Tailoring your franchise agreement

You can't have a franchise agreement tailored for your business before the franchise model has been established. Clive Sawyer reveals the steps you need to take

I am often surprised at the number of business owners that seem to forget fundamental business principles when franchising their business. The most important and critical first step, when undertaking any new venture, is to develop your business plan, and franchising is no different. The franchise development plan, sometimes called the feasibility study, is the document that creates the franchise model that all other phases of the franchise development will refer to. I find it inconceivable that some business owners believe they can develop, launch and run a national network of franchisees without having developed a comprehensive franchise model first.

The franchise development model will typically include the roles and responsibilities for franchisor and franchisee, the terms that the franchise will be offered on, the upfront and ongoing fee structure. In addition, it will dictate the size of territory and whether territories will be offered on an exclusive or non-exclusive basis, whether there will be any minimum performance levels for franchisees, and the basis for any renewal of the franchise.

The franchise development model must also have financial projections for both the franchisee and the franchisor. This should reveal what every franchisee should achieve as a minimum. Franchisee projections should not be ‘on target earnings' which very few people ever attain. It is far better to understate the franchisee projections ensuring that franchisees exceed them, creating motivation and goodwill, rather than having disappointed de-motivated franchisees.

The franchise development model must also include franchisor projections for franchisee recruitment. The franchisor projections should not be an exercise in spreadsheet manipulation, whereby the number of franchisees recruited is adjusted until the bottom line figure looks good! For most businesses starting out in franchising, recruiting four or five franchisees a year for the first couple of years is doing well. It would be ideal if all franchisees started together and all at the beginning of the year, however in practise this does not happen. In reality franchisee recruitment will be staggered throughout the year and therefore an allowance has to be made in the franchisors financial projections that the income from each franchisee will not be a full 12 months.

When deciding if franchising is viable, three criteria must be met: 1) Franchisees must be able to make sufficient profit based on conservative income projections and realistic operating costs 2) The franchisor must be able to make sufficient profit based upon realistic franchisee recruitment levels and realistic costs of properly supporting their franchisees 3) The franchisee profit potential and upfront cost must be suitable for the type of person targeted as a franchisee.

Only after the franchise development model has been created and meets these three criteria should one move to the next step in franchising a business, namely implementing the franchise development model. The implementation phase will involve putting the systems and processes in place to support a nationwide network of franchisees, having the franchise legal agreements produced, writing the franchise operations manual, creating a franchisee training programme, developing the franchisee recruitment strategy, and creating the franchise recruitment material.

When franchising a business do not forget basic common business practices, create the franchise development model first. If you get this right then the other elements in implementing the franchise become relatively straightforward.

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