Have you ever thought about expanding your business by franchising it and becoming the McDonald’s of your industry, only to have the thought fade fast because all you can picture is a restaurant?

For the most part, when we think of a franchise business, typically food, car care and home repair are the most familiar business categories. However, in the last decade the diversity of franchised business formats has grown rapidly. The International Franchise Association now breaks down franchise businesses into 81 different industry categories and 21 sub-categories. Most notably is the proliferation of business-to-business franchises. Environmental, Internet, paralegal and training leads the list of new franchised business formats. Health care, with six sub-categories, and recreation, with five sub-categories, are also coming to the forefront of franchised businesses.

hoteles en HoofddorpThere are many misconceptions about franchises. One is that all franchise companies are large corporations like Holiday Inn, Century 21, H&R Block, with several hundred locations. The fact is that nearly 70% of all franchises have less than 50 locations. Conversely, another misconception is that all new franchises are small companies. There are many large corporations that have launched additional expansion through franchising. An example would be Valvoline Oil Company, which had 200 company-owned fast-lube locations before they began franchising.

Franchising is a business method and relationship, not an industry. It is a legitimate business expansion strategy for product or service businesses. How mainstream this strategy became in the 90s is substantially noted by the fact that currently there are more than 4,500 companies that franchise with approximately 650,000 franchise locations generating more than $850 billion in annual sales in the U.S.

The McGrow Group, a franchise consulting company located in Massachusetts, predicts that by the year 2010, there will be more than 9,000 companies that franchise, with over 1 million franchise locations with annual sales expected to reach $2 trillion. This will represent 45%-50% of all retail and service sales.

Hotels de IzolaFranchising can best be described as a relationship between a parent company and an independent partner in which the partner, for a financial fee, acquires characteristics and elements, including identity, imagery and experience from the parent. Essentially, one who owns or has developed a business or product becomes the "franchisor"and grants to the "franchisee" the ability to offer, sell, or distribute products or services that are closely associated with the "franchisor's"business systems, trademark, service mark, trade name logo, advertising formats, or any other commercial symbols.

Some of the advantages of franchising are:

1. Provides capital for growth. Traditionally, businesses trying to expand will obtain capital by borrowing, or by surrendering equity. Franchising allows companies to expand without the risk of debt or the cost of equity.
   
   
2. Reduces the legal risk of expansion. Generally, the franchisee signs leases and makes commitments to various insurance and service contacts that allows the franchisor to expand with minimal contingent liability.
   
   
3. Enables faster market penetration. By leveraging the manpower, time and efforts of the franchisee, several markets can be developed at the same time.
   
   
4. Motivated on-site management. With the franchisee's investment on the line, they are more dedicated than a company employee. Sales and profits should be higher, expenses will be lower, customer satisfaction will be greater, and quality standards will be maintained.
   
   
5. With minimal refinements, a domestic franchise program can address the need to expand into global markets.
   
   
6. Buying power, steady cash flow from royalties, trademark recognized nationally by way of unit advertising, and organized distribution of products or services are additional advantages of franchising.

There are of course some disadvantages to franchising which can delay or eliminate this means of expansion. Three main considerations are:

1. The preparation of a written franchise-offering-circular that meets the Federal Trade Commission requirements, plus the organizing of training and marketing materials will require an up-front investment.
   
   
2. You will be dealing with independent operators rather than employees. Since your business relationship with these operators was initiated by way of a franchise contract that required a financial investment, different management and people skills will be required.
   
   
3. Although your initial investment per location is minimal, proportionally your net receipts from franchisees could be less than from company-owned operations.
   

ERROR MSGThe most important factor when considering expansion via franchising is whether or not your business can be easily replicated. Before you retain legal or franchise consulting services, the following questions should have positive answers.

Do you presently own a profitable business?

Do you want to expand you business rapidly?

Can your business be readily systematized and broken into its essential components?

Is your business relatively simple to operate? Could it be learned quickly and easily by other business people?

Does your business generate enough revenue for both the franchisee and the franchisor to share in the wealth?

Could your business be easily duplicated? Could it be cloned for a reasonable amount of money?

Is your business based on a trend rather than a fad?

Could a copy of your business break-even in a reasonable amount of time (a year or less)?

Is your business prepared to enter long-term business relationships with independent operators?

Can your business afford to invest in a franchise program?

Three elements of your business that need to be reviewed prior to the decision to expand are: trademarks, accounting procedures and training/operational systems. Your company name, logo, product name or distinctive service systems will need to be processed through a legal search to make sure your company identity is available wherever you plan to expand.
Accounting information that will be presented to a prospective franchisee will require auditing. And, all operational procedures will need to be produced in a written operational manual.

Expansion through franchising will not work for every business format. However, for the small-business owner who thinks only of burgers, tacos and mufflers when they think of a franchise, it may be time to get out of the box and explore franchising as a method of expansion.

> See also: Franchising

Authored by Dick Mueller, president of FranSelect, Inc., a franchise consulting firm.
Republished by permission of the St. Louis Small Business Monthly, The Source for Business Owners
May 2001.

For further small business assistance, contact a consultant at a Small Business Development Center near you.