to give you an idea, we give you a typical scenario for some successful food chains. Imagine a franchisor has 500 franchisees, each with their own business. If each of the stores has a gross annual turnover of 5 million pesos and the franchisor sets five percent of the license fees each year, he gets 250,000 pesos a year … multiplied by 500. That means more than 120 million pesos are needed. Not bad, right?

5. What are the basic legal considerations?

The franchising process involves complex legal issues. It is best to consult an experienced lawyer whose area of ​​expertise is franchise law. It is also important to note that Franchise legislation can vary from state to state. Make sure you understand the specifications of each location before proceeding to the next step.

6. What is a franchise disclosure document and why should I have one?

The Franchise Disclosure Document (DDF) is a legal document that franchisors must make available to potential franchisees at least 14 days before the partnership. It is a complex document consisting of 23 sections and hundreds of pages. To read it, it’s a good idea to go to a lawyer.

The DDF contains information about the history and finances of your company, Details of the franchise system (brands, patents, copyrights, etc.) and the specific agreements and contracts that franchisees must sign. In summary, this document – which incurs additional costs – is designed so that potential franchisees make the best possible decision when considering an investment in your franchise.

7. How can I attract potential franchisees?

One of the best ways is to use the various marketing tools and your website to clearly explain what can be achieved by investing in your brand. To further promote the opportunity you offer, consider taking part in franchise shows in your city.

You can also hire a franchise agent to contact potential franchisees for you. This could make your life a lot easier, but of course there are costs involved: if you contact them that lead to a sale, They charge a commission for their work.

When addressing potential franchisees, it is important that you present the opportunity as a relationship that is mutually beneficial.

Make sure you give potential franchisees security and let them know that the relationship you are building with them is not a one-way street. Show them that you are open to a win-win partnership and they will stay with you.

8. How can I identify potential franchisees?

As a young and inexperienced franchisor, it can be difficult to refuse a 300,000 peso check from someone who has the money. However, before you accept it, you need to take certain precautions, such as: B. interview him personally, examine his background and listen to your instincts.

To build a trusting relationship – and to avoid getting into problematic relationships – Libava recommends that you conduct a credit check on all potential franchisees. Look for red hot spots such as lawsuits, allegations of fraud or bankruptcies.

9. How many franchise companies should I start with?

You have two options:

You can select a single franchise unit (direct unit), which means that franchisees can operate a single business.
You can offer a multi-unit agreement that allows franchisees to manage multiple stores.

If you are franchising a company for the first time, experts recommend Start step by step: with a single operation. If your first franchise is making enough profit to continue and you are familiar with the workload, you can add units.

10. What common mistakes are to be avoided?

According to Libava, the worst mistake he made was consulting a single franchise lawyer and failing to get an additional opinion. If you save a little money on advice, you can pay very high costs in the long run … maybe your entire operation.

Another common stumbling block is turning your business into a franchise without opening a second location that serves as an experiment. Before franchising, open a second store or location where you know how a franchise would work. You could avoid a lot of setbacks.

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