In September 2003, Katharine Halpin sat eating breakfast with a business associate at a Phoenix restaurant.
Halpin was in an irritable mood and grumbling. For 10 years, the Phoenix-based coach and leadership strategist for CEOs and corporations had hired personal contractors in order to keep up with high demand. In return, she found herself training her competitors and diluting her brand.
After she put down her fork and finished venting, her friend referred her to a franchise consultant. Halpin’s first two-hour meeting with the consultant resulted in three options: grow company-owned stores with others managing employees, license her product to others or franchise.
“I was a very successful solo-preneur with a few part-time employees,” Halpin said. “I wasn’t big enough to hire full-time employees to be leadership strategists. If I licensed, I would lose quality control.”
Halpin, 48, came out of the meeting with complete clarity – she needed to franchise. “Franchising was the only way I could build a bigger brand and maintain quality control over the services provided,” she said. “I had been burned a few times with my independent contractors when I had not stayed involved. It was an easy decision once I got to that point.”
Like many business owners, Halpin had reached a tipping point where it made personal and economic sense to franchise. “I was limited by what every entrepreneur is limited by: what he or she can produce,” Halpin said. “Now I’m reaching further and deeper into the organizations because I have more people to deliver the services.”
She formed the Halpin Cos. Inc. for the sole purpose of selling her non-traditional intellectual property franchise. To date, she has sold seven franchises in three states at $25,000 a pop.
Not just fast food
The traditional model of franchising has been turned upside-down with no limit on what can or should be franchised. Once dominated by the fast-food and cleaning-service industries, businesses offer franchises in everything from cruise planning and children’s parties to fresh-fruit bouquets and IT services. In 2005, more than 300 new franchise concepts opened their doors in the United States alone. And in Arizona, there were 223,000 people employed by franchises, according to a 2004 report by the International Franchise Association. Franchises make up nearly 20 percent of the state’s private-sector economy.
One reason for the growth: Franchise businesses are successful. According to the association, 90 percent of franchises succeed while 90 percent of regular startups do not.
First challenges
If you think your company is ready to franchise, experts say you should form a legal and consulting team to draw up a UFOC, or Uniform Franchise Offering Circular. The UFOC is a document on your company and what you will provide to franchisees. Some UFOCs run more than 100 pages.
And they’re not cheap. Costs for the documents can run into the hundreds of thousands of dollars, but if the legalities of franchising laws are not clearly spelled out, there could be serious consequences.
“It was very expensive as a small-business owner,” Halpin said. “It cost me about $75,000 the first year, mostly in legal and consulting fees. I had two attorneys, my franchise attorney and my corporate attorney. I had to have two audits. It costs me about $10,000 a year to maintain the franchise, between getting the audited financial statements and updating the UFOC.” But, she says, the money she collects from selling franchises, royalties and other commissions helps offset those costs.
Franchising also can be a challenge for some business owners, especially if they are the aggressive, my-way-or-the-highway types. Franchisees are partners, not employees. The relationship between franchisor and franchisee is more like a marriage. “You have to nurture the partnership as much as you nurture the business,” Halpin said.
Support system
Joann Smith and Beth King spent more than six months researching different franchises to purchase. They interviewed at corporate headquarters, drafted comprehensive business plans, proved their financial stability and underwent background checks before they took control of a Two Men and a Truck franchise in the southwest Valley three years ago. They purchased a second franchise in the northwest Valley last year.
“We thought it was the safer way to go. We both left safe, long-term jobs and didn’t have the luxury of taking too much risk,” said Smith, 52. “They support you with marketing, branding, training and software. You feel a little more confident. They held my hand through the financials.”
However, buying a franchise can be just as financially daunting as starting to franchise your business, with total startup costs for Two Men and a Truck between $100,000 and $400,000. But a 2006 survey from the franchise association found that more than 20 percent of all franchisors offer direct financial assistance through a formal financing program. .
The rules for franchisees also may not be as limiting as you might think.
“In a lot of things we have flexibility,” said King, 46. But in other areas King and Smith have to follow strict guidelines.
“You get your own area to market in based on ZIP code,” Smith said. “You can’t go into other areas.”
The legal concerns, balancing act between franchisor and franchisee, and financial commitment can make the leap into franchising a frightening venture. But the risk might be worth the reward.