Entrepreneurs opening a franchise have the unique challenge of starting a new location of an already established business. Opening a franchise is similar to opening a new business, but comes with its own set of hurdles to overcome. Franchisees may not need to establish brand loyalty in the chosen market or figure out a supply chain process, but they will need to learn how to use a regionally or nationally recognized company’s branding and products for the intended use.
If you’re set on opening a franchise, here’s everything you need to know about the process, including a six-step how-to franchising guide.
What Does Franchising A Business Mean?
Unlike starting a new business from scratch—which includes registering copyrights and trademarks, going it alone, and trying to figure out the right step in uncharted territory—starting a franchise builds on an already established and successful business model to offer additional growth to the entity and the individual franchise.
Franchisees sign a contract agreement to get a license allowing them to do business under the larger entity’s name. Under the agreement, a franchisor might permit franchisees limited rights to intellectual property that are essential to the business, as well as mentoring, supply chains, training networks, and various systems and solutions needed to maintain and manage a new location. In addition, a franchised business will have operational procedures and need to follow specific state and federal franchise laws to keep customers, owners, and stakeholders safe.
Owning a franchise comes with its advantages and disadvantages, including time, money, and resource gathering.
What Are The Pros And Cons Of Franchising A Business?
Among the benefits of franchising a business are:
- More revenue – Opening your business to franchising promises the owner both a startup fee from the franchisee and a percentage of the franchise location’s earnings, also known as royalties. When the location(s) have success, the main entity will reap the benefits too.
- Expansion into new markets – Besides revenue, the main advantage of franchising is the opportunity to expand your business. After conducting market research to discover where your product or service will fill a void, franchising allows for expansion quickly and without significant owner expense.
- Improved supply chains – By expanding into new markets, you’ll be able to enhance your supply chain with a variety of additional vendors. The increased revenue will allow for specific supply chain enhancements, as well.
- Increased brand recognition and loyalty – Think of the most well-known franchises: McDonald’s, Re/MAX, Ace Hardware, and Jiffy Lube. They all have national recognition. As your franchise grows, so will your brand as a household name.
Franchising a business also comes with risks, however, including:
- Decreased control – It’s impossible to be in two places at once. So to become a franchisor, you will need to release control as new franchisees establish themselves. While they’ll guide the new locations through standardized procedures and operation processes, the success of the franchise will largely sit on the location owner rather than the CEO.
- Legal obligations – Franchisors have laws specific to their operations, usually involved with offering support to franchisees, updating business systems, and various small methods of financial support.
- Up-front training and capital – While franchisees pay a startup fee, the franchisor has their name on the line and risks their established business success. While franchisors can spend money, time, and resources training new franchisees, the responsibility for success lies with the new manager.
What Are The Steps To Franchising My Business?
Wondering how to franchise a business? Follow these six steps to ensure you complete the process successfully.
1. Decide If Franchising is Right For Your Business
Take an in-depth look at your long-term business goals and consider contingencies when deciding if pursuing a franchise is right for your business. Questions to ask yourself about the decision include:
- Does opening your business to franchise opportunities align with your long-term goals?
- Are the systems you have in place scalable, especially as you introduce franchises into the mix?
- Is there a clear opportunity for growth and profitability in your industry?
- Are you interested in running and growing a franchise?
- Do you have the capital available to invest in setting up a franchise?
One of the main functions you’ll have as a franchisor is to ensure your franchisees have the training, support, and tools they need to be successful. Do you have the bandwidth and interest to consistently act in such a support and leadership role? Does your business model lend itself well to franchising? And is there an opportunity to create or satisfy the demand for your product or service in the industry?
After self-reflecting and examining the potential success of your business’ franchise in the marketplace, you’ll need to evaluate the costs associated with franchising your business.
2. Evaluate the Costs
The costs vary widely to franchise your business; however, one constant is that many of the expenses stem from legal and startup fees.
The first major expense is hiring a law firm to prepare your franchise disclosure document (FDD). Your FDD serves as the foundation for the entire franchise; it will outline the responsibilities of the franchisor (you) and each franchisee. Before franchisees put money down to open up one of your franchises, they’ll read this comprehensive document to decide for themselves if the investment is worth their time and money.
This is a lengthy and involved document with over 20 sections, which is why writing, revising, and editing this document command such a high cost. Expect to pay between $10,000 and $50,000 for an FDD. Depending on the industry you’re in, you’ll need additional documentation, which adds to the price tag.
Other costs associated with franchising your business include:
- Building the program – If you’re building your first franchise, consider hiring a consultant with experience in successfully launching franchises. You’ll also need to create an operations manual, training resources, and recruitment materials.
- Marketing your franchise opportunities – Once you’ve built your franchise structure and program, you’ll want to advertise it to potential investors and franchisees. Ensure you have enough financial resources to advertise your franchise for at least its first year. Marketing and advertising costs may include trade show booths, digital advertising, or direct mail.
- Miscellaneous expense – You’ll need a website, software, and more to keep your franchise running smoothly. Don’t forget to factor miscellaneous expenses into your bottom line, like domain names for franchise locations and software licenses.
3. Issue Your Franchise Disclosure Document
To sell franchises, you’ll need to issue the FDD to interested parties. Your FDD should be prepared by an experienced franchise lawyer well-versed in state and federal franchise laws to ensure airtight language and compliance.
As a franchisor, you are legally bound to issue the FDD by the Franchise Rule. This is a rule put forth by the Federal Trade Commission to ensure potential franchisees receive comprehensive information on “23 specific items of information about the offered franchise, its officers, and other franchisees.”
4. Draft a Franchise Agreement
As you embark on drafting a franchise agreement, you’ll want to include each expectation franchisees need to follow for this binding agreement. While there isn’t a specific format to follow (like there is with the FDD), a franchise agreement may include terms and conditions of the franchise, timelines, minimum sales requirements, dispute resolution processes, and startup and recurring franchise fees.
Consider working with the same attorney you used for your FDD to draft this agreement, as well. They’ll be able to guide you through what requirements your business model will require in the franchise agreement.
5. Prepare an Operations Manual
The franchise operations manual is a confidential document for franchisees after they sign the agreement. It provides them with proprietary information about running the business, from supplier names to operational standards to marketing requirements. The operations manual you create should teach franchisees how to open their location, as well as share the mission, vision, and values of the business as a whole.
6. Protect Your Intellectual Property
If your business relies significantly on intellectual property, but you want to start a franchise, understand the risks involved. Consult your attorney to learn how you can properly protect your intellectual property, like adding clauses to guard trade secrets in a franchise agreement or requiring franchisees to sign a non-compete. Depending on your situation—and the importance of intellectual property to your competitive advantage in the market—protecting yourself may be a simple task.
What To Consider Before Franchising
How Long Does It Take to Franchise a Business?
While the above steps may feel like franchising a business is a lengthy process, many business owners can create a franchise within three and four months’ time. The amount of time it takes will vary depending on the amount of time you spend in the research and planning phase, how complex your business model is, and how quickly you’re able to find a lawyer to prepare your FDD.
How Much Does It Cost to Franchise a Business?
As stated above, costs vary widely to franchise your business. Some business owners can franchise their business for under $20,000, while others spend upwards of $100,000. Again, many factors contribute to the bottom line of starting a franchise.
What’s Unique And Scalable About Your Concept?
Finally, you should also consider your business’s uniqueness and scalability. A unique and attractive concept will draw customers and future franchisees, while scalability ensures your concept can be replicated efficiently and profitably across many locations. This involves standardizing the elements that make your business unique so franchise owners can quickly adopt the concept without sacrificing quality or brand consistency.
Franchising can lift your business to new heights—but choosing to franchise comes with unique challenges, advantages, and opportunities. Business owners should ensure they have a passion for leading and teaching, understand their financial situation, and protect themselves and their intellectual property when choosing to franchise their business. By following the simple steps outlined in this guide, business owners can successfully franchise their business and enjoy the benefits and excitement of scaling to new heights.