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FAQ: Converting a Business to a Franchise

By: Dave Howell - Updated: 17 May 2012 | comments*Discuss
Franchise Franchise Business Franchisee

Many small businesses develop to the point where expansion is the next logical step. Opening more branches is one option, but for some businesses converting their business into a franchise operation they can sell could be an option. Use our frequently asked questions below to decide if your business can use the franchise format to expand.

Are all Businesses Suitable for Franchise Expansion?

The short answer is no. A business that wants to expand by converting to a franchise must be easily duplicated in any part of the country. Customer facing businesses like restaurants or printing services have proven to be very popular. Specialised businesses that require high levels of technical expertise are not generally suited to the franchise format. All successful franchises avoid having to reinvent the wheel with each franchise branch. Your business must be an off-the-shelf enterprise that can be set-up and run easily by anyone.

Are the Costs High if I Want to Become a Franchisor?

Yes, simply because your business must invest considerable sums of money developing its franchise operation. A franchisee is looking for a brand they can buy into. What many businesses that want to use the franchise format for expansion fail to appreciate is the level of input and support they have to give to each of their franchisees. It is not simply a case of creating a franchise handbook for your franchisees to learn from. Day-to-day hands-on help and support is always needed. This of course comes at a cost in time and resources.

Legally, do I Have Any Responsibilities Once I Have Sold a Franchise?

Once you have signed the franchise agreement with your franchisees you enter into a legally binding contract. The contract itself should clearly lay out the responsibilities of each party. Business expansion via the franchise model can be highly profitable, but you should ensure your franchise agreements set out how who is responsible for which components of the franchise operation. Commercial premises is a clear example of how things can go wrong. Your franchise contract should indicate who is responsible for the business’s premises. Commercial leases are notoriously complex. Make sure you understand your responsibilities before expanding your business using the franchise model.

Can I Close a Franchise Operation if it isn’t Profitable?

You should be able to do this as ultimately your contract with the franchisee is to make enough profit to pay your franchise fee each year. The good news is that over 90% of franchises are profitable. You can of course eliminate all of the risk your business takes on when it expands using the franchise model. However, a good vetting process should enable your business to spot any franchisees that won’t commit to the business, and therefore, make a profit.

Do Franchises Work in Any Location?

Not really no. The basis rule with a franchise expansion is to look at the existing area you want to set-up a franchise in. If your business is similar to others, ask yourself why a franchise isn’t already operating in that area. Detailed market research is vitally important. This will tell you if there is a market for your business’s goods or services in the area your franchisee wants to set up within. Your business may want to expand using the franchise model, but a few well chosen franchise sites are infinitely more profitable than many franchise operations that can only just pay their franchise fees.

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