How Is a Franchise Formed: Everything You Need to Know
“How is a franchise formed?” is a question that many business owners find themselves asking when they are considering expanding their businesses.3 min read
“How is a franchise formed?” is a question that many business owners find themselves asking when they are considering expanding their businesses. A franchise refers to a business operation that consists of outlets operating under the same brand. These outlets are owned and managed by independent owners. Starting a franchise is an arduous process that requires considerable research, planning, and funding. It is important that you carefully consider the pros and cons of franchising and understand all the requirements you need to meet before you form a franchise.
What Is a Franchise?
In business, a franchise refers to a method of expanding a business by opening other outlets that are run by independent owners. From an owner's point of view, the process of franchising is costly, but it can be regarded as an investment.
In franchising, a franchisor grants a licensed privilege to a franchisee to conduct business and provides assistance in organizing, merchandising, marketing, managing, and training in exchange for a monetary consideration. Essentially, the franchisee is required to pay an initial fee and ongoing royalty fees to the franchisor. In return, it gains the right to use the franchisor's trademark, implement its operation system, and sell its products or services, as well as access to ongoing support.
If starting your own business from scratch seems intimidating or buying an existing business is not the right option for you, owning a franchise may be the best alternative.
Benefits of Franchising
Franchising provides a number of important benefits for business owners, including:
- Increasing the rate of business development by delegating management and growth to a network of outlets
- Enhancing financial growth through startup and royalty fees from franchisees
- Providing motivation for franchise owners whose funds are tied up in their businesses
- Putting the franchisor's brand in the hands of entrepreneurs who have extensive knowledge of local markets
Steps to Starting a Franchise
Step 1: Weigh the Pros and Cons
Starting a franchise enables you to use a tried and tested business model. You will benefit from a solid built-in support structure that provides helpful services such as business advice, advertising, and training.
Step 2: Choose the Right Franchise
It is important to select a franchise that suits your goals, skills, and personality. Identify your entrepreneurial strengths and weaknesses, the type of business you wish to own, and your business goals.
Step 3: Form a Limited Liability Company (LLC) or Corporation
It is beneficial to start a franchise as an LLC or corporation. Both an LLC and a corporation offer liability protection and tax breaks that are inaccessible to a sole proprietor. If you want your business to be regarded as more credible by your prospective investors, franchisors, business partners, and customers, you should incorporate it.
Step 4: Do Research on Market Conditions and Franchise Opportunities
You need to have a good understanding of your local market conditions. You can find reliable market data at the websites of the Small Business Administration, Census Bureau, and market-research firms, as well as your local college or university's business development center. To locate good franchising opportunities, you can seek the assistance of a franchising consultant. Make sure you choose a franchise with the following characteristics:
- Sufficient experience
- Affordable initial and ongoing costs
- Reasonably quick time to profitability
- Excellent support system
Step 5: Create a Business Plan
Having a well-written business plan will help you stay organized and deliver better pitches to investors. Your business plan should include the following information:
- Company protocol
- Mission statements
- Product standards
- Employee training manual
- Dress codes
- Operations manual, including information such as company history, daily operations, inventories, quotas, pricing, equipment maintenance, cash handling, customer service standards, shifts, refunds, and others.
Step 6: Secure Financing
In order to start a franchise, you need to have sufficient capital to cover your initial franchise fee and startup costs. Some possible sources of capital include:
- The franchisor
- Family members and friends
- Banks or financial institutions
- Small Business Administration
Step 7: Sign the Franchise Agreement
It is highly recommended that you hire a lawyer to review your franchise agreement before signing it. Make sure you have a clear understanding of the terms of the agreement, including your contractual rights and obligations.
If you need help understanding how a franchise is formed, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.