Here is How to Franchise a Business
Franchising makes sense for entrepreneurs who are focusing on the long-term success of their business and are looking to expand it. But keeping up with a business’ daily operational and administrative requirements can make the idea of refining the business concept and replicating it on a national or international level seem out of reach. So why do some companies franchise their businesses?
Franchising is a great way to scale a business, meaning that the business' size or scale can grow. This scalability will allow the business owner to yield faster growth and higher profitability, which will lead to higher valuations when the business is sold. This is true for resales, as well.
Since franchise owners provide the capital required to open and operate a franchise unit, it allows companies to grow using the resources of others.
When a business owner becomes a franchisor, he has the opportunity to help others go into business and enjoy certain benefits. These perks include staffing leverage, ease of supervision, having a built-in fan base, and more. Franchising leads to motivated management on both sides. Since franchisees have skin in the game, franchisors and franchisees work to help each other succeed.
What Are the Steps to Franchising a Business?
As a prospective franchise owner, you should appreciate the steps that the franchisor takes to franchise a business. Here are the steps to franchise a business:
Evaluate the Business
The franchisor must consider if the concept is worth franchising. Professionals in the industry suggest taking something familiar but putting a twist to it.
Refine the Business Model
To ensure that a business is replicable, its systems must be streamlined. This will allow anyone to come in and run the business in a different location since the system is proven to be successful. This is a very important factor when franchising a business.
Access the Costs
The costs associated with franchising a business include: the FDD legal fee, which can cost between $15,000-$45,000; the operations manual development costs, which are estimated to be $0 - $30,000; financial preparation statement costs, which can cost between $2,500 - $5,000; and registration and filing fees, which can range anywhere from $1,000 - $4,500.
Research the Market
It is critical to research the market before franchising a business. Considerations include if there is widespread consumer demand for the business beyond its original location and if there's room for competitors.
Prepare for a Mindset Change
When a business owner franchises his business, he has to change his mindset. He is no longer working the business but is responsible for the entire franchise system. Since the franchisee will focus on the daily operations of the business, the franchisor will focus primarily on selling franchises and providing franchisees with support and training.
Become Educated About the Legal Requirements
In order to sell franchises in the U.S., a franchisor must create and successfully register a Franchise Disclosure Document (FDD) with the Federal Trade Commission (FTC). Beyond the FTC, individual states have their own rules.
Finalize the Franchise Offering
Before franchising a business, a lot of details must be finalized: The franchise fee and royalty percentage, the terms of the franchise agreement, the territory sizes, and the geographic areas offered. It is important to know if the state you’re doing business in is a filing or registration state, as well. All of these factors can impact the franchisor’s profitability.
Hire Good Managers and Staff
A good staff is essential to scale franchise operations and support franchisees.
Look for Prospective Candidates to Invest in the Franchise Business
To connect with prospective franchise owners like yourself, franchisors rely on franchise brokers to streamline the franchise sales process.
Support Franchise Owners
The franchisor has the sole responsibility of providing franchisees with a working system plus ongoing support and training after the location is open. Entrepreneurs who want to open a franchise meet with the consultant to see if owning a business is the right path for them. Based on the franchisor's ideal franchise owner, the consultant will look into franchising opportunities that would work for you. As a franchise owner, you will also be provided with an operations manual on how to properly run your franchise store during this training.
Protect the Franchise’s Intellectual Property
When franchising a business, a central part of the business is granting a prospective franchise owner the rights to the business’ intellectual property. This allows the franchise owner to run the franchise store according to the franchisor's guidelines. It also encourages the growth of the franchise business. But, franchising can also expose the business to risks if its intellectual property is not correctly protected. It is essential for the franchisor to properly secure the business’ intellectual property before turning your business into one of the many franchising opportunities to consider.
Create a FDD
According to the FTC's Franchise Rule, all entrepreneurs who want to open a franchise must be provided with a FDD. This is a legal document with 23 items that gives those who are interested in buying franchises everything they need to know about the business. These items include the company’s history and business structure; territorial right protections; details about the franchise cost; and more. The FTC also states that you must be provided with the FDD at least two weeks before the signing of the franchise agreement, and the franchisor has to update it annually. This update ensures that every franchise owner in the system is provided with the most current and up-to-date information.
Draft the Franchise Agreement
A franchise agreement will also have to be drafted, along with the FDD. This legally binding agreement outlines how the franchise business will operate. There are several items that have to be included, such as franchise fees, noncompete agreements, sale requirements, and more. To take the guesswork out of setting up a franchise business, a franchise attorney will assist in the drafting of the franchise agreement.
Put Together an Operations Manual
The operations manual will detail the daily operations of franchise business. It is confidential and can only be seen by the franchise owner. It is your guide on how to own a franchise business, and it is incorporated into your franchise agreement. It will also change over time and can be viewed digitally with supplemental videos and links. As a franchise owner, you are obligated to follow all of the instructions in this manual.
Register the FDD
Once the FDD is completed, it should be registered with the government of the state that you are looking to do business in. There are registration states, filing states, and non-registration states. Each state has different requirements. For example, if a franchise business is looking to operate in a non-registration state, a registered trademark is required for the FDD.
It will also be beneficial to set sales goals in order to entice entrepreneurs who want to open a franchise. Working with a franchise attorney to register the FDD is also important.