When a business licenses its trade name and operating systems to a third party in exchange for a payment, and the business exercises some controls over the operation of the third party's unit, the business is considered a franchise. Franchising enables retailers to use third party capital to expand, decentralizes the cost of operating the retail locations, and reduces the cost of headquarters' operations. All these factors have a positive impact on a company's return on investment. For those companies for which franchising is a proper method of distribution, it has proven quite successful. It is not the right strategy for every company, and many companies that chose to franchise wish they had not done so. Care should be taken before a determination to franchise is reached. Once the decision to franchise is made, the development of the system should only progress by strategically developing the entire concept (operations, training, marketing, financial and legal aspects of the company). Each program should be developed to respect the company's structure and culture. It is important to remember that it is the system which will be offered and will guide both the franchisor and the franchisee to success. The builder of a franchise program needs to follow a detailed business (or strategic) plan which examines the issues and make the determinations needed to implement the franchising strategy.

• Does your business have an established track record?
• Do you and/or any of your partners have experience in the business greater than the period of time your business has been in operation?
• Does your business have more than 5 locations?
• During the time your business has been in operation, has it maintained net profits in each location?
• Does the business generate repeat customers?
• Do you have money to invest in the development of your franchise concept?
• Will the start-up requirements for franchisees be less than $25000?
• Are training requirements less than 3 months?
• Does your business have international adaptability?
• Is your industry competitive?
• Have you received franchise inquiries in the last year?

• How strong is your company? - Personal evaluation, management assessment, team capable of developing the franchise plan.
• How much money do you need? - Certain factors you should consider: company's organization, products' positioning, operations, distribution, marketing, training, support services, required number of locations in a market to effectively deliver the company's product, expansion forecast, legal requirements, projected return on investment for each different type of location, headquarter's requirements, development costs...
• Is your idea feasible? - The first source of guidance and advice during this fact-finding period is a franchise consultant. Individuals who specialize in this type of business operation can help you with management issues, research and development, trademark preparation, training requirements, expansion goals, market segment research and start-up preparation. This doesn't exempt you from doing your own research, however. A thorough market research will help you make a reasonable sales forecast for your expansion activity.

If the feasibility analysis is positive, the next step is to develop a strategic plan. The strategic plan describes the basis for the development and continuing management of the franchise system. The development of the franchise system should be approached as a team effort between the company's management and its outside advisors (franchise consultant, legal counsel, accountant, marketing professional...). The basic elements of the strategic plan include:

• Executive summary and business overview summarizes all that follows.
• Industry analysis and background is prepared for the product and service (focusing on the end-user) and the franchisor (focusing on its competition).
• The franchise operation defines the franchisor's program for each step of the franchise relationship: start-up, early development, continuing operations.
• Organizational structure determines the most appropriate organizational structure to accommodate the present organization and its anticipated growth. Organizational structures should be developed for the franchisor headquarters, staff, international operation and franchisee operations.
• Operational format defines the relationship between the company and its franchise distribution system, including communications and training.
• Manuals and training determines the correct structure and language for procedural and operational manuals and training programs.
• Retailing issues defines the retail operating system including merchandising standards, inventory issues, reporting requirements, loss prevention, marketing and advertising, catalogue issues and those other critical aspects insuring that the franchisee operates as a "mirror reality" of the franchisor's operations.
• Franchise development prioritizes the goals and makes specific recommendations for implementing an effective growth program.
• Franchisee selection criteria and marketing strategy determines the franchisee recruitment and selection process and the most effective means of market entry, the markets to be penetrated, critical mass and distribution requirements and the definition of the franchisee profile.
• Evaluating the roll out fees determines the projected rate of growth for the franchise system and the company itself. The rate of growth when coupled with the financial projections and start-up costs will enable the company to determine the franchise fee, continuing royalty fee, advertising contribution and other income for the franchisor.
• Action plan organizes and schedules the tasks to be completed in implementing the plan. It should provide for controls and feedback to ensure a clear direction for the company.

When financing the future franchising of your company, plan ahead. Revise your business plan on a yearly basis, and generate marketing plan to complement your business plan. These strategic planning tools not only help you define goals and objectives, they also provides you with a time frame upon which you can build your financial projections. This will help you to be prepared when you need to go knocking on doors for additional capital.
Methods of raising money

• Self-financing
• Banks
• Venture capitalists
• Miscellaneous investors: family, friends and business partners
• strategic alliances with suppliers, vendors...
• going public

Finding prospective franchise buyers: Specifically, you will need to know the following:

• Who would most likely be interested in your franchise? Where can you find them? One way to qualify potential franchisees is offering him or her a survey similar to the one prepared by the International Franchise Association "Is franchising for you?".
• Can they afford your franchise fee? Whenever possible, run a financial background check on your potential franchisee.
• Do they represent a sound business risk? Take into account the previous information collected, such as a person's credit history and their personal background in business ownership and management.

Believe it or not you may already have prequalified, potential franchisees waiting to be investigated for potential business ownership. Those are the people who have come up to you and said "If you decide to franchise, let me know. I want to be involved".

Where are the potential franchisees?:

• networking
• public relations
• advertising
• open houses, workshop and seminars
• trade shows

Once you found someone interested:

• Thank them for their interest in your company
• Offer them your franchise brochure (this brochure should give them a good idea of what your business is like and tell about your business concept, your plans and your attitude towards expansion)
• Answer their questions

Set your sales goals and prepare ways to reach them:

• Understand your potential franchisees
• Encourage them to do some research on your company and industry
• Learn how to handle objections

The franchise agreement is a complicated document. A number of areas must be covered, each in a section designed for that purpose. Key topics should include what the franchise fee will be, and what that cost will include, it should define and develop specifically what the location requirements are, establish the rights and duties of the franchisor and the franchisee.

Entrepreneur Magazine's Guide to Franchising and Expanding your Business, Entrepreneur Business Start-Up Guide No.1808, 1995.