After establishing a business, many entrepreneurs begin to look for effectual ways to scale their business, and one such method is through franchises. And why not? Franchises pave the passage to grow successful operations. However, knowing where and how to franchise your small business can be a little overwhelming.
If you are also ready to take your next step toward franchises but don’t know where to start, then you are at the right place because, in this guide, we are going to discuss every crucial detail of how to franchise your small business.
What Does It Mean To Franchise?
A franchise is a type of business that grants access to the franchisor’s process, business model, trademarks, and business system, thus allowing the franchisee to sell its product or services under the franchisor’s business name.
Think of Pizza Hut or Burger King outlets that you’ve seen in multiple cities. Each location is a franchisee with its own management and pays a fee to the franchisor. These fees include the initial franchise fee, royalty fee, and an initial investment.
Franchising is legal and regulated and requires compliance with Federal and state franchise laws. Moreover, when you franchise your business, you have to create a dozen legal documents, among which the franchise agreement is the crucial one to begin the process.
This is the legal agreement that allows franchisees to acquire limited rights to your intellectual property, supply chain, and training system.
So, in simple terms, franchising is the right you give to the franchisee to open new franchise locations under your name and to duplicate your business model in return for fees.
How Franchise Is Different From Licensing?
Many entrepreneurs get tangled in the confusion between licensing and franchising. In fact, they are somewhat similar as they both involve the sharing of business assets and intellectual property rights of the franchisor.
However, licensing is more limited than franchise agreements and does not provide control to the licensor on how the licensee will operate the underlying business.
Here are some key differences that will make the difference more clear:
| Franchising | Licensing |
|---|---|
| The franchisor owns the business | Licensor owns trademarks to a brand. |
| Franchisee buys rights to sell products or services under the franchise name, basically replicating the business | Licensee only pays royalty fees to use the trademarks, such as brand name or logo. |
| Franchising allows the franchisor control to determine where the franchise can operate, day-to-day operations, etc. | Limited in practical application and control the licensor has over the business. |
| Franchising is usually a service-based business. | Licensing deals with products. |
| Highly regulated legally. | Less stringent legal regulation. |
What Are The Advantages And Disadvantages Of Franchise?
There’s no doubt that franchising your business will help it reach new heights because of its benefits. However, it’s important to weigh down both the benefits and drawbacks of the business to make well-informed decisions.
To determine whether franchising your business is right or not, consider the following benefits and drawbacks of franchise:
| Advantages | Disadvantages |
|---|---|
| With franchising your business can earn a regular income through franchise fee and royalty. | The cost of franchise approval can be a drawback, as it can cost you thousands of dollars. |
| Franchising gives exposure to your business to cater to a new audience. | There can be possible disputes between the franchisees and the franchisor related to operations or any other issue. |
| The various fees that you’ll earn from franchisees will diversify your revenue stream. | Opening a franchise is expensive and it requires your patience to recoup the investment. |
What Are The Types Of Franchises?
How To Franchise Your Small Business: A Step By Step Guide
If you are planning to make your franchise a household name then its significant to do franchising in the right way and by following the right strategy.
Here are steps to help you set up your franchise:
1. Determine If Your Business Is Ready For Franchise
The very first step is to determine whether your small business is ready to become a franchise or not. There are a few questions you need to ask yourself to ensure that your business is ready:
- How strong is my company’s financial performance?
- Am I able to afford franchising and expansion, or do I need to borrow funds?
- Can I replicate my business model effectively?
- Do I have the capacity to expand and market my franchise?
- Do I have the ability to act as an advisor and supporter to franchisees?
Answer all these questions honestly and evaluate them to determine if you are ready or nott
2. Issue The Franchise Disclosure Document
The franchise disclosure document also called as FDD is a legal document which species what you’ll need to franchise your business and sell your franchise. It should be prepared and issued in compliance with the federal and state franchise laws.
A FDD must contain 23 specific sections according to the Franchise Rule:
- Franchisor
- Business Experience
- Litigation
- Bankruptcy
- Initial Fees
- Other fees
- Initial Investment
- Restrictions on sources of products and services
- Franchisee obligations
- Financing
- Assistance, advertising, computer system and training
- Territory
- Trademarks
- Patent, copyrights and proprietary information
- Obligation to participate in the actual operation of the franchise
- Restrictions on what franchise may sell
- Renewal, termination, transfer, and dispute resolution
- Public figures
- Financial performance representations
- Financial Statements
- Outlets and franchisee information
- Contracts and
- Receipts
3. Create Operations Manual
You will be needed to provide a confidential franchise operations manual to the franchisees. The operations manual will serve the purpose of guiding franchise systems and inform franchisees about important system standards and requirement.
Some of the primary topics that needs to be covered in the franchise operations manual are:
- Brand purpose, goals, and vision
- Product and service requirements
- Designated suppliers and industry requirements
- Operation standards and
- Marketing and administration requirements
4. Register Your Trademark
The entire franchise system will revolve around your brand’s name and logo, this makes it extremely important to register your trademark.
If your trademark, brand’s name, brands’s logo are not registered with the United States Ptent and Trademark Office then they are not protected.
This can lead to the disruption of the operations for the franchisee as some other local business owner might be using the same name and because of the unprotected trademark you will not be able to stop them.
5. Draft A Franchise Agreement
A franchise agreement is the contract that abides you and the franchisee to the obligation of how to conduct the operations. The best and clear franchise agreements should include:
- Franchise fee
- Terms and conditions for renewal of the contract
- Franchise territory protection
- Minimum sales requirements
- Opening timeline for the franchisee
- Noncompete agreements
- Equipements, supply and inventory specifications
- Dsipute resolution methods
6. Register And File The FDD
Before you sell franchises in the Franchise Registration State or franchise filling states, it is crucial to first file and register withing each state.
Now once your FDD is complete, the next step is to register and file it. Your FDD is an important document but whether you have to file it or not depends on the government of the state you live in.
One thing to keep in mind is that the FDD needs to be registered at the state-specific level within the franchise registration states and with the federal government.
7. Create Your Franchise Sales Strategy And Budget
Now that your legal documents are completed, its time to set realistic goals and strategies. Your sales strategy should be unique to your business and community.
Evaluate your target franchisees, target markets, and a realistic budget for attracting, training and supporting franchisees.
There are many software which can help you in establishing a successful franchise by effectively managing your operations also by attracting leads such as lead management software, franchise recruiting software, compliance software and etc.
Once you have set up the goals for your franchise, analyze them often through franchise analytical softwares which will make your work more easy.
Do I Have To Work With A Franchise Attorney?
Hiring an attorney is a good idea. If you want to do franchising right, then include a lawyer who specializes in franchising and is experienced in instructing business owners to turn their small business into a successful franchise.
A promising franchise lawyer will help you in each phase of the franchise development procedure and will provide you with insights and strategies that have worked for other brands.
The right lawyer will understand your brand, believe in your vision, and have the systems in the right place to help you franchise the right way.
They can also help you avoid the mistakes and pitfalls of franchising, which many small businesses fall into or find out very late.
Also, one thing that you should be careful of is that many franchise consultants pretend to be lawyers or have lawyers on their staff who practice law illegally and have zero knowledge about the legal importance of FDD and franchise agreements.
How Much Should It Cost To Franchise A Small Business?
The cost to franchise your small business depends on the franchise type, scope, industry, and state of residence. Generally, it can cost less than $20,000, but some franchises cost nearly $100,000 or even higher.
Some common costs associated with turning your small business into a franchise include:
- Forming FDD
- Making Operations Manual
- Filing Fees
- Preparing Financial Statements
- Marketing Costs such as advertising, sales website optimization, social media marketing, and public relations
- Networking costs like franchise organization fees and conferences.
Also, remember to abide by the rules and regulations of each state, which are regulated by the Federal Trade Commission.
To make sure you don’t miss any crucial points, talk to your lawyer, who might help you in preparing the state-specific legal documents.
4 Strategies For A Successful Franchise
Setting up a franchise is not so easy but not a big deal either, but making it successful is. To make your franchise work, you need to set up proper strategies and implement them.
Here are some strategies that will help you successfully set up your franchise:
1. Develop Realistic Goals
Set realistic goals on how and what franchise success looks for you. What will the sales look like in the first year, over the next two years, and over the coming years? The best time to set your strategy for goals is before you launch your franchise.
2. Research Your Competitors
Within your FDD, you will be disclosing important metrics like franchise fees, royalties, investments, and other obligations. Evaluate your competitors, understand their metrics, and work with your lawyer to make your FDD competitively positioned.
3. Learn About Franchising
Franchising is a broad term, and only knowing about what franchising is is not enough. You can also ask your lawyer to help you learn franchising and get you involved with franchise organizations, networking events, and other professionals who might be of value once you set up your franchise.
4. Create Your Franchise Offerings For Both Individual and Multi-Unit Sales
Sometimes, franchisees want the control to develop and open multiple locations. For this reason, your FDD should be well-structured to accommodate the sale of both multi-unit sales and individual sales.
Developing your FDD without the option to sell multi-unit sale will put you at a competitive disadvantage.
Points To Consider Before You Turn Your Small Business Into A Franchise
Franchising your small business is an excellent opportunity to grow your business to new heights. In fact, some of today’s largest businesses have used the franchise strategy to grow into global brands.
However, franchising is no cakewalk; it needs to be done properly, and it must be planned strategically.
Here are a few points to consider before turning your small business into a franchise:
- Take proper professional advice- Solicitor, Accountant, and Franchise Consultant.
- The franchise agreement must be written by an expert franchise solicitor.
- Focus on franchisee satisfaction and profitability
- Ensure marketing, advertising, and PR are top-notch.
- Avoid overselling and forecasts.
- Carefully write your operations manual.
- Maintain good ongoing relationships.
Wrapping Up
Franchising is not so tough but its also not a piece of cake, that being said there are many things to consider if you are thinking to franchise your small business. The most important thing is to get a franchise lawyer who has a perfect knowledge on what franchising is and can understand your brand.
He/she should also be able to guide you and introduce you to various franchise networks which can be of value once you set up the franchise.
Moreover, once you set up a franchise, it will become challenging for you to manage and keep track of your franchisees; this is where best franchise operations software comes into play, which will help you operate and track all your franchises.
We hope this article has provided you with every detail on how to franchise your small business.
FAQs
How long does it take to franchise a small business?
Generally, it can take anywhere between 3 to 5 months to set up a new business franchise.
Can you turn your small business into a franchise?
Yes, franchising is s great opportunity to expand your business and cater to a new market. However, you need to set up realistic goals and realistic strategies in order to achieve success.
How a franchise fee is paid?
Franchise fees are usually on a monthly basis. The fee is a percentage of your revenue, and the royalties can range from 4% to 12% per year.