Startup Diaries: Top 10 Lessons Learned Through My Franchising Adventure
Felena Hanson shares with The NextWomen the key lessons she learned through her experience of franchising her business, Hera Hub, explaining the steps it takes to launch a franchise, and the factors to consider when embarking on this process.
It is one thing to build a business, but it is entirely another thing to build something that can be replicated hundreds of times. In the following article, I will share my experience in franchising and the steps it takes to launch a franchise.
What is a Franchise?
Franchising is defined by state and federal laws as a business relationship between two parties, which gives:
- A person or group of people (the franchisee) the right to sell a product or service using the trademark or trade name of another business (the franchisor).
- The franchisee the right to market a product or service using the operating methods of the franchisor.
- The franchisee the obligation to pay the franchisor fees for these rights.
Assuming you have a strong business model that’s duplicable, you may want to explore franchising as a way to expand. This allows you to scale without significant funding and management.
1. Shift Your Thinking
It’s an understatement to say I bootstrapped my business. I did everything from assembling furniture to painting the walls. I didn’t even hire my first full-time employee until 12 months after I launched. It took me a while to go from the mentality of business owner to franchiser. Who am I kidding… ? I’m still fighting it on a daily basis. You’ll often find me watering plants, fixing chairs or washing dishes. I know that’s not the best use of my time, but I feel compelled to make sure the facility provides our members a first-class experience.
I continue to challenge myself to step out of the day-to-day business and use my time to focus on franchise expansion.
I find that continuing to set up “systems” and blocking my time is allowing me to see the light at the end of the tunnel… still a work in progress!
2. Hire a GREAT Attorney
You will be required to prepare a standard disclosure document for your franchise operation. This document, called the Franchise Disclosure Document (FDD), is required by the Federal Trade Commission if you want to offer franchises for sale anywhere in the United States. You will need an amazing franchise attorney to get you through this process.
I interviewed eight attorneys, all of whom were personal recommendations. I spent at least one hour on the phone with each of them and based my decision on the following factors:
- Experience – the attorney we chose had 20 years of experience, specifically in franchise law.
- Responsiveness – how big is the firm? How responsive will they be to my needs?
- Price – not looking for the cheapest but somewhere in the middle.
- Personality – is this someone I could spend a lot of time with? Because you are going to spend A LOT of time with this person!
In the end, I chose to work with Lee Plave, as he seemed to have all the above requirements.
3. Learn How to Make GREAT Decisions (all of which you could be sued for!)
I typically take the “Ready, Fire, Aim” approach to business. I like to follow my gut and move quickly. Those days are over when you franchise.
Here are just a few of the hundreds of decisions you’ll have to make…
- The franchise fee and royalty percentage.
- The term of your franchise agreement.
- The size territory you will award each franchisee.
- What geographic area you are willing to offer franchises within.
- The type and length of training program you will offer.
- Whether franchisees must buy products or equipment from your company.
- The business experience and net worth franchisees need.
- How you will market the franchises.
- Whether you want an owner-operator for each unit, or area/master franchisees who will develop multiple units.
Business Structure - Another major consideration is how you will structure the legal entity of your business. I initially set up Hera Hub as a C Corp (for tax and liability reasons). When I decided to franchise, my attorney advised to me to set up a separate entity to manage the new business.
Multiple entities help you build, as our attorney says, “air tight cabins” (in our case protecting company owned locations and the Federal Trademark).
Another major reason to set up a separate entity is because you are required to prepare audited financial statements before filing. This can be upwards of $10,000 if the accountant has to review complicated financials. Our new entity (Hera Hub Franchise International, LL) had a very simple balance sheet because there was no activity. The exercise still cost us $2,500… and that was the least expensive option we could find. It is critical that you hire an experienced franchise accountant to produce these audited statements and to advise you on the structure of your business enterprise.
4. Build a Strong/Protectable Brand
Your concept needs distinguishing features to give it a clear identity in the marketplace. This identity includes things like:
- Trade dress and image (the way the locations look);
- Trademarks (identify the business and/or the products offered); and/or
- Service marks (identify the business and/or the services offered).
Protection of Identity – You should take the necessary steps to protect the franchise identity by registering with the U.S. Patent and Trademark Office. This federal registration will give you important legal rights. Part of this process will be to investigate who else might already be using the same or similar names and logos. You can do this yourself, using a service like Legal Zoom, or you can hire an IP attorney. We did the latter. There is an additional bonus – a federal trademark; this gives you automatic access to 30 U.S. States when you file your FDD with the Federal Trade Commission.
5. Design Strong Systems
You first need to start with several editions of your model before you’re ready to franchise. This is for two reasons – one, you need to shoot holes in your own system by duplicating it several times, and two, your franchisees want to see that you have a solid track record. One location can be an anomaly, two is better, three or more is best.
Our franchise team had to analyze every aspect of our business and build sophisticated systemized standards for operations. These include things like policies and procedures that will be used at every business location. The system includes the special know how about how to set up and run the business.
These systems are detailed into the lengthy Operations Manual. In addition to the Ops Manual, you will need to develop a training program that will teach a new franchisee whatever they need to know to become a successful operator. You will also need to formalize the sales and marketing plans that a new franchisee will use to drive customers into their new unit.
There's a mountain of work involved in getting all your systems set up and ready to go.
We took a blended approach to this process, using our existing staff, complemented with outside experts in franchising and process mapping.
6. Know Your Numbers
I have to admit… I’m a marketing girl. I can create it, price it, promote it and sell it, but in the early days I tended to operate on the old ‘I have money in my bank account’ model.
It wasn’t until I found a good accountant who I could pay to sit me down every month and really understand my numbers that I felt like I was a “real” business owner.
Profitability – Operating a franchise is a business, and the primary purpose of businesses is to make money for the owners. You must make sure that the concept is capable of generating sufficient profits to make money for your franchisees (even after paying your royalties and other fees).
Accounting Systems – Be sure to work with an accounting firm that understands franchising, as you will need to implement sophisticated systems to track sales and collect royalties. We chose to go with Vector Business Solutions, as they were willing to learn with us and create a system that provided us with a standard chart of accounts, a training program for franchisees and a cloud based platform.
7. Document Everything
You will need to build comprehensive manuals for every aspect of your business. Ours break down into Operations & Marketing, Real Estate and Start-up Manuals.
Your Franchise Agreement will require your franchisees to follow the mandatory system standards in the manual. So, it is important that the manual includes everything that the franchisees must do. It can also include non-mandatory suggestions for other things. Manuals change over time, as system standards are added, dropped or changed. Your Franchise Agreement should allow you to modify the manual anytime you want to.
Your training program will be a short course on how to set up and run the business. Some training programs last a few days, while others last a few months (our program is one week). The complexity of the business and your franchisees’ previous experience will affect how long your training program will last.
Most franchise training programs involve some “classroom” time and some on-the-job training. Classroom time typically consists of meeting key franchisor personnel, reviewing key parts of the manual, going over the franchisor’s forms, learning to use computer software or point-of-sale equipment and learning things needed for day-to-day operation of the business. Some training programs involve "self-study" time, where the franchisees watch training videos, or fill out worksheets about the business. On-the-job training is usually offered at the franchisor’s location, at the location of an existing franchisee or at the new franchisee’s location right before opening.
8. Beware of “Out of the Box” Systems
There are many “one-stop-shops” that will help you franchise your business. The problem is that your concept will have to fit into a square box, even if you’re a round peg. Hera Hub is definitely a round peg. We figured this out early on when we purchased some manual templates. Much of the franchise industry is focused on food and hospitality so much of language in the FDD/FA and manuals spoke to these industries.
I wanted to really understand the process I was taking my business through.
I was also skeptical of the prices I was being quoted. Ultimately, it took twice as long and twice as much money as we were told (almost a full year from decision to franchise and $100,000+ U.S. dollars).
9. Find GREAT Mentors
Connect with those who have walked in your shoes, no matter what their industry.
Because I decided against the “box” method to franchising, I knew I needed to find and hire expertise that I didn’t have.
Both specialists pretty much fell into my lap – Bett Mickels came by Hera Hub one day for a tour and inquired about membership. When I looked at her resume and realized she had 20+ years of franchise development experience, I snagged her. Also, Marliese Bartz was an existing member, who was repositioning her business from events back to her roots in process improvement. Marliese is a process queen… just the type of person we needed on our team.
Another key advisor is Mary Ann O’Connell, founder of FranWise. She has been franchising forever and knows all the key players and moves. Any time I have a question or need a resource, I call Mary Ann!
Advisory Board - It took me a year to build my advisory board (after I made the decision to franchise), but I’m glad I did, because as I grew to understand the needs of the business, I realized I needed a different caliber of mentor. I now have some heavy hitters on my board, including a woman who built and sold one of the largest service-based franchises in the world and a woman who built and sold one of the most successful office suites in the United States.
10. Sell, Sell, Sell
Know your target franchisee and build a bullet proof franchise development plan. Most franchisors use brokers, online listings and exhibit at tradeshows. We’ve decided to go the non-traditional route of old fashioned networking and shoulder tapping. We’re not necessarily looking for a person who is seeking a franchise opportunity. Rather, we’re looking for an individual that brings unique characteristics to the table – someone who is well-connected, outgoing, a natural marketer, and of course, supportive of female entrepreneurship.
This entire process has taught me so much and I am fortunate to have such strong counsel on my side.
It won’t be long until Hera Hub is across the United States, engaging and supporting female entrepreneurs. It’s an exciting chapter for us and we couldn’t be more ready!
One of the best starting points for researching this idea is the International Franchise Association (IFA). The IFA is the industry trade association for franchising, and has a host of resources that you can access to get started in this process.
Franchise Glossary - http://www.franchise.org/uploadedFiles/Files/Glossary%20DL%20-%20IFA.pdf
International Franchising - http://www.franchise.org/international.aspx
Felena Hanson is the Founder of Hera Hub, a collaborative co-working space for women which has two locations in San Diego and is getting ready to open a third. With the goal of franchising over 200 locations in the next five years, Hera Hub is the first co-working space to franchise. Felena’s vision and mission is to create an empowering space for women entrepreneurs to find fellowship, community, resources, and development.
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