I have a challenge for you, if you\u2019re up to it. Are you ready? I want you to ignore every pre-conceived notion you have about franchising for a few minutes. Pretend that it\u2019s your first time learning about the franchise model. Be at one with the newness of it. Deal? Let\u2019s say that you\u2019re the owner of a dog-training business. Your business has been growing steadily since you started it, 4 years ago. You\u2019ve hired more people every year, and you\u2019re thinking of expanding, especially since an ideal commercial space recently opened up in an industrial park two suburbs over. In your mind, now\u2019s the time to do this, as small business loan rates are at historic lows. You\u2019re just warming up.\u00a0What you\u2019d really like to do is turn your dog-training business into a franchise business. That way, you can continue expanding your business by using other people\u2019s money (OPM). That's how franchisors make money. How Franchisors Make Money On the surface, it certainly sounds like a great plan. You\u2019d invest the money needed to franchise your business, and once you started to sell franchises, you\u2019d be able to recoup your money. So how do franchisors make money? Money comes from two places: Franchise fees Ongoing royalties Developing A Franchise If you\u2019re going to set-up your business as a franchise, your first moves need to be right. My late father taught me something very valuable about franchise development, and it has to do with money. He said that the biggest mistake people make who want to franchise their businesses is doing it on the cheap. A perfect example of this is someone that only uses an attorney when developing their franchise concept. There is so much more to franchise development than the legal requirements needed to franchise. \u00a0But for some reason, most of the people I talk to are laser-focused on legalities. Legal fees to setup a franchise run about $15,000 or so, and someone could get away with spending under $20,000 to get a franchise up and running. But, it won\u2019t be a very successful one. That\u2019s because there are so many more things involved in franchise development. Things such as: Creating a business plan Writing an operations manual Developing a marketing plan Website development Technology implementation Training program development Franchisee recruitment Franchisee support system setup The Bottom Line If you\u2019re planning on turning your business into a franchise, you really need to work with a franchise development firm that can help you do everything from A-Z. Otherwise, you\u2019ll be lucky to sell one to two franchises -- if any at all. A Word of Warning Make sure that you thoroughly vet any franchise development company that you\u2019re thinking of hiring. Ask for lots of references. You may find that some of them are a little too eager to turn your independent business into a franchise business. The picture that you have in your mind of what it would be like to be the CEO of a 250-unit franchise chain is a pretty compelling one. Your visual may even include a 5,000 square foot beachfront home in Maui. Because as you see it, 250 franchise units paying you monthly royalties of approximately $2000 each = $500,000, which translates into $6 million a year in royalties alone. And don\u2019t forget the upfront franchisee fees that you\u2019ll receive every time you sell a new franchise. Of course, there are a lot of ongoing expenses that you\u2019ll have to cover as a franchisor, but you\u2019d still do very well. Every prospective franchisor that I\u2019ve ever talked to wants to sell 100-200 franchises, so they can make a lot of money. The simple math that I just showed you proves that it is possible to do. So to again share how franchisors make money: Come up with a concept. Invest some money up-front to develop it into a franchise. Use other people's money (OPM) to grow it. And then have the people that invested in it pay you royalties every month for the opportunity to use your business system. Voila'! As a franchisor, you\u2019re now making money from the franchisees. But wait. Not so fast. According to Lonnie Helgerson, a franchise development executive who just wrote a book called, \u201cFive Pennies, Ten Rules to Successfully Build a Franchise Mega-Brand And Maximize System Profits,\u201d franchisors profits don\u2019t come from the franchisees. From Helgerson\u2019s book: \u201cI often tell my staff members that as a franchisor, we do not make our money when a royalty check is received. We and our franchisees earn it when the point of sale system rings up a sale for a customer and our job is to help our franchisees ring up lots and lots of sales. Losing sight of this leads to fewer sales, frustrated franchisees, and over time will become a significant branding problem.\u201d At the beginning, I asked you to pretend that you were just starting to learn about the franchise business model. I also encouraged you to give up any pre-conceived notions that you had about franchising. Can you see why? Lonnie is 100% correct. If, (as a franchisor) you\u2019re not offering a great product or service that will enable your franchisees to ring their registers ... a lot -- you won\u2019t be successful. Which means your franchisees won\u2019t be successful either. So before you even think about turning your business into a franchise, make sure that what you\u2019re offering is outstanding. Or your business could end up going to the dogs.