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If you run a successful business, franchising is a great way to grow your business model. However, you can run into issues if you franchise your business too early or recruit a franchisee who is the wrong fit for your franchise. These are just two common franchising mistakes. Furthermore, you risk your franchise collapsing if you fail to consider which corporate structure can facilitate your franchise business’ growth.

This article explores these common franchising mistakes and how you can avoid them to ensure your franchise runs successfully.

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Your Business is Not Ready to Franchise

Often, business owners fall into the franchising mistake of franchising their business too early. It may seem like an excellent time to franchise your business when there is a steady cash flow and you are generating revenue. However, you should ensure your business is in its maturity stage when franchising. This is where your business’ revenue and growth start to plateau.

At this stage of your business lifecycle, you will likely have:

  • a sound operations system that works for your business model; and
  • sufficient capital.

As a franchisor, there are some costs you must consider when establishing your franchise. These costs can include:

  • legal fees for drafting legal documents and manuals;
  • investing in training franchisees; and
  • marketing materials to aid your business’s expansion.

You might be able to recoup these initial expenses from your franchisees. However, you will still need some capital to initiate the franchising process.

Furthermore, there are some factors you should consider when deciding on the right time to franchise. For example, you should ensure sufficient consumer demand for your business’s goods and services. If your sales have been unstable over the past few years, your business model may not be ready to franchise.

Additionally, it would help to consider whether other people may be interested in buying into your business. In a franchise, other business owners buy into your business and become your franchisees. The franchisees will run the day-to-day operations of a store or branch while you receive a portion of the profits and license fees. If there is little to no interest from third parties to invest in your business, you may not have enough interest from prospective business owners to enter the franchise agreement.

Consider the Right Corporate Structure for Your Franchise

The very success of your business could depend on how you set up your corporate franchise structure. Therefore, you should consider a few corporate structures, each with advantages and disadvantages.

A Single Company Structure

A single company franchise is where you set up a proprietary limited company (Pty Ltd) to operate as the franchise. In this sense, the company operates as a separate legal entity that owns assets and incurs its own liabilities.

One advantage to this structure is that it is relatively easy to operate. For a single company franchise, you will usually have a single set of accounts and regulatory requirements to meet.

A disadvantage of this structure is that if your franchise business faces financial difficulties, you risk losing valuable assets and intellectual property. This could hinder your plans to use the assets in other ways.

A Two-Tiered Company Structure

A two-tiered company structure generally consists of a:

  • holding company that owns the assets and intellectual property of the business; and
  • subsidiary company that enters into contracts and incurs liabilities.

Generally, the holding company owns 100% of the franchise system’s shares in the subsidiary companies.

One advantage of this structure is that it protects your business’s assets if a third party sues the subsidiary company. This is because the holding company owns the business assets.

The main disadvantage of this structure is that it can be expensive to set up and manage. Primarily, you need to have separate accounts and records for each company. Additionally, you will need additional legal agreements between the holding company and the subsidiary companies.

Trusts

A trust is a legal relationship where the trustee owns the assets of a business and operates the business on behalf of the trust’s beneficiaries. For your franchise, you can typically have a:

  • discretionary trust, which allows the trustee to choose how to distribute the assets to the beneficiaries; or
  • unit trust, where the trustee must distribute the trust assets according to the set number of units a beneficiary holds.

Recruiting the Wrong Franchisees

A franchisee is essentially your brand ambassador. This is because a franchisee will use your business’ branding to market and sell its goods and services. Therefore, if you recruit the wrong franchisees, they could potentially damage your business’ reputation.

To recruit a franchisee who is the right fit for your franchise business, you need time to conduct an effective advertising strategy to get in contact with as many potential franchisees as possible. Moreover, once you have a pool of potential applicants, you should develop selection criteria to assess the potential applicant.

When interviewing prospective franchisees, you should ask franchise-focused questions and also broader questions about their experience. While the applicant’s qualifications and experience in the franchise industry are essential to running a new business, other qualities such as ambition and work ethic make a franchisee valuable.

Some franchise owners prefer a rigorous interview process. However, other franchise businesses allow potential franchisees to spend time within the core business. This way, the applicant gets a feel for the day-to-day running of the franchise business before deciding to join the franchise system.

Key Takeaways

Franchising your business can bring some excellent benefits to your business. However, there are some common franchising mistakes that can occur if you are not careful. If you decide to franchise your business, you should ensure that:

  • your business is at its maturity stage;
  • your corporate structure can facilitate your franchise business’ growth; and
  • you take time to recruit the right fit for your franchise.

If you have questions about franchising your business, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is a franchise?

In a franchise, other business owners (the franchisees) can buy into your business model. The franchisees will run the day-to-day operations of a store or branch using your business’ branding.

When is the right time to franchise?

There is no clear-cut time to franchise your business. If you are considering franchising, you should speak with an experienced professional such as a lawyer and an accountant.

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