What is a franchise?
With a franchise, you allow other business owners (franchisees) to use your business model, operating manual and proprietary information.
Some companies even offer mentoring and other services. In exchange for these resources, every franchisee typically pays a one-time startup fee and ongoing royalties based on their revenue. As a result, starting a franchise can offer exciting and profitable opportunities.
Franchisees benefit from the franchisor ‘s support and already-proven business model, while the franchisor benefits from having other business owners distribute their products and spread brand awareness in new markets.
Benefits of starting a franchise
Starting a franchise comes with many opportunities to generate revenue. Some benefits of learning how to start a franchise may include the following.
Access to capital
When you enter into a franchise agreement with a franchisee, they’re generally responsible for providing start-up funds or securing financing. You enjoy the benefits of growing your company without gathering the necessary capital. In finance, this is known as using other people’s money (OPM) to fuel your business success.
Reduced risk
Franchisees pay royalties, which can potentially help reduce the financial risk compared to other expansion strategies. This lets you focus on preserving your brand and ensuring that franchise locations meet your quality expectations.
Motivated distributors
Franchisees pay thousands, sometimes even millions, of dollars to start their businesses. In addition to paying you a licensing fee, they have to secure a location, purchase equipment, invest in advertising and cover other expenses.
Due to the upfront commitment, each owner-operator is typically highly motivated to make their location a success.
Passive revenue streams
As a franchisor , you can potentially earn passive income through various fees and franchisee contributions. This income can then be reinvested back into your company.
As your franchise grows, you have multiple sources of revenue from owner-managers, so even if one location is unsuccessful, you still have a steady stream of royalties.
Rapid expansion
If you have a great idea, it’s only a matter of time before competitors start to appear and compete for market share. Small businesses may struggle to grow large enough to defend their customer base. Operating as a franchise lets your business grow quickly across many different markets, spreading brand awareness and gaining market share with minimal investment.
Growth potential
As a franchisor , you can grow into new markets without researching those markets yourself. Additionally, you may have the opportunity to expand internationally and create support networks for your franchisees.
Economies of scale
By ordering inventory and other supplies in bulk, you may get a significant discount. If you have a large network of franchisees distributing your inventory, you might purchase in bulk and benefit from economies of scale without selling every inventory item yourself.
As the number of franchisees increases, you can continue growing your savings by purchasing large quantities of products or equipment.
Hands-off management
When you run your business, you handle everything from hiring to bookkeeping. You can hire employees or rely on third-party consultants, but you may still oversee daily operations.
Franchising lets you delegate operations to owner-managers, so you can generate revenue without making day-to-day decisions regarding hiring, accounting, customer service and marketing. Instead, develop an operations manual and provide support tools to your owner-operators.
How to know if you’re ready to franchise your business
Not all businesses are optimal for franchising. Starting a successful franchise operation requires establishing a business model, standardizing operations, managing legal agreements and creating a compelling pitch for potential owner-managers.
Before you turn your business into a franchise opportunity, consider the following questions:
1. Are you profitable?
Before you can ask others to expand your business, ensure your business plan works. People like the franchise business model because it helps them start a business using a proven concept.
To attract potential franchisees, provide data that indicates consumer interest in the business and the ability to create a consistent and sustainable income stream for the franchisee.
2. Do you have a brand?
A successful franchise can potentially offer strong branding and customer recognition. People may be more interested in signing a franchise agreement if they know they’ll sell branded products customers already love.
Strong branding through packaging, signage, social advertising and a compelling mission statement can help sell franchise locations.
3. Can your business be replicated?
Think about what makes your business special and determine whether you can reproduce that success. If your business relies on your unique talents and dedication or only succeeds in a highly niche market, it may not be suited for a franchise.
A franchise concept should be simple, teachable and appealing to customers in different markets. If you can teach your business model to others, consider learning how to start a franchise.
4. Do you enjoy strategizing?
Even though franchising requires less hands-on work, successful franchisors still invest their time into creating a strong business plan, training owner-operators and developing strategies for development.
You need to generate leads for franchise sales, create an adequate support infrastructure and maintain relationships with franchisees. This helps ensure all collaborators enjoy the profits from your company’s business model.
What are the legal requirements to become a franchisor?
Before you create a franchise business plan, you should register your trademarks and patents to protect your brand. This helps ensure you have the right to license your intellectual property.
Consult with an attorney to select a business structure for your franchise and carefully review federal franchise law to determine the content and formatting of your Franchise Disclosure Document (FDD). Many businesses work with franchise lawyers to complete this process.
The federal Franchise Rule requires the FDD to cover 23 subjects related to the terms of a franchise sale:
-
Corporate information
-
Management and business qualifications
-
Litigation history
-
Bankruptcy
-
Startup fees
-
Additional fees
-
Estimated startup investment
-
Sourcing products and services
-
Summary of franchisee legal obligations
-
Financing details
-
Support from franchisor and advertising requirements
-
Territory
-
Trademarks
-
Other proprietary information
-
Management obligations of franchisees
-
Restrictions on offering products and services
-
Renewal, termination and transfer
-
Celebrity or influencer contracts
-
Financial performance
-
Current franchise outlets
-
Financial reporting obligations
-
Copies of contracts and agreements
-
Receipt of FDD
How to choose a pricing model
Your pricing model determines how much money franchisees pay upfront and while operating. Franchisors need to create a pricing model that balances profit with value for franchisees.
A franchise pricing model includes the initial franchise fee, which can range from $20,000 to $50,000, and the ongoing royalty fee, which generally ranges from 4% to 12% of the profit. Some franchisors choose to charge a flat monthly rate instead of a percentage. Other fees might include:
-
Area development fees
-
Site location fees
-
Software and equipment set-up
-
Promotional costs
-
Initial inventory charge
-
Relocation fee
-
Insurance
-
Administration fees
-
Additional training fees
-
Customer support service
-
Payment processing fees
Tips for attracting franchisees
To operate a successful franchise, you need to recruit owner-operators willing to invest in your brand. Just like franchisees research franchisors, review applicants and consider potential franchisees’ ability to contribute to your success and follow brand guidelines. Consider these tips to find quality franchisees.
Optimize your website
Create a web page dedicated to franchising opportunities at your company. Explain what you have to offer as a franchisor and what kind of experience you expect from applicants. Provide an easy-to-use contact form so interested buyers can reach out directly.
Target key locations
Use location-based ads to find potential franchisors in areas you’ve scouted. Direct advertising spreads local awareness of your brand and generates interest in your business opportunities.
Engage your current franchisees
Your current franchisees are a valuable networking resource for potential owner-operators. Provide incentives for current franchise owners to serve as brand ambassadors online or at industry events.
Terms of a franchise agreement
A franchise agreement is a legal document confirming the sale and purchase of a franchise outlet. This document outlines how a franchisee can use your proprietary information and what they owe in return.
The franchise agreement includes operational guidelines that the franchisee must legally follow, including training and site maintenance rules. It also specifies the length of the contract and when it goes into effect.
How to support your franchisees
If you want your franchise business to grow on a large scale, you should be involved in developing new outlets. Like any business, your franchise’s policies and procedures may adapt over time to respond to market trends.
You can offer strategic support to each of your franchisees in several ways.
Scout locations
A common provision in a franchise agreement involves helping the franchisee select a location and secure real estate or a leasing agreement for their outlet. Some franchisors assist in site development or assign territories to their franchisees based on market research.
Build confidence with in-person meetings
If possible, meet face-to-face with franchisees and provide customized advice on making sales and running an efficient outlet. Consider hiring staff to help onboard new franchisees if you want to offer additional support beyond the initial orientation period.
Offer financing
Once your franchising business is large enough, consider providing in-house financing for expanding current outlets or starting new ones. Offering low-interest loans to trustworthy franchisees can be mutually beneficial for both parties.
Provide a comprehensive operating manual
Your operating manual is one of the main things you offer in exchange for the franchise fee. It outlines the best practices associated with running a successful outlet and includes extensive business advice. Developing a detailed operating manual gives every franchisee a valuable resource to reference when managing the day-to-day operations.
Encourage professional development
After the initial training, give your franchisees opportunities for professional development to help them enhance their business skills and overcome challenges. Provide ongoing training whenever you debut a new product or update company branding to ensure your franchisees have support to keep up with company-wide changes and adjust their workflows.
Facilitate communication
Put your franchisees in touch with one another to create a network of owner-managers who support each other and share business strategies. You can create a sense of community by celebrating successes as a group and encouraging input on how to improve the franchise.
Market your brand
Investing in marketing and advertising can grow sales across your company’s franchise outlets, increasing your royalties while contributing to your franchisee’s financial success. Developing brand awareness through video advertising, SEO optimization and your social media presence can build trust among your customer base and make them feel more comfortable purchasing from your franchise outlets.
If possible, provide training on implementing marketing strategies for franchises. Extra training can give owner-operators the information they need to make wise decisions.
