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Thread: Approached to Franchise

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    Default Approached to Franchise

    Hello-
    I have been approached by a successful franchiser who wants to partner and franchise my business. He will handle all of the business side of things including marketing, franchising agreements, websites, basically everything but the refinement of my product. He will give me space in his office space at a rental price and have his current staff work my issues at a payment schedule that I would incur. He would delay those costs until the business is turning a profit. In return he has asked for a 50/50 split of future earnings.

    I have not clue if this is appropriate or not. I do know that I'm not inclined to pursue franchising on my own given all the work involved from the business side; and even if I did, this would propel me 3 years ahead in the process at least. Also I would retain total control of my original business.
    What things should I ensure are in place. I believe we should have an dissolution piece but what else should I be considering? Thanks..the business side is not my forte.

    ps-I do trust this person, who is already very successful with over 75 franchises of their own business...just want some other advice from those who might know more.

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    I work with a group that does exactly that, look for existing businesses that are suitable for franchising. They then do all the work as you mentioned.
    The structure is usually along these lines;

    1) The business owner keeps the existing business. This is so it is NOT tied into the franchise side of the business, to make sure the owner continues to have a livelihood and to not have the existing business involved with any possible liabilities or law suits.
    2) A separate company is set up for the franchising with the “concept” or product or service licensed from the existing. Sometimes the original owner gets some equity, but not a majority.
    3) The original owner does not get a percentage of profits, but rather a percentage of sales. This is a clean way to do it so there is no question about, or ability to manipulate, “profits”. It also gives the franchising company the freedom to do what is necessary, including adjusting the franchise business model, product or service (sometimes to the chagrin of the original owner).
    4) Franchisors typically receive up front franchising fees and then an ongoing royalty from its franchisees. Sometimes they also make money from selling a particular product to the franchisees OR by receiving rebates from suppliers who sell to the franchisees.

    Rather than splitting profits you may want to consider simply receiving a portion of the revenue, fees, royalties, product profits and rebates. This will assure you receive money quickly regardless of profit. It’s too easy to manipulate profits that you may never see.

    As a real life example; we found a small quick serve restaurant owner with 2 or 3 shops who agreed to let us franchise the business. We set up a separate company and gave him a small equity position in the new company; he kept all his original shops. The new company licensed his trade name and concept.

    We then spent the money to do the legal paperwork and redesign the shop look, logo and signage. We sourced out the products and arranged for rebates from the manufacturers/suppliers. We spent the money for marketing including exhibiting at trade shows etc.

    We paid the owner a percentage of sales, I think it was 30% of franchise and territory fees and royalties. This was good for him and us. Whenever we sold a franchise or collected royalties he was paid quickly, regardless of our profit. I was good for us because we knew our costs AND we had full autonomy to operate the franchising business. His primary responsibility was to train new operators and show up at meetings and trade shows ( he was a bit of a character like a Colonel Sanders so he was good for that).

    As a safeguard for the owner we had a performance schedule (quota) that required we sell and open a certain number of franchisees within a certain period of time. His recourse was simply to be able to halt the license from going forward.

    Franchising a business can be difficult and expensive if you have never done it before. It is a great way to expand and profit from a business, assuming the business works. The legal part is a little complicated and tedious but basically boilerplate. The FDD (franchise disclosure document) is a pain to complete and keep up to date. It’s also a little confusing dealing with individual states, some have no particular requirements while others are difficult to be approved.

    The HARDEST and most expensive part is the marketing. I don’t know what your product is, but in restaurants it is a life changing decision and significant investment. It required professional sales people to dig up and close the sales.

    So, after all that, my biggest recommendation would be to consider a percentage of sales, rather than a percentage of profit. Otherwise, It sounds like a great opportunity with an already successful franchisor, especialy if you do trust him.
    Last edited by Paul; 06-07-2014 at 05:39 PM.

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    wow-Paul..thanks tons I so appreciate your input. The sales versus profit is something I'll have to explore. My product is education based, so actually I think you're right that this is a great opportunity. I don't want to give up control so the partnership offer sounds like a good way for me to keep that side of things in hand. Your point about the manipulation of the concept of profits is important. So glad I found all of this!

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    Quote Originally Posted by dlaustin View Post
    wow-Paul..thanks tons I so appreciate your input. The sales versus profit is something I'll have to explore. My product is education based, so actually I think you're right that this is a great opportunity. I don't want to give up control so the partnership offer sounds like a good way for me to keep that side of things in hand. Your point about the manipulation of the concept of profits is important. So glad I found all of this!
    Glad if it was a little bit helpful. Let me know if you have questions as you go forward, I am familiar with franchisor/licensing structures etc.

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    What a great response Paul... I have also been approached by an organization to franchise my business... I didnt decide to do it at first but have been contemplating it more lately. Your outlining of the norms, helps me to see that they werent to far beyond what I should expect. I was suprised initially when they told me that the company would be restructured to a separate organization outside of my company and I wouldnt have any real control... I have recently began to think about the benefits a bit more tho. I was on the forum tonight posting a bit of advise that I give to my store owners about shipping, and after I was done I browsed around a but and came across this thread and it made my night.. well morning lol... thanks again for putting the time in to such a detailed and forth coming response to this gentlemans inquiry.
    Michael Elliott, MBA
    http://gamestartstores.com
    Want to open a video game store? I can help! Check my site for max detail!

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    I’m glad if helped give a little perspective.

    I took a look at your site. No wonder they want to franchise you, you are already 90% there! You are doing exactly what a franchise does.

    If you want, let me know what kind of proposal they have made. I may be able to give you a bit of feedback and a little more detail on the process and what to expect.

    Good luck,
    Paul

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