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Franchising Your Business: Begin with the End in Mind
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(Currently Reading) Franchising Your Business: Competitively Position Your FDD
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Franchising Your Business: Adopting the Right Growth Mindset
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Franchising Your Business:
Competitively Position Your FDD
Winning strategy #3 is to competitively position your FDD.
As a start-up and emerging franchisor its critical to outmaneuver the competition. Your competition includes direct industry competitors and brands in other industries that share a similar investment range and that, franchise buyers, may consider as an alternative to buying your franchise. One of the most important ways to differentiate your brand, is through a competitively positioned Franchise Disclosure Document (FDD). The structure of your FDD, your Item 19 financial performance representations, and the KPI’s, fees, and development strategy built into your FDD must be designed to provide you with a competitive advantage. If it doesn’t, you’re missing out on a critical opportunity.
Below, we discuss some of the best methods for competitively positioning your FDD.
Understand Why Your FDD is So Important
As a franchisor, having the right mindset about your FDD is everything. Although new franchisors often make the mistake of dismissing it as a check-the-box document during the initial franchising process, the FDD is an important legal document that can hold the key to successfully selling – and scaling – your franchise in the future.
One of the five documents needed to start a franchise, the FDD contains 23 important disclosures mandated under the federal Franchise Rule. By law, franchisors cannot legally offer or sell franchise opportunities without an FDD. As a document that will be reviewed by every franchisee candidate and broker that shows interest in your franchise system in the future, your FDD will also play a significant role in the success of your business on an ongoing basis. Because of that, its development shouldn’t be taken lightly.
Although the contents of the FDD are limited to the legal format set forth by the Franchise Rule, it’s important to understand that not all FDDs are created equal. As a franchisor, you should think about your FDD as the blueprint for your business. Its contents will be reviewed by countless people and translated into your franchise marketing and recruiting materials, including your sales website. Because of that, franchisors should maintain a mindset that prioritizes the proper preparation and competitive positioning of the FDD from the start.
Follow Best Practices and Franchise Benchmarks
No matter which industry you operate in, identifying and following best practices is critical for making sure your business runs smoothly, efficiently and successfully over time. The same is true for franchising – especially when you’re just getting started and developing your FDD.
Don't Just Copy Competitors
As a new franchisor, it can be tempting to look at the success of larger and more established brands and simply copy what they’re doing. But for new and emerging franchisors, the path to success lies in identifying what works for your brand – not what works for others.
Because startup and emerging franchisors often have needs and challenges that larger franchise systems don’t have (or that those brands have already overcome), it’s important to evaluate your brand’s needs on an individual level based on where you are in the development process. By meeting your company where it is, you’ll be able to identify its unique strengths, weaknesses, challenges and pain points to grow and improve authentically.
Benchmark KPI's and Franchise Metrics
Because franchise brokers often show franchisee candidates opportunities with similar levels of initial investment in multiple industries, and because franchisee candidates themselves sometimes look for opportunities across industries, it’s important to make sure that your brand is not only positioned competitively within its industry but also as a franchise offering in general.
Benchmarking – the process of evaluating your franchise’s operations, performance, and estimated initial investment metrics against those of your competitors – can help make sure your brand is positioned competitively in the franchise market.
By ensuring that your franchise system’s metrics are competitive when compared to other franchisors with similar levels of initial investment, you can position your FDD competitively to attract prospective franchisees and brokers exploring opportunities across industries.
Differentiate Your Products, Services, and Brand Story
When you’re going through the FDD development process as a new franchisor, it’s important to make sure you have a firm grasp of your brand’s identity and advantages. Imagine finding yourself in an elevator with two franchise brokers. If they asked you what your franchise system was all about – and what set it apart – could you answer their question in one sentence?
If not, it might be time to reflect on how your brand positioning is communicated in your FDD. Usually, this means evaluating your brand to determine which qualities and characteristics set it apart and make prospective franchisees feel compelled to buy a franchise from you over someone else. It can also mean developing a compelling brand story and being able to communicate a clear “Why You, Why Now” to prospective franchisees.
Products and services
To assess your brand positioning, start by analyzing the products and services you offer, your industry and your brand’s position in it, as well as your unit-level economics and supply chain systems. As a franchisor, these metrics can help you evaluate how your brand stacks up against the competition in the eyes of prospective franchisees and brokers.
Franchisee support
When determining your brand positioning, it’s also important to evaluate whether you’re setting franchisees up for success. Brokers and franchisee candidates want to feel confident that franchisors will actively support the success of the franchise after a sale is finalized.
As a franchisor, are you living up to your responsibilities to franchisees by providing them with quality technology to streamline daily operations or connecting them with a supply chain that offers advantages in the marketplace? Do you provide franchisees with local marketing support to help them attract more customers? How does your unit-level economics look compared to your competition?
Once you’ve differentiated your franchise’s advantages from others in terms of what you offer to franchisees, those qualities must be communicated clearly in your FDD. This will position your franchise more competitively and convey the value of your brand more effectively to potential buyers during the FDD review process.
Create Economic Incentives and Advantages
Beyond brand advantages, making sure your franchise is financially attractive to prospective franchisees is critical for selling franchises competitively. When developing your FDD, it’s important to make sure that your franchise is positioned in an economically competitive way. This process often involves conducting market research to better understand what your competitors are charging franchisees and then positioning your offering competitively based on those numbers.
Initial Franchise Fees
Setting the right initial franchise fee is critical for success in franchising for several reasons. First, as a franchisor, it’s important to competitively position your fees to continue selling franchise opportunities over time within your industry. To do this, you can create advantages in your fee structure for franchisees in terms of territory sizes and opportunities for potential discounts for multi-unit territory purchases, among other options.
Setting the right initial fees can also help make sure the costs of your franchise sales process are covered. If you’re working with franchise brokers, it’s important to remember that brokers earn a commission based on a percentage of your initial franchise fee. Because of that, you’ll want to make sure that those commission fees are built into your initial franchise fees.
Royalties
Whether paid weekly or monthly, royalties are the lifeblood of a franchise and determine the long-term value of your brand. As a franchisor, your goal should be to build a network of satisfied franchisees that perform well and pay ongoing royalties to maintain your franchise system over time.
When developing your FDD, it’s important to make sure that your royalty structure is competitive to secure longevity for your franchise system. Although typical royalty structures are based on charging franchisees a percentage of their gross sales, opportunities exist for more competitive positioning depending on your industry. These can include options for fixed rates, hybrid structures and performance-based rewards systems for franchises in industries where sales often fluctuate.
Unit-level economics
During the FDD development process, it’s important to communicate the advantages of your franchise system’s unit-level economics compared to others. To do this, it might be a good idea to reflect on the return-on-investment (ROI) of your system, including its estimated startup expenses relative to income potential unit-level economics. This can help franchisee candidates know what the franchise looks like today and what it could look like in the future.
Develop Compelling Item 19 Financial Performance Representations
Item 19 of the FDD is where franchisors disclose their financial performance representations – that is, information about sales or other financial data about the franchised business, including projections and pro forma. As guided by the Franchise Rule, these numbers include data about income, gross or net profits, or a specific level or range of actual or possible sales.
In the FDD, Item 19 is the most important tool a startup or emerging franchisor has to communicate the value of their franchise to franchisee candidates. By disclosing your franchise’s track record of financial success in a way that’s easy for franchisees to evaluate, like refining your Item 19 data to showcase both single and multi-territory opportunities, you can position your FDD competitively by highlighting your system’s financial strengths.
Create a Balanced Franchise Relationship
During the FDD development process, your franchise attorney will also naturally develop your franchise agreement to ensure both documents are consistent and contain the same legal information.
As a franchisor, your franchise agreement should exhibit all of the working legal agreements that will be signed by franchisees, including but not limited to lease addendums, digital media assignments, social media account assignments to prevent rogue franchisees from breaking your brand’s social media policies, the ability to sell multiple territories, the ability to sell multi-unit development agreements and more.
These documents and disclosures will help protect you legally as a franchisor, but they can also provide a level of transparency that could position you competitively during the sales process while leaving room for the future growth of the franchise.
When developing your FDD as a new franchisor, your goal should always be to make sure your franchise’s advantages over others are communicated clearly to prospective franchisees. Whether it’s unit-level economics, financial performance representations, brand and economic positioning, fees, or legal structures, the best thing you can do to competitively position your FDD is to make sure prospective franchisees can easily understand the value of your brand over competitors.
If you’re ready to take the next step in franchising your business, we’re here to help. Contact us to learn more about how our team can help you establish the right legal foundation for your new franchise. To learn more about franchising, read our Ultimate Guide to Franchising Your Business.