Why Do Some Companies Franchise Their Businesses?

Here are the Steps to Franchising 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 with the Federal Trade Commission. 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

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. 

 

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