Thursday, June 23, 2011

Growing the Franchise

imageThis article was written by Betty Otte, SCORE Orange County Management Counselor

(Editor’s Note: This is the third in a series of articles on franchising by Ms. Otte. If you missed the prior two parts, you may access them in the newsletter archives under the “franchise” heading.)

When most of us think about franchises, we are referring to the business based franchise like the top 500 franchises published in Entrepreneur magazine each year. Entrepreneur’s 75 different categories range from automotive to services, but they all have one thing in common – a systematic method to deliver services or products.

You, the franchisee, have supported this system with your royalties and initial purchase price and now will be one of your biggest assets as you decide to grow your business.

Since the systems for the franchise are already in place, your biggest concerns as you grow your business are:

· Finances – having sufficient capital and assets

· Location – for many businesses, location is critical

· Employee training

· Culture transition

Employee Training and Culture Transition

You have worked the business in the first franchise location, so those employees have translated your style into their work habits. They have seen by example how to handle a customer. To expand, you are required to hire people who will accept your style and be able to train other employees in that culture without your presence. Turnover of employees is expensive and time consuming. Finding the right managers who can translate your wishes should be high on your priority list before taking on that second location.

How will your role change? Will you still manage the first location with a manager in the second, or will you try to manage both? Trying to be in two places at once is difficult if not impossible. Will you put a manager in each location and personally tackle marketing and public relations? Can you relinquish control? It may be harder to do than you think.

Due Diligence

Be sure you exercise due diligence and investigate the following before you decide to expand:

· Figure out why the franchisee is selling. If it’s because the franchise is not successful, you need to figure out why. Lack of motivation or self discipline, poor territory, inability to keep employees, there could and will be many reasons. You have the advantage of knowing the system so it is easier to differentiate perception from reality.

· Protect yourself from liabilities. You will want to do a net asset sale to protect yourself from liabilities connected to the present owner with an indemnification clause. Even though he or she may have given you many reasons why they want to sell, you may never know the true reason, so make sure to protect yourself from any outstanding legal actions.

· Check financial statements. It is mandatory to check out the owners financial statements for 5 years or as long as they have been in business. What has the growth pattern been over this time period? Look at the sales tax returns and the income tax returns. It is easier to determine accounts payable, but equally important, in some businesses, is the accounts receivable. Often last minutes games are played with receivables.

· Can you assume an existing lease? It is important to check with the landlord if you are taking on an existing location. Many resources are available online to define due diligence requirements for the purchase of a business. Read one from SCORE.

· Right of first refusal. In many franchise agreements, the franchisor has the right of first refusal. That means if the existing franchisee has someone who is willing to purchase the business, the franchisor has the first right to come in and make the purchase at that price.

How to Grow the Franchise

· Purchasing another territory. One way to expand is to purchase a territory from another franchisee. The same due diligence must take place here, however, as with the purchase of any business.

· Purchase more territory or locations directly. Exercising this option means you will adhere to the same requirements published in the Franchise Disclosure Document (FDD) for the given year. FDD’s need to be renewed each year within the state of the sale. California and New York are states with the strictest requirements.

In many ways, growing a franchise is easier than growing an independent business. Take advantage of the network of other franchisees in the system. You all share a common goal and work within a given framework. Call them for marketing, PR and management tips.

Multiple unit management is a very difference challenge but it comes with many rewards. You, the owner, will change what you do, but your philosophy will double and triple with each new growth step. Make it the fan that it really can be. Remember that SCORE has over 12,400 volunteers ready to help mentor you, many of whom have franchise experience. Seek help from your nearest SCORE office or online counselor. SCORE counseling is always free and confidential.