Consider Expansion Through Franchising
Originally published: 08.01.14 by Charles N. Internicola
Grow your business while monetizing and leveraging the business assets you’ve already built
The success and growth of an HVACR business, like many other services based businesses, in large measure is dependent upon excelling at customer service, providing timely estimates and delivering prompt service. Typically, this means a successful HVACR business is one characterized with a solid marketing plan and a sufficient supply of service vehicles, support staff and well trained technicians.
What should follow next is a thriving business and thoughts or questions about how to take your business to the next level. That is, how do you raise the funding and get the time to really expand your business?
One option is to go at it alone, keep reinvesting in your business and establish a line of credit with a local bank, and expand staffing to support the management of your business. The problem with this option is it’s expensive and will remain heavily dependent on you.
One proven alternative is franchising. By franchising your HVACR business you create a franchise system around the business assets and systems you’ve already built, including your business or trade name and your methods for attracting customers and providing excellent service.
What is Franchising?
First and foremost, franchising is a legal and business model that allows successful business owners to expand their businesses by formalizing and systematizing their business model — taking what has worked for them, including their trademarks, methods of operation, training and customer service, and allowing third-party franchisees to duplicate their business operations.
If approached and structured properly, franchising represents a win-win scenario. As a franchisor you achieve your goal of expanding your brand, service locations and revenue potential, and your franchisees obtain the benefit of your know-how, established or soon to be established brand and on-going support. Your franchisees also solve a critical growth hurdle or impediment for you.
Your franchisees self-fund the expansion of your brand by investing their own funds to establish a new service location for which they purchase vehicles and hire staff. Your franchisees also manage the day-to-day operations (subject to the guidelines that you establish) of their own franchised service locations.
By franchising, you’ll monetize and leverage the business assets you’ve already built. Your franchisees benefit from your know-how and brand and, in return, you achieve growth and the potential to exponentially increase the territories serviced by your business and brand.
The Economics Involved
Leverage is a big factor when franchising is involved. As the successful owner of a well-respected HVACR business, franchising allows you to create new revenue streams in the form of franchise fees and royalties paid by your franchisees. In turn, your franchisees should benefit from economies of scale and increased earnings power from the systems and know-how you provide them.
The franchise fee is typically a onetime fee that a franchisee pays to a franchisor for the right to become part of the franchise system and be granted a designated operating territory. Franchise fees typically range from $12,000 to $35,000 and represent the upfront fee for training.
While the franchise fee is the upfront “entrance” fee, royalties represent an ongoing fee paid by franchisees. Royalty fees are typically charged on a weekly or monthly basis and they are commonly calculated based upon a fixed percentage of a franchisee’s gross sales. For example, a common royalty rate is 6 percent of a franchisee’s gross sales. The royalty fee represents an on-going obligation paid by a franchisee to remain a part of the franchise system. In exchange for the royalty fee, as a franchisor, you provide your franchisees with support and protection of your brand.
Depending on the structure of your new franchise system, there are opportunities to charge advertising fees. These fees are typically charged to cover costs associated with website maintenance and development of print and other advertising media such as vehicle wraps and advertising copy that may be used by your franchisees at the local level.
As you develop a growing franchise system, you’ ll achieve economies of scale and purchasing power with vendors. Over time, this plus factor can turn into valuable leverage in the form of rebates paid to you by vendors and favorable pricing obtained on behalf of your franchisees.
The Steps Involved
In nearly every service industry, franchising has been proven to be an achievable and flexible business model. There are legal requirements and costs, with
the primary requirement of a regulatory requirement that before you offer or sell a franchise you must provide your prospective franchisee with a written disclosure prospectus known as a Franchise Disclosure Document (FDD).
The FDD contains detailed information about you, your business model, estimated start-up costs and the legal rights and obligations between you and your franchisees. In certain states your FDD must also be registered.
Next Step for Your Business
While there is no one single formula to expand and grow your business, for the right HVACR business and owner, franchising represents an expansion vehicle that, at the very least, merits serious consideration.
If established and executed properly, franchising allows you to monetize your business assets and establish recurring streams of revenue. Best of all, franchising allows your business to start working for you.
Charles N. Internicola is a national franchise lawyer who assists successful business owners in franchising their businesses. Charles is the author of “How to Expand and Grow Your Business Through Franchising” and in addition to his work as a franchise lawyer he is also the managing member of a national franchise company in the cleaning services industry. To learn more about Charles visit his website at FranchiseLawSolutions.com.