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Open Your Franchise with a Boom
By J. Perry Maisonneuve
You have just signed your first franchise agreement and handed over money for a franchise fee to the franchisor. So, what happens in the time between signing a franchise agreement and the day it opens for the first time? Let us take a look.
Ownership
If you have not already done so, set up a corporation to own and operate the business. You, in turn, will own the shares and control the company.
This is done for two reasons:
- It limits your personal liability and protects your personal assets in case anything should happen to the franchise.
- 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 your personal obligations to him/her (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 should help you out with this procedure.
Financing
By the time you have signed a franchise agreement, it is likely you have had preliminary discussions with your bank concerning financing. Now that you are a bone-fide owner, it is time to solidify those discussions and commit your financing with a commitment letter. Check with your franchisor to see if he/she has a package set up with a corporate bank. If so, preferential lending terms and service charges may have already been negotiated by the franchisor. If not, banks will often offer preferential terms to keep their corporate clients happy.
To issue a financing commitment letter, banks will require a copy of your signed franchise agreement and a copy of the lease (or offer to ease) for the premises of your business. In addition to confirming the details of any term loans, small business loans and/or operating lines of credit, do not forget to confirm the various service charges the bank will levy on transactions. Remember to shop around for competitive rates.
Securing a site
Finding and securing a site can take anywhere from eight weeks to six months. Be patient. Building a business is a marathon, not a sprint. Often, franchisors will have detailed site selection and a leasing professional available to help with choosing the right site. If your franchisor does not have any formal criteria or leasing arrangements, talk to other franchisees about their experiences.
There are many commercial real estate firms with leasing agents who can help you find a location. They tend to work on commission or on a success-fee basis where the landlord of the property you will lease from pays the fee. Make sure you confirm these terms with the leasing agent in advance before doing any work for you.
Once the offer to lease is signed and the first and last monthâ??s rent is paid, landlords usually hand over the keys to the premises and construction of your new business can begin. Send a copy of the offer to lease to your bank so it can prepare funds to pay building contractors. However, banks will need evidence to prove the work has actually been completed. This can be an engineering certificate, supplier invoice with receiving documents or similar documentation.
Initial training
While your new location is being built, start learning more about the industry. Often, franchisors will schedule training immediately prior to opening the store. Make sure to read your operations manual. Ask to volunteer at a neighbouring location. This way, your initial training with the franchisor will be become more meaningful as you are able to relate first-hand to what is being talked about.
Staffing
Selecting and managing the right staff is the backbone of any successful business, especially in consumer-oriented franchised operations. Your franchisor will provide job descriptions and hiring guidelines for you to use. Often, the first position to be filled is a manager or second in command (2IC), in addition to the franchisee. The 2IC position is so important, many franchisors will get directly involved in the screening and recruiting process. Budget so you can bring your 2IC to initial training with you. It is important he/she receive full support as well as have the opportunity to develop relationships with your franchisor's head office staff.
Place want ads in your local newspaper to attract job applications. Do not forget to put a sign in your new store window while under construction and include an e-mail address and fax number. Contact neighbouring franchisees for extra applications or part-time staff looking for more hours.
Soft openings vs. grand openings
You are now ready for business. But, no matter how good the product, service or how established the franchisorâ??s brand may be, no company promotes itself. (This is especially true of new businesses to the area.) Hit the ground running with a strong, well-conceived marketing plan, budgeting for at least the first 12 months of business. Decide whether you want to conduct soft-opening advertising or grand-opening advertising.
A soft opening means opening your location without any unusual fanfare or special attention. Advertising and promotional efforts are minimal and follow the retail marketing programs generally recommended by the franchisor for that time of year. This way, you can work with your new staff and develop good team spirit while ensuring all the bugs are ironed out. Consider the soft-opening period of six to eight weeks to be a trial run.
Grand openings are the official introduction of the franchise to the community. Send special invitations to local politicians, dignitaries, media and community groups. These events are designed to be exciting for everyone (although hectic to organize and execute smoothly). Do not forget to ask ranking dignitaries to perform the ribbon-cutting ceremony.
Growth cycle of the franchise
A franchise's business life cycle begins with initialization, when the franchise agreement is signed and a franchise fee is paid. From initialization to the soft opening (or when the franchise first opens its doors for business) is the incubation stage. This is followed by the development stage, which begins when the soft opening ends and when the franchise reaches its break-even point. A break-even point is reached when a business's revenues are high enough to pay all expenses on a consistent basis. This is a critical time for any business and is associated with the highest degree of risk. Once break-even is achieved, the franchise enters into a growth stage characterized by annual sales growth of 10 to 15 per cent or more a year. This is 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 on which the whole franchised business life cycle rests. Your ability to learn and apply the know-how developed by the franchisor will have a direct impact on how quickly your franchise turns a profit and yields a return on your investment for years to come.
J. Perry Maisonneuve is founder and principal of Northern Lights Franchise Consultants Corp., a management consulting firm specializing in developing and expanding businesses that use franchising as a strategy for growth. He can be contacted at (877) 667-8449 or via e-mail at jpmaisonneuve@franchiseservices.ca.
Added on March 01, 2006
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