So you have signed your first franchise agreement and just signed over a hefty sum of money for a franchise fee to your new “strategic partner”, the franchisor. Now what? You are nervous about one of the biggest decisions you will make in your life, excited about the opportunity of “being your own boss” at long last and making some “real money” (hopefully!), anxious about everything going smoothly (knowing full well that “Murphy’s Law” is alive and well) and restless to get started on your new venture. So what happens now? We have all driven down the street and seen the seemingly endless franchised businesses on every corner and in every mall. Most of them seem to be busy and full of customers. But how do they get there? What happens in the time between signing a franchise agreement and the day a franchised business opens its doors for the first time? Let’s take a look!
ORGANIZING THE FRANCHISED BUSINESS
If you have not done so prior to signing the franchise agreement, you will likely need to set up a corporation to own and operate the franchised business. You, in turn will own the shares and control the corporation. Owning a franchised business through a corporation is commonly done for two reasons: first, it limits your personal liability and protects your personal assets in case anything should ever happen to the franchised business; and second, it allows you and your accountant to use certain techniques to minimize income taxes. However your franchisor will require you to sign a “Transfer and Assignment Agreement” so that your personal obligations to them (confidentiality, non-competition, compliance with the operating system, and any personal guarantees) are not neutralized by the transfer of the franchise rights to the corporation. Your lawyer will be able to help you with this relatively straightforward procedure.
FINANCING THE FRANCHISED BUSINESS
By the time you have signed a franchise agreement, it is likely that you have had at least preliminary discussions with your bank concerning financing. However, it is also likely that although your bank may have given you some positive indications of their interest, they would not have gone so far as confirming their commitment to finance your franchised business in writing (often referred to as a “Commitment Letter”). That’s because at the time you spoke to them, you were not technically a franchisee of anything – so any discussions were strictly hypothetical. Now that you are a bona fide franchisee, it’s time to firm up those discussions. First, check with your franchisor to see if they have a “franchise package” set up with their corporate bankers. If so, preferential lending terms and service charges may have already been negotiated by the franchisor for the benefit of all of the franchisees in the franchise system. Even if there is not, banks will often offer preferential terms in order to keep their corporate clients happy.
In order to issue a financing Commitment Letter, the banks will likely require a copy of your signed franchise agreement, and a copy of the lease (or Offer to Lease) for the premises from which you intend to operate your franchised business. In addition to confirming the details of any term loans, small business loans and operating lines of credit you may need to finance your business, don’t forget to confirm the various service charges the bank will levy on just about every transaction that hits your bank account. Remember, it’s a competitive world out there – even for banks. It always pays to shop around.
SECURING A PLACE OF BUSINESS
Finding a suitable location and negotiating a lease for your franchised business can be a complex and intimidating process for the best of us. For most businesses, the three most important rules are “1) Location, 2) Location and 3) Location”! In today’s competitive market place, finding and securing a location can take anywhere from 8 weeks to 6 months. So it’s best to have patience and remember that building a business is a marathon, not a sprint. So take your time and do it right!
Franchisors will often have detailed site selection criteria drawn up and experienced leasing professionals available so that everyone can minimize the risk of choosing the wrong site – or the right site for the wrong price. In the event your franchisor does not have any formal criteria or leasing arrangements established, talk to your nearest franchisee colleagues about their experiences and advice – with the benefit of hindsight. Asking them “If you had to do it all over again…” is usually a good place to start. There are all kinds of commercial real estate firms with leasing agents that will be more than happy to help you find a location. These leasing agents customarily work on a commission or “success fee” basis where the landlord of the property you have leased pays the fee. Make sure that you confirm these terms with the leasing agent in advance of them doing any work for you.
Once the Offer to Lease is signed and the “First and Last Month’s Rent” deposit is paid, landlords are usually willing to hand over the keys to the premises and construction of your new franchised business can begin. Once they have a copy of the Offer to Lease, your financial institution will likely be prepared to advance funds to pay the building contractors. However, the banks will also need to receive some form of evidence to prove the work has actually been completed. This may be in the form of an Engineering Certificate as to the percentage or stage of completion of the work, a supplier invoice with receiving documents, or similar documentation.
While your new location is being built, it’s usually just the right time to start learning your new business. Franchisors often like to schedule training so that it is immediately prior to opening the location. That way everything you have learned is fresh and ready to be implemented right away. You will likely have received a copy of your Franchisor’s Operations Manual. READ IT. Take notes. Scribble in the margins. Better yet, if there is time before training, ask your Franchisor if you could VOLUNTEER your time and work for a while in a neighbouring franchise location. There is nothing like hands-on experience to make book learning come alive in a very real setting. Your initial training with the franchisor will be that much more meaningful because you will be able to relate first hand to what the instructors are talking about. While your neighbouring franchisee is introducing you to the day-to-day operations of the business, you are offering him some free labour for his store.
Selecting and managing the right staff is the backbone of any successful business. This is especially true in consumer-oriented franchised businesses. Knowing this, your franchisor will likely have a series of job descriptions and hiring guidelines developed for you to use. Most franchised businesses anticipate a manager or Second In Command (“2IC”), in addition to the franchisee in order to properly manage the business on a day-to-day basis. This is the first position to be filled. This 2IC position is so important that many franchisors will get directly involved in the screening and recruiting process. Budget so that you can bring your 2IC to Initial Training with you. It is important that they receive the full benefit of training as well as have the opportunity to develop important relationships with your franchisor’s home office management and staff. While placing “want ads” in your local newspaper is the usual practice to attract job applications, don’t forget to put a sign in the window of your new store while it is under construction – you’ve already paid for the space so why not take advantage of “free” advertising to the walk-by traffic. Make sure you include an email address and fax number on the sign. In addition, it is often worthwhile to contact neighbouring franchisees to see if they have any extra applications or part-time staff who are looking for extra hours. Remember: “Hire the Attitude and Train the Skills”.
“SOFT” OPENINGS VERSUS “GRAND” OPENINGS
You are now ready for business! You’re trained, your brand new franchised location is built, staff hired and you are ready to greet the rivers of customers that will soon be pouring through your door to spend their hard-earned dollars. Possibly, but not likely. No matter how good the product or service, no matter how established the franchisor’s brand, no business promotes itself. This is especially true of new businesses to the area. It is therefore critical to hit the ground running with a strong, well conceived marketing plan that budgets for at least the first 12 months of business. While there are many different forms of advertising and marketing techniques, marketing and public relations gurus will often differentiate between “soft” opening advertising versus “grand” opening advertising.
A “soft opening” simply refers to opening your new franchised location for business without any unusual fanfare or special attention. Advertising and promotional efforts are held to a minimum and tend to follow the retail marketing programs generally recommended by the franchisor for that particular time of year. This is done so that you have the opportunity to work with your new staff and develop a good team spirit while ensuring all the “bugs” are ironed out of your new facilities and equipment. No matter how prepared we are, we can always count on something going wrong that we did not anticipate. Always remember “Murphy’s Law”: “If something CAN go wrong, chances are it WILL go wrong!” (Or, put another way, “Buttered bread always falls with the buttered side down!”) Consider the soft opening period, usually 6 to 8 weeks in duration, to be a trial run or test period. Although this may seem like a long period of time, remember that your franchise agreement probably runs the better part of 20 years – including renewal periods. So this is a marathon, not a sprint. Take your time and get it right.
All too soon the soft opening period will be over and it will be time to consider a “Grand Opening”. Now that your staff has settled in and are comfortable with their responsibilities and the systems and equipment are operating smoothly, it is time to create some fanfare and special attention by a Grand Opening. Grand Openings are designed to be the official introduction of the franchised business to the community. They are usually held at the franchise location so that you can show off your well-trained staff and state-of-the-art facilities and otherwise introduce your products or services to the neighbourhood. Special invitations are usually extended to local politicians and dignitaries, media and community groups. They are designed to be exciting and a lot of fun for everyone – although hectic to organize and execute smoothly. Don’t forget to ask the ranking dignitaries present to perform the traditional “ribbon cutting” ceremony!
GROWTH CYCLE OF THE FRANCHISED BUSINESS
Like any business, franchised businesses grow and mature in a distinct pattern known as a “Business Life Cycle”. The Business Life Cycle of a Franchise begins when the franchise agreement is signed and a franchise fee is paid. We might refer to this point as the “Initialization” of the Franchised Business Cycle. From Initialization to the Soft Opening, or when the franchised business first opens its doors for business, may be referred to as the “Incubation Stage”. The next stage of growth, referred to as the “Development Stage”, begins with the Soft Opening and ends when the Franchised Business reaches its breakeven point. A ‘breakeven point” is reached when the revenues generated by a business are high enough to pay all the expenses, on a consistent basis. This is a critical time for any business and often associated with the highest degree of risk. (Remember “Murphy’s Law”!) Once breakeven is achieved, the Franchised Business enters into a “Growth Stage” characterized by annual sales growth of 10% to 15% or more per year, followed by a “Maturation Stage”, yielding sales growth equivalent to a few percentage points above inflation, then decline. In many ways the Incubation Stage is the foundation upon which the whole Franchised Business Life Cycle rests. Your ability to learn and apply the intellectual know-how developed by the Franchisor and licensed to you for your use will have a direct impact on how quickly your franchised business turns a profit and yields an attractive return on your investment for many years to come. That is why it has been the primary subject matter of this article.
Perry Maisonneuve is the principal consultant at the Northern Lights Franchise Consultants Corporation, Ontario, Canada. He can be reached at firstname.lastname@example.org