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How to Franchise a Business? Key Takeaways for 2024
Written by: Parth Parth
Last Updated by
Brenda Bagnoli: January 20, 2023
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Franchising is a great way to build your business and increase the brand recognition it gets in exchange for losing some control over the day-to-day of the locations you will franchise and splitting the money you get. However, franchising is not an automatic route to success and there are franchises that fail too.
Are you curious how to start a franchise business? Don’t know where to start. If so, keep reading as this article is for you!
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That said, franchising your business helps you get more customers, more recognition, and a higher number of people to advertise your business through word of mouth. If you can provide an offering that the public needs and is either distinct from other offerings or does not exist yet, you can have a huge network of franchisees from coast to coast or even around the globe.
When you franchise your business, you also do not require as much up-front capital as you would start a location on your own as a lot of costs are typically borne by the franchisees. You also make some money off the initial franchise fee that franchisees will pay you in exchange for your intellectual property (the development of which is already a sunk cost).
What you need to keep in mind is that starting the process of franchising is a bit long and is going to involve a small fortune. Also, just because you are selling franchises, it does not mean people want to buy them. You need to make your business and offerings as distinct as you can in the minds of not only customers but also prospective franchisees who will not be interested in your business if you cannot prove the business model or if there are more attractive models in the industry available.
In this article, we are going to give you some of the basic steps of how you can start to franchise your business. Remember, despite all of its caveats, franchising is a great way to grow your business and earn money.
Are you ready to franchise?
The very first step in starting to franchise your business is evaluating whether your business is ready or not.
Speak examples from your own life and see how most Concepts that grow to be very large offer something that might be common but with a Twist on it. For example, Mellow Mushroom offers its franchisees the creative control over its locations. Not only does this appeal to prospective franchisees who might want to customize the look and feel of their store but also to the End customer who gets a new experience aesthetically and Visually whenever they go to a new Mellow Mushroom location.
The whole point of franchising is scalability. As such, you need to ask yourself whether your business is scalable or not. You need to make sure that even though you might have a good track record in financials, customers, and volume at your location, that can be replicated in at least some markets if not all.
Do some market research for your franchise. Don’t rely on your gut to tell you that your franchise is going to be amazing. Talk to people and see if the service that you are providing appeals to them. If not, you might want to get feedback and incorporate it into your business to make sure that the value your business brings to customers is actually something they want.
Evaluate the financials of your business. To start franchising you’re going to need in the region of $100,000 to $200,000 at the bare minimum. your business and its financials must be in a good spot for you to be able to afford to start franchising your business. Also, Remember that franchising helps your business grow faster even if you are going to get a lesser revenue than from a location that you own yourself.
Lastly, prepare yourself. your responsibilities are going to be much different and increase once you start franchising. For example, you are going to now going to be talking to prospective franchisees and negotiating and entering into deals with them rather than selling fried chicken or burgers.
What are the legal requirements to franchise a business?
In order to franchise a business, you need to abide by the Federal Trade Commission’s Franchise Rule and engage an attorney to draft a Franchise Disclosure Document (FDD). This document lists basically most of what a future franchisee needs to know before starting a franchise.
In addition to filing the FDD, some states might have their own rules for selling franchises inside them. California and Illinois are some of the states that are considered to have the most lengthy registration processes. To franchise in one of these states, you need to cover an additional cost.
You also want to register all of your Intellectual Property (IP) and trademark or copyright it under your or your business’ name. If your franchise becomes popular, someone is eventually going to try and copy the IP. You absolutely do not want to be in the losing position here where the other person wins and you have to give your business up. It will take some money to do this, but it is very strongly recommended to do this.
We recommend hiring a franchise consultant or franchise attorney.
How will your franchisees conduct business?
Once you have made up your mind to start franchising your business, you need to start considering how your franchisees will operate the business and what are the expectations from them.
- How much the franchise fee would be
- How much royalty your franchisees are going to pay you
- What is the geographic territory where you want to franchise
- How long be the term of your franchise agreement
- If your franchisees will have territory protection and if they will how big of a territory do they get
- What kind of training program you will offer to your franchisees
- Whether or not there will be ongoing support from you while conducting business
- How much would other fees and costs like advertising and local marketing be for the franchisee
- Whether or not you want to set up an area development/master franchisee model
- What are going to be the minimum requirements for starting a franchise of your company for example how much should wear minimum net worth be and whether or not they need prior industry experience
It is important to consider these questions right now before you sign a 10 or 20 year long contract. You might also want to consider offering discounts for certain groups of people like veterans etc.
An operations manual with a style guide for your franchisees is also going to be very useful to them and even you to refer to when making stylistic or business decisions. You might want to require the franchisees to stick to the operations manual as a contractual obligation. If your franchisees run the business wrong – have bad customer service, bad quality of food or service they provide, or are just rude – it is going to affect your business and other franchised locations too. As such, you do not want to be in the spot where that is happening.
What paperwork is needed to start franchising?
Once you have made the decisions that we talked about above, and are ready to go ahead with the next step you need to start with the legal paperwork. When you submit the paperwork you should be ready for there to be questions about stuff in your documents and request for additional information and other disclosures before your applications are approved.
The Federal Trade Commission maintains a record of your FDD but you also need to wait to get State approval to start selling a franchise.
What other staff do you need to franchise?
As you were business starts expanding into a franchisor you are also going to need to add staff members to your company. some of these might help exclusively it’s supporting new and existing franchisees. Some of these may deal with the paperwork for the business. And others might just be needed to help in the day-to-day running of your existing business.
You should also consider getting someone that has worked in marketing and who knows how to market your franchise. This is going to be one of the most important things when you franchise. if people do not know about your company they are not going to reach out and start the process of franchising. What you can’t see, you can’t franchise.
Start selling franchises
Now that you are all set to start franchising your business, probably one of the hardest parts of selling franchises is here: selling franchises. You will need to hire sales representatives that can help answer questions that prospective franchisees might have. you can also offer incentives to existing franchisees when they open a new location or refer someone to open a new location with small bonuses or discounts on their fees. you might also want to have an increasing royalty system where the franchisees do not pay any royalty at the very beginning and it eventually runs up to whatever level you want. yes, this is going to lose you some money in the short term. But, in the long term, it is going to basically have more locations for your franchise.
Support existing franchisees
At this point, you have at least one franchisee and ideally many more running stores for your company or offering its services. These people are going to need your help and support to make or break their business. In this case, your interests are aligned – you do not want to lose one or more franchised locations and your franchisee does not want to lose the undoubtedly enormous amount of money and time they put into buying a franchise.
You need to also provide ongoing training and optionally also train all end-level employees who work for locations owned by your franchisees. This is not that hard in the age of the internet where you can just create a course and evaluations online.
Conclusion and wrapping up
Franchising is an amazing way to grow your business, as we discussed. Yes, it is a lengthy process and you need to give up some control and some money, you might want to do it anyway for a variety of reasons.
Do your market research before you sell franchises. You also do not want your fees and start-up costs to be so high that future franchisees just go to another competing business for a multitude of reasons like if it is well-established, has better financials, lesser fees, or has just proved itself in the longer run. You need to prove to your franchisees why yours is the business they should want.
That said, good luck with your franchising journey, and reach out to us at Vetted Biz if you have any questions or want us to analyze your or some other franchise businesses.
