| Imagine opening 20 new business locations without | | | | legal requirements, franchise operations manuals, |
| having to foot the bill for real estate, equipment and | | | | training programs, etc., they decide to “delegate |
| development costs or taking on any of the risk. Even | | | | responsibility,” usually to a high-priced franchise |
| more, imagine finding managers to run all those | | | | consultant who produces the operations manual and |
| locations, who are just as committed to growing the | | | | sometimes even the legal documents. Putting aside the |
| company as you, and you don’t have to pay them | | | | practicing law without a license issue on the legal |
| a dime. Finally, imagine that these managers will hire, | | | | documents, does using someone to write your |
| fire and manage all employees as well as foot the bill | | | | franchise operations manual who knows literally nothing |
| for all operating costs and expenses. Sound | | | | about your business, ever make any sense? |
| far-fetched? | | | | The best practice approach, developed over almost |
| Not if you're planning to enter the franchise industry, | | | | three decades of my writing, editing and reviewing |
| one of the fastest ways to grow a small business | | | | hundreds of franchise operations manuals is based on |
| without breaking the bank. For many companies, | | | | common sense. Let the true “expert” in your |
| franchising a business (or licensing) is a sensible way to | | | | business write the operations manual. And who is that |
| achieve rapid, profitable growth without giving up any | | | | expert? It’s usually the founder of the business or a |
| control or ownership. Going from a single location to a | | | | handful of your management personnel who know the |
| dozen in a couple years, or a hundred in ten years is | | | | business inside and out. It’s true, an outside |
| possible and well-documented because franchise | | | | franchise expert should be involved in the process, but |
| owner-investors put up all investment capital, shoulder | | | | this should be limited strictly to a planning and editing |
| all risk and assume all day-to-day operating | | | | capacity – helping develop the overall Table of |
| responsibilities. | | | | Contents, giving samples of writing styles and |
| It's expansion, using OPM - Other People's Money. | | | | technicques, then reviewing each chapter after it’s |
| Also, the franchise company gets paid handsomely for | | | | drafted by you or your management team. This |
| teaching others the secrets of how to operate its | | | | approach produces a professional, easy to use and |
| business. First, there’s the up-front | | | | update franchise operations manual. It also ensures the |
| “membership” or franchise fee of $20,000 to | | | | most efficient use of resources and talent.franchise |
| $50,000 paid for using the brand name and operating | | | | disclosure documents |
| methods. In addition, there are continuing royalties of | | | | Finally, and only after all of the above are underway, a |
| 5% to 10% of gross sales for ongoing advice and | | | | Franchise Disclosure Document, similar to a securities |
| consultation. In essence, a franchise development | | | | (stock offering) prospectus, is prepared by competent |
| program allows a company to get out of the trenches | | | | franchise counsel and registered with various |
| and become a highly-paid general overseeing its | | | | regulatory agencies to comply with applicable federal |
| soldiers. Long-term options are also attractive. Build an | | | | and state laws. This document can contain thousands |
| empire and relax, or let the franchise company be | | | | of discrete disclosures within its twenty-three chapters |
| acquired by an increasing number of large companies | | | | and attached exhibits, and obviously needs to be |
| that look for small, but growing franchise companies. | | | | prepared by a franchise attorney. Doing it properly and |
| According to the International Franchise Association, | | | | with a balanced and fair perspective can help keep |
| 900 new companies have franchised in the last three | | | | the company out of the courtroom later. In addition, a |
| years. | | | | franchise registration process is required before any |
| ENTERING A NEW BUSINESS | | | | franchises can be advertised or sold in those 14 or so |
| A company planning to franchise must realize it is | | | | states having a franchise registration requirement. |
| entering a new business, offering an entirely different | | | | Having one firm author, edit and review all documents |
| service (training & support) to entirely new | | | | is not only cost-effective - it also avoids |
| customers (business owner-operators). This new | | | | inconsistencies that can plague the franchise company |
| business requires different skills, abilities and expertise. | | | | as franchise legal pitfalls in the future (see discussion |
| In the new business of franchising, it is critical to | | | | below). |
| develop effective evaluation, documentation, mentoring, | | | | RECOMMENDATIONS |
| training and consulting skills. Since these new skills are | | | | My twenty-eight years of experience has |
| rarely present within existing personnel, an outside | | | | demonstrated that in order for a franchise company to |
| franchise expert is needed to train existing personnel | | | | get off to a good start, a heavy emphasis should be |
| and plan the transition. The first step involves | | | | placed on strategic franchise planning to manage |
| determining whether or not a business can franchise, | | | | future franchise relationships as discussed above. |
| and if so, what needs to be developed. Next, strategic | | | | Then, before the franchise program begins, |
| franchise planning is necessary to create a "blueprint" | | | | management needs training in how to effectively |
| for successful expansion efforts. Experience shows | | | | operate a franchise organization. At a minimum, the |
| that, just like a building, the foundation developed at the | | | | following programs should be in place before franchise |
| beginning will create lasting consequences affecting | | | | marketing efforts begin: |
| the relative success (or failure) of the entire venture. | | | | 1. Franchise Lead Processing System (sm): |
| Legal (franchise disclosure document, franchise | | | | Two key considerations for all franchise companies |
| agreements) and operational documents (franchise | | | | engaged in franchise marketing are the careful |
| operations manual, franchise training program) are | | | | screening of franchise applicants and adopting the |
| prepared and drafted and finally a franchise | | | | proper media plan, schedule and budget. Only the |
| registration process is required in some 14 states, | | | | cream of the crop should be allowed to join the |
| depending on which state(s) the company sells | | | | franchise network. Eliminating applicants at the entry |
| franchises. These phases are discussed below. | | | | stage is far easier than waiting for inevitable and costly |
| THE FRANCHISE FEASIBILITY PHASE | | | | problems later on. An examination of franchise |
| An indispensable step before any franchise | | | | networks plagued by troublesome franchise owners |
| development program gets underway is an analysis of | | | | (who often ripen into future lawsuits) shows a lack of |
| the concept and business model. Has the concept | | | | planning and attention to this relatively simple concept. |
| been sufficiently proven in the marketplace? How | | | | Given the unlimited personal liability risk inherent in |
| profitable are existing prototypes or company-owned | | | | franchising, companies neglecting this important |
| outlets? Franchising will not solve existing problems, it | | | | concept, or those using franchise brokers, are simply |
| will only intensify them - and usually at a serious cost | | | | asking for trouble. |
| to franchise investors. Franchising should not be | | | | Before franchise marketing efforts start, a company |
| viewed as a method to raise capital, expand a | | | | should adopt a customized Franchise Lead Processing |
| business that has existing problems, or a way to get | | | | System that includes instructing key personnel in: |
| rich quickly. There must be sufficient profitability in the | | | | (1) adopting the proper organizational structure; |
| business model so that royalty and other payments | | | | (2) defining the appropriate profile characteristics of |
| can be made and leave the franchise investor with a | | | | prospective franchise owners; |
| sufficient profit. With a franchise feasibility analysis, a | | | | (3) developing effective interviewing techniques, |
| determination can be made about: | | | | marketing materials, procedures and checklists; |
| (a) whether franchising or licensing expansion ideas | | | | (4) using a series of tests and other measures to |
| should be pursued, postponed or abandoned; and | | | | ensure that inappropriate candidates are disqualified |
| (b) assuming a positive result in (a), what needs to be | | | | before joining the franchise network; |
| fine-tuned or developed from scratch for the franchise | | | | (5) detecting (and then avoiding) red flags that arise in |
| program. | | | | the franchise marketing cycle; and |
| Besides determining if and when the business can | | | | (6) adopting the appropriate media plan, schedule and |
| franchise, the analysis should also include providing | | | | budget. |
| guidance and direction so as much of the groundwork | | | | 2. Legal Compliance Program (sm): |
| as possible can be done by existing personnel. This | | | | A franchise lawsuit can result if inconsistent or |
| has proven to be a very effective approach and | | | | misleading communications occur when a franchise is |
| significantly reduces franchise development costs. If | | | | first sold. Most of the legal risk is franchising centers |
| the feasibility analysis is positive, the other phases | | | | around what happens during the marketing cycle: the |
| discussed below follow. My twenty-eight years of | | | | twenty-three chapters of disclosures in the franchise |
| experience in the franchise industry lets me share a | | | | disclosure document as well as who said what, and |
| valuable insight about franchise feasibility studies. Too | | | | when. Defending any franchise lawsuit, even a |
| many companies leap into franchising without doing a | | | | frivolous one, can be enormous. Franchise companies |
| feasibility study, or if one is done it is performed by a | | | | involved in franchise litigation are shocked to discover |
| franchise consultant or group that tells everyone good | | | | they have fallen into a quicksand that swallows up |
| news - they're all "franchise-able." The vast majority of | | | | time and money without limit. The cost of prosecuting |
| franchise feasibility studies I've done either identify | | | | or defending even a "small" franchise lawsuit can |
| areas that need attention before franchising makes | | | | quickly exceed $100,000, and up. Exposure can run into |
| any sense or tell the client to forget about it and | | | | the millions. Although one study of franchise disclosure |
| pursue other options. | | | | documents indicated 27 percent of franchise |
| THE FRANCHISE STRATEGIC PLANNING PHASE | | | | companies have a history of franchise litigation (slightly |
| A successful franchise development program begins | | | | greater than 1 in 4), the real percentage is much |
| with a solid plan - a foundation for franchising. The | | | | greater and probably north of 50 percent. This is |
| long-term goal is to establish balanced, integrated, | | | | because only pending litigation and final judgments |
| successful business relationships with qualified | | | | must be disclosed in franchise disclosure documents. |
| individuals who support the company's goals and | | | | Most franchise litigation cases, like other litigation cases |
| image. Creating an enduring relationship requires a | | | | are settled, so they’re only required to be in the |
| comprehensive strategy that addresses all aspects of | | | | franchise disclosure document from the time |
| the franchise endeavor. | | | | they’re filed until settled. After that, they vanish |
| The starting point is a detailed analysis that covers: | | | | without a trace. And whether the chances of getting |
| (1) identifying profile characteristics of who will be the | | | | sued in a franchise lawsuit and getting embroiled in |
| best franchise owners for the particular business; | | | | franchise litigation is greater than 1 in 2 or 1 in 4, who |
| (2) competitive positioning to make the franchise stand | | | | wants to get involved in a time-consuming, stressful |
| out from the other 3,000+ franchise companies; | | | | and expensive mess? |
| (3) geographic scope - where and when will franchises | | | | It is almost impossible to avoid potential franchise liability |
| be sold; | | | | unless a genuine program of education and instruction |
| (4) analysis of the company's organizational strengths | | | | is conducted with marketing personnel as well as |
| and weaknesses relative to franchising; | | | | middle and executive franchise management. An |
| (5) identifying the appropriate franchise organizational | | | | integrated Disclosure Compliance Program that |
| structure as well as staffing requirements and | | | | specifies rules and expectations (including legal rules in |
| responsibilities; and | | | | selling a franchise), manages franchise disclosure |
| (6) structuring the franchise relationship for a balanced, | | | | documents and controls the dissemination of all |
| win-win scenario. | | | | information is absolutely essential. It is also one of the |
| What should emerge from this detailed analysis is a | | | | best investments a franchise company will ever make. |
| specific strategic plan and framework for guiding | | | | For all of the above reasons, the use of franchise |
| virtually all franchise efforts. Despite the long-term | | | | brokers is definitely NOT recommended. Their |
| importance of the franchise planning step, too many | | | | statements (or other actions) made to "close the deal" |
| emerging franchise companies enter franchising with | | | | will make the franchise organization (and the personal |
| no plan or planning - other than "let’s try and sell a | | | | assets of its officers) liable for violations of federal or |
| lot of franchises." They rush through (or neglect | | | | state franchise laws. This also explains why the |
| entirely) the strategic planning process, thereby | | | | overwhelming majority of successful franchise |
| creating future franchise litigation land mines that are | | | | organizations set up their own in-house franchise |
| ticking franchise lawsuits waiting to happen. | | | | marketing department so that actions and statements |
| Often, this is because they only utilize the services of | | | | made during the franchise marketing cycle can be |
| a franchise consulting firm or franchise attorney, where | | | | monitored and controlled within the framework of a |
| little or no attention is paid to critical strategic planning, | | | | Franchise Sales Control System (sm). |
| operational and organizational issues. Normally, these | | | | 3. Franchise Sales Control System (sm): |
| firms draft "boilerplate" franchise disclosure documents, | | | | Franchise Sales Control is the other half of the entire |
| franchise agreements and franchise operations | | | | compliance equation. While legal compliance specifies |
| manuals based on a questionnaire completed by their | | | | rules and expectations, franchise sales control is the |
| client, who is presumed to have made all strategic | | | | mechanism for detecting gaps and inconsistencies. |
| decisions. The franchise documents are presented, | | | | When detected, their causes can be identified and |
| along with an invoice and a handshake - hardly the | | | | corrected before injuring the franchise effort. A |
| ingredients for success in the new business of | | | | Franchise Sales Control System should be designed |
| franchising. | | | | with this in mind, and should include a variety of |
| THE FRANCHISE DOCUMENTATION PHASE | | | | feedback mechanisms to monitor performance and |
| If the company has made doing a good job at the | | | | retrieve pertinent information for review by |
| planning stage the number one priority, franchise | | | | management. This not only increases the |
| documentation goals will be apparent. Proprietary and | | | | effectiveness of franchise marketing efforts - it also |
| intellectual property assets (like operating techniques, | | | | greatly reduces the likelihood that sales personnel will |
| customer information, recipes, formulas and methods) | | | | deviate from established procedures in selling |
| need to be identified and protected. A trade secret | | | | franchises. Finally, a well-designed Franchise Sales |
| protection program is developed and implemented. The | | | | Control System creates a complete back up file for |
| name, logo and tag lines should have been previously | | | | every franchise sold that will qualify as business record |
| registered as trademarks or service marks.franchise | | | | evidence in the event of a future franchise dispute. It |
| operations manuals | | | | also satisfies the legal requirement of various states |
| Franchise operations manuals and training programs | | | | that franchise companies maintain a complete set of |
| are developed, often from scratch, to impart business | | | | books, records and accounts of franchise sales. Since |
| operating skills to the franchise owner as well as | | | | most of the legal risk in franchising arises during the |
| ensure uniformity of products and services. The | | | | franchise marketing cycle, a comprehensive Franchise |
| franchise operations manual and training program | | | | Sales Control System is the company’s best |
| curriculum must be drafted with a particular focus. | | | | protection against the quicksand of franchise litigation. |
| Certain topics, chapters and policies found in manuals | | | | 4. Managing Franchise Relations: |
| for a company-owned chain, for example, are entirely | | | | As franchises are sold, the communication lines that |
| inappropriate in a franchise environment, creating | | | | develop between the parties will have a major impact |
| significant liability (lawsuit) issues for the franchise | | | | on the success or failure of the ongoing franchise |
| division. | | | | relationship. Controlling who is brought into the network |
| I routinely find franchise operations manuals drafted by | | | | through the steps outlined above is the critical first step. |
| franchise consultants or do-it-yourself manual | | | | Once inside the franchise network, franchise owners |
| kitscontaining inappropriate chapters or topics. Not | | | | must be taught to realize they are members of a |
| knowing where the bullets come from in franchise | | | | system of mutually dependent outlets, each working |
| litigation, they proceed blindly ahead using "boilerplate" | | | | for the better of the entire network. Developing an |
| manuals where most (but not all) instances of | | | | awareness of this concept early in the relationship and |
| "hamburgers" are changed to "tax returns." The | | | | implementing a franchise feedback system will create |
| support aspect of the franchise relationship needs to | | | | a positive attitude, encourage innovative ideas from |
| be carefully considered, structured and reflected in the | | | | franchise owners, ensure timely royalty payments and |
| franchise operations manuals. | | | | prevent franchise relationship problems later on. |
| Deciding who writes the franchise operations manual is | | | | © 1982-2008, Kevin B. Murphy, B.S., M.B.A., J.D. - all |
| a relatively simple question to answer, yet many new | | | | rights reserved |
| franchise companies also fall into a trap here. | | | | For more information, visit the Franchise Foundations |
| Bewildered by the new business of franchising, with its | | | | website. |