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Do you need a proven business system to franchise?

Posted by Carolyn Dufton on 3 May 2010
Do you need a proven business system to franchise?

"Has anyone ever seen a franchisor that has sold franchises without an open, operating, and successful company owned location?"

This was a question posed on Linked in by Kelcey Lehrich a US franchising consultant.

This question turned into a discussion that was contributed to by many players in the franchising industry.

In essence, there were two camps. The one camp that maintained that it is not necessary to operate a business prior to franchising and who stated:

"Franchising is its own industry. A Franchisor can achieve the same result with a franchisee who purchases the first franchise and uses it as a "showcase" facility.  Out of the 76 industries that franchisors are presently franchising more and more are NOT opening company operations.  Most franchisors that do have company operations will sell them after starting to franchise."

The reply to this was;

It may be possible however my question would be why in the world would anyone be willing to pay a franchise fee if there are no units open and no demonstrated record.  When I put myself in the position you are obviously thinking about it seems this is not a franchise at all but a possible partnership with one person who has a yet unproven idea and one believer in the business idea.  My thought would be either become a partner and help open a unit or take the financial risk in exchange for a very sweet deal.

And a US lawyer's input was:

There is no legal requirement that a business ever exist prior to it offering franchises. Indeed, at congressional hearings about a decade back the issue of franchisor competence was discussed and it was found that franchisors did not owe a duty of competence to its franchisees. All you need to be a franchisor in the United States is a Franchise Disclosure Document and in some state file or submit it for review and registration.

Putting that aside, there is no support in the professional community, and that would include stretching the word "professional" to include the franchise packagers be they consultants or lawyers for franchising based on a concept that has never had a working prototype. One of the baselines for a threshold analysis of whether a company is franchisable, in all of the literature i have ever read on the subject is the existence of the model being based on a working prototype at least. States merely require disclosure unless there are other facts for your clients that support their claims there may not be much they can do.

The failure rate for start up franchises is already too high as many companies move into franchising simply by completing the legal requirements. There is nothing to prevent them from doing that. But it is a terrible practice and one that does not have much support in franchising. But unfortunately, it happens. 

As it relates to having company owned locations while a company is franchising, (they closed or sold off company owned locations), many companies do not have owned operations including many of my firm's clients. Different issue and different debate.

The discussion was stimulating and fascinating and I can recommend it to anyone who understands or wished to learn more about the industry.

Here is the link;

(you have to be registered to LinkedIn to access this link)
http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&gid=698197&discussionID=17164486&split_page=1

So, is it true, do you have to have successfully operated a business prior to franchising?

Best practice franchising is a business model that replicates a proven successful system.

You will note the use of the term "best practice".

It is apparent that there are franchise models that have not operated their business prior to franchising. In this case these businesses do not have a proven system. They are dependent on the franchisees to provide them with the "proof".

It is also apparent that there are business owners who are not only prepared to spend time and money creating the proof but who are also prepared to pay a Franchisor money for the opportunity to do so! Astounding!

There is no legislation which states that a franchise has to have run successfully or unsuccessfully for that matter, before being franchised.

Most responsible franchise consultants would advise a potential Franchisor to operate a business at one or more locations (in the case of retail particularly) before Franchising the business.

It is then commonplace for a Franchisor to "sell on" the original operation/s and to not retain a company outlet. Some Franchisors find that operating a company store assists them with;

  • Cash flow
  • Training
  • Staying in touch with business operations
  • Operating a flagship store

Either method is quite acceptable.

The Franchisor has operated the business themselves prior to Franchising and can sell franchises with confidence in the proven system.

I am often approached by businesses with "great ideas" and my answer to them all is always the same. Go and build the business, test and refine the system. Create a profitable business.

When you feel confident that you could teach someone else to do exactly the same thing and get a positive result, let's talk franchising.

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Author: Carolyn Dufton
About: Carolyn Dufton Dip. Bus (Franchising) heads the team as the owner and manager of franchisingplus. Carolyn has a wealth of small business experience, and many years of hands on franchising experience.
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Tags: Franchisor Franchising

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