How to Start a Franchise: Everything You Need to Know
A franchise is a business that is owned and operated by you, but the business follows company policies, procedures, and brand overseen by someone else. 7 min read
A franchise is a business that is owned and operated by you but is overseen and branded by someone else. This means that you must follow that company's policies and procedures. This is a great opportunity if you are a bit gun-shy about starting a business on your own. Starting a franchise means to enter the business world with a business that is already successful.
Reasons to Consider Starting a Franchise
Choosing a franchise instead of opening your own business has a lot of benefits as long as you are not too independent. These include:
Less risk to you. Since you are opening an already established business with a good business plan in place, there is less chance that the business will fail. Franchises fail less often than a mom-and-pop enterprise. By signing on with an established and well-known brand, you can cash in on name recognition, much more than typical small businesses.
Ongoing training. The franchisor usually offers ongoing training to keep you up to date on sales practices, laws and regulations in your chosen industry and how to run your business. The franchisor’s success is dependent upon yours, so they will invest time and energy in making sure you know what you’re doing and will help you make the franchise succeed. You will have a support system that you can access immediately.
Financial benefits. The franchisor can often negotiate lower costs for the items you sell if all of his franchisees use the same suppliers. This means that you have a higher profit. You also have access to marketing departments, and existing business infrastructure that you would not otherwise have access to if you set up an independent small business. This often includes preferential rates - discounts given to franchisees due to the large numbers using that particular supplier.
You get to work for yourself – to an extent. While you have the ability to hire and fire people, you cannot change the business model. Your stores must conform to the franchisor's specifications. A franchisor may also dictate the hours your store must be open and whether you have to wear uniforms.
You can hit the ground running with little to no experience in that industry. Management franchises mean that you hand the actual work over to tradesmen, while you are responsible for expanding the business.
If you create your own franchise, you get to determine how your stores will look and what products and services the stores will offer.
Reasons to Consider Not Starting a Franchise
As with everything, franchises also have some drawbacks. Some of the drawbacks of owning a franchise include:
You can't change the business model. This can mean very repetitive work, where you are beholden to another person.
Buying into a franchise can be very expensive since a lot of the work is already done for you. You also have to pay fees and split profits with the franchisor, which ultimately cuts into your profits.
If you are highly independent, a franchise may not be for you, since you do have to follow the franchisor's rules, regulations and business model. Franchisors often limit their franchisees to a specific geographic region, preventing them from moving outside the area. If you cannot see yourself staying in the same place for 20 years, a franchise may not be a good fit for you. In this way, franchises can be extremely inflexible options.
There is still some risk, as with most business endeavours. Franchises are not bulletproof. If you choose the wrong franchise, and the market or location is struggling, your store could still fail.
If you create your own franchise, you are responsible for creating a model that will succeed for all stores.
You are responsible for maintaining the business model and ensuring that all of the franchisees adhere to the business model. This goes hand in hand with lack of control when it comes to a franchise - a poorly run franchise can affect the reputation of all stores - even internationally. Just think about the story of a rat being fried in the KFC - that was likely one franchise. But it seriously degraded the reputation of KFC nationwide.
The contracts can be incredibly limiting. Sometimes, once the franchise agreement ends, there are prohibitions from the franchisee running the franchise independently. You will need to consider developing an exit plan when the term ends. Terms are usually anywhere from 5-10 years, usually with an option to renew (though at a cost).
Diluted rewards - when you start your own business from the ground up, it takes a lot of hard work, but you know all the profits will go straight into your pocket. You’ll owe a fee to the franchisor, and repeat customers might frequent other franchises of the same brand, rather than your particular store.
Overall, franchise investors must do thorough research, and weigh a lot of their own particular factors and considerations in determining what kind of franchise they would invest in, if at all. You will need to look and have an honest assessment of how often you want to work, what industry you’re interested in, and what skills you have.
Common Mistakes Made by Franchisees and Franchisors
If a franchisee attempts to change the business model of the franchise, they run the risk of voiding the contract and being completely debranded. Even tiny changes could negate the agreement.
A franchisee also needs to understand all the costs behind the franchise. The franchisor should provide this to you, which spells out everything, but there are hidden costs that will not be included, such as rent and fees to your landlord, travel and lodging when attending franchise training, legal and accounting fees, and insurance the franchisor may require you to obtain. The overall startup costs can run anywhere from between $50,000 to $200,000 - which is quite a wide range. Do your research on all the costs and when in doubt, round up.
A franchisor must enforce the business model. Otherwise, stores could start losing money and eventually go out of business. Franchisors often fail to prepare all the appropriate documents, including the standard disclosure documents, audited financial statement, and the development and documentation of the systems for your franchise.
Both franchisees and franchisors must go in with the right mindset. For franchisors, remember that franchisees are not your employees, and therefore, they should not be treated that way. Use your powers of negotiation and persuasion to get franchisees to do what you want. For franchisees, remember that you have to respect the franchisor, and the success of your particular location is still ultimately on your shoulders.
Potential franchisees should avoid franchise consultants. These are people who advise you on the pros and cons of a franchise, but are typically simply salespeople, who get a hefty cut of the franchise fee. Ask for their financial arrangements up front to avoid getting unfairly pressured.
Frequently Asked Questions
My business does great. Should I franchise?
You may qualify to start a new franchise, but are you ready? Make sure your business concept has the ability to succeed just about anywhere, make sure your financial situation is in order and get ready for change. You'll have to learn legal requirements, create a great business model and then register as a franchisor.
What is the process for becoming a franchisee like?
It depends on your state and the franchisor.
The Federal Government requires the Uniform Franchise Offer Circular, or UFOC, to be distributed to all individuals interested in acquiring a franchise. The UFOC is a 50+ page document detailing your responsibilities as a franchisee, the rules and regulations of the franchise, as well as its background and history. You must wait at least 10 days with this document before you can receive the franchise agreement.
If things go well, the franchisor might invite you to the corporate headquarters for ‘Discovery Day,’ where you learn about corporate culture, do some networking and meet other franchisors face-to-face. You might then receive the franchise agreement, which must be read carefully.
At this point, it is a good idea to seek the advice of an attorney who can review all the documents with you. Then, if you decide to go forward, you will need to acquire funding. This can be from a Small Business Administration (SBA) loan, a bank loan, or even from the franchisor directly.
Then you will need to get down to hard tasks - figuring out where your franchise should be, deciding whether you should lease or own the premises, and whether it needs to be fitted out for certain specifications. Finally, you’ll attend franchise training, which usually lasts around 1-2 weeks.
After this, you can begin planning your opening - hiring employees, contacting suppliers, getting utilities set up, etc. It can take anywhere from a month or two to a year before you can open up a franchise, but it all depends on you, the state, the franchisor, and how hard you work to get it off the ground.
What do I need as part of my business model?
Your business model is up to you; however, you should always include:
- The term of the franchise agreement (that is, how long it will last);
- The geographic areas in which you are willing to place your franchises;
- How big of a geographic area you are giving to each franchisee;
- Training requirements;
- How much the franchise fee will be;
- How much the royalty percentage will be;
- Whether you will provide equipment and products or the franchisee will provide same, and whether there will be an arrangement to split the costs;
- Marketing strategies for the franchises;
- How much net worth and business experience the franchisees need; and
- Whether you prefer each franchise to have an owner/operator or master franchisees that develop more than one franchise.
Talk to a Lawyer
If you need help starting a franchise or buying a franchise, you can post your question or concern 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, Stripe and Twilio.