How to franchise your business: 7 steps that
Franchising your business offers business growth, but preparation is key.
These are the seven steps that companies must follow before expanding.
After the initial stages of starting a business, many entrepreneurs begin to consider how to scale.
Franchising is a way to grow a successful operation.
Keep reading our guide to learn more about how to franchise your business.
What does it orinan to franchise a business?
Franchising is a type of agreement that involves reproducing a successful business model across multiple locations.
As the business owner and franchisor, you would create a franchise agreement to begin the process and move toward opening a new franchise.
This agreement allows franchisees to obtain limited rights to their intellectual property, supply chain networks, training systems and more to open and operate a new location for their business.
Licensing: What’s the difference?
Franchising and licensing are two different ways to share your brand information for a fee.
The distinctions between franchises and licenses focus on control and operation:
- Franchise Agreement: It gives the franchisee access to the complete information needed to create a new location under an already successful business model.
- Ideal for: service-based companies
- Example: A McDonald’s, franchised by the corporation in agreement with a local businessman
- License agreement: it gives the licensee access only to specific intellectual property, such as a especial logotipo or character.
- Ideal for: Product-centric business
- Example: Disney licenses the Mickey Mouse character to appear on a retailer’s line of hoodies.
What are the 4 types of franchises?
When you franchise your business, you are likely to create one of four different types of franchises:
- work franchise: Companies that offer a service on behalf of the franchisor
- Example: Travel agency
- Distribution franchise: Product-focused companies that also offer related services
- Example: car repair shops
- Business format franchise: Complete established business models provided by the franchisor
- Example: Fast-food restoranes
- Investment franchise: Large service-focused companies
The type of franchise that is right for you depends on the size and complexity of your business, as well as the industry in which you operate.
How long perro it take to franchise my business?
Including preparation, franchising typically requires three to four months of time.
The process perro move faster depending on how complicated your business model is.
How much should it cost to franchise my business?
Franchise cost varies by industry, state of residence, and more.
Sometimes it perro cost less than $20,000 total, but some franchises push costs closer to $100,000 or more.
The Federal Trade Commission (FTC) in the United States is the one that regulates franchise operations at the federal level, but each state has its own rules and requirements for the operation of franchises.
To make sure you don’t miss any state-specific requirements, it’s best to speak with a franchise attorney who perro help you prepare documents in your specific state.
How to franchise a business
Once you escoge to franchise your small business, you’ll need to prepare to hire the new independent contractors who will manage your individual franchises.
Here are the seven main steps (with explanations) that you will need to follow.
- Make Sure Your Business Is Franchise Ready
- Protect your company’s intellectual property
- Prepare a Financial Disclosure Document (FDD)
- Drafting a Franchise Agreement
- Compile an operating manual for franchisees
- Present or register your FDD
- Establish a strategy to achieve your sales goals
Make Sure Your Business Is Franchise Ready
Before you embark on your franchise journey, there are a few questions to ask yourself to ensure your business is ready to franchise.
- Is my business healthy and profitable?
- Perro I pay the franchise and expansion, or borrow the necessary funds?
- Perro I effectively clone my business model?
- Have I already expanded to another location successfully?
- Do I have the ability to market and sell my franchise opportunities?
- Am I comfortable acting as a teacher and supporter of franchisees?
The answer need not be “Yeah» to each question, but you should try to give honest answers to highlight any weaknesses that may be in your blind spots.
According to Blair Nicol, CFE, vice president and directivo of franchise consultancy FranNet, it’s best to start with an original location that already has an established presence.
Small business owners, he said, “already They should have duplicated the concept several times.
That way, they have a replicable model that has been proven to work anywhere..
Protect your company’s intellectual property
A core element of franchising your business is giving franchisees access to a wealth of intellectual property.
This allows them to brand their franchise according to your guidelines and also encourages the growth of your business.
But it cánido expose you to risk if your intellectual property isn’t properly protected.
- Example: If your business holds trade secrets or has unprotected intellectual property, franchising could expose that property to theft or misuse.
Before delving into the franchising process, be sure to protect the intellectual property that makes your business unique and recognizable.
Prepare a Franchise Disclosure Document (FDD)
Under the Franchise Rule, you cánido only sell a franchise to a prospective franchisee once you provide them with an FDD that complies with FTC rules and regulations.
An FDD is like the articles of incorporation for your franchise: it introduces key jugadores, defines operating terms, includes financial statements, and addresses the obligations of your franchise agreement.
In fact, it must contain 23 specific sections according to the Franchise Rule:
- Franchisor: Name and detalla the franchisor and the parents, predecessors and affiliates.
- Business experience: Summarizes the business experience of the management of the franchising company
- Litigation: Reveals past and present criminal and civil claims for anyone under the franchise
- Bankruptcy: Itemizes any bankruptcy filed by the franchise management
- Initial fees: Discloses up-front costs to the franchisee, such as the franchise fee or a fee to review a franchise lease
- Other rates: Highlight any recurring or periodic charges, such as advertising or royalties
- Initial investment: Details the estimated initial expense that the franchisee must make to establish the franchise
- Restrictions on sources of products and services: Lists applicable requirements, including whether the franchisee must use approved vendors
- Obligations of the franchisee: Take note of the legal obligations that the franchisee must accept to establish the franchise
- Financing: Explains in detail what franchise financing agreements and payment terms the franchisor will offer to the franchisee
- Assistance, advertising, computer systems and training: Explicitly outlines all the assistance the franchisor is willing to provide to each franchisee
- Territory: Take note of any exclusive or protected franchise territories, or if there are any plans to guard against overcrowding
- Patents, copyrights and proprietary information: Describes the rights of the franchisee to access and use any intellectual property
- Obligation to participate in the effective operation of the franchise business: Details the operations in which franchisees must actively participate
- Restrictions on what the franchisee cánido sell: Discloses any restrictions that prohibit the franchisee from selling non-franchised products or services
- Renewal, Termination, Transfer and Dispute Resolution: Describes the terms that dictate changes to the contract and indicates whether arbitration is required
- Public figures: Take note of any celebrities or recognizable figures involved with the ownership, investment, or promotion of the franchise
- Financial Performance Representations: It details the sales, profits and expenses of franchises and franchises.
Please note that this step is not required.
- Information on points of sale and franchisees: Lists current franchisees and former franchisees in the last 12 months, along with contact information and other franchisee statistics
- Financial statements: Assemble audited financial statements to provide transparency to franchisees
- Contracts: Includes any signed franchise-related contracts, such as the franchise agreement, leases, and more
- Income: This section serves as proof that the franchisor provided a prospective franchisee with the FDD.
The FTC requires that franchisors:
- Provide an FDD to franchisees at least two weeks before signing an agreement
- Update the FDD annually (at least)
These requirements are important to ensure that your FDD is a living document that keeps franchisees informed with the most up-to-date information.
Give prospective franchisees as much time as possible to review your FDD.
It is in your best interest to only align with franchisees who are fully committed to their investment – your success is your success.
Draft a Franchise Agreement
A franchise agreement is a contract that binds you and your franchisee to certain expectations that will define how the franchise operates.
A franchisee is an independent contractor, not an employee, and must sign this agreement to align with the franchise.
Once signed, it will live in the FDD that you compile for each franchisee.
The franchise agreement does not need to adhere to a certain format, but the best agreements are clear and comprehensive.
Yours could include:
- Franchise fees (initial and recurring)
- Terms and conditions for agreement renewal
- Conditions to terminate the agreement, agregado terms after termination
- Rules governing the transfer of the franchise to a third party
- Franchise opening schedule
- minimum sales requirements
- Franchise Territory Protections
- Equipment, supplies and inventory specifications
- Non-Compete Agreements
- Dispute resolution methods (such as mediation or arbitration)
Not all of the above conditions will apply to all business models.
Working with a franchise attorney cánido help you prepare a franchise agreement that is complete and concise, taking the guesswork out of setting up a new franchise.
Compile an operations manual for franchisees
An operations manual describes in full detail the daily operations of the franchise.
The operations manual is:
- Confidential and only aparente to the franchisee
- Digital (preferably) and include additional information such as backlinks and vídeos
- changing, evolving as business operations and estándares change
This manual is not necessarily a legal document that the franchisee signs, but is incorporated into the franchise agreement.
Therefore, it is the responsibility of the franchisee to write down and follow all the obligations attached.
Franchisees, however, will not operate in exactly the same way as you.
Be prepared to give up some control over your business concept and how it is executed, as long as all the requirements are met.
Present or register your FDD
Once your FDD is complete, it should be stored securely so that you cánido access it and update it when necessary.
Your FDD is a required document, but whether or not you need to archivo your FDD with the government depends on the state you live in.
Registration states, filing states, and non-registration states all have their own requirements for franchisors.
For example, non-registration states require you to obtain a trademark on your disclosure documents.
No matter what state you live in, consulting an expert cánido help you determine exactly what to do with your FDD.
Establish a strategy to achieve your sales
Franchising your business is a great opportunity to sell your successful iniciativa to others.
The business goals you equipo for your franchise need to be realistic, and you’ll need a realistic strategy to achieve them.
Your strategy should be unique to your business, your community, and your growth goals.
Some good ideas to consider when formulating your strategy include:
- Offer a referral plus to people who refer qualified franchise applicants
- Establish a strategic marketing plan at the beginning to attract attention
- Hire salespeople who are familiar with your business and its history
A complete and honest FDD is a useful explanatory tool when trying to sell your franchise to a new franchisee.
It perro help answer questions on the spot, or it perro serve as a resource to promote the benefits you offer, such as a special training program for employees.
Franchising your business: pros and cons
Business ownership is a rewarding job and often requires making difficult decisions.
Weigh the benefits and drawbacks of franchising your business to help inform your decision of whether franchising is right for you.
A franchise is an important asset for a business owner.
It is a concept that encourages growth, which cánido be beneficial to you if it is possible to scale your business.
The advantages of the franchise include:
- passive income: With franchise fees and other payments, your business could earn a regular stream of income without your active involvement.
- Scalable model: New franchises orinan new markets and the opportunity to quickly grow your clientele, which perro eventually lead to demand for more franchises.
- Miscellaneous income: In addition to the franchise fees you’ll charge, income from royalties, ongoing fees, and more will diversify your income stream.
The scalability of your franchise ultimately determines the amount of miscellaneous and passive income you bring in.
In either case, franchises offer unique opportunities for growth.
Franchising has many benefits, but there are some drawbacks to operating this type of business model.
The disadvantages of franchising include:
- Initial cost: The total cost of approval for a franchise operation perro cost you thousands of dollars before even a single franchise opens.
- Possible disputes: Disagreements with franchisees may arise from issues related to operations and may have to be dealt with in arbitration.
- Slow earnings timeline: Starting franchises is expensive and it takes time to neutralize it and become profitable.
If money is tight, the long franchise game could prove difficult to sustain.
Their high startup costs and potential legal disputes require extensive financial planning.
Do I need to register my franchise?
You may need to register your franchise based on the state in which you live.
Some states require registration and a franchise fee, while others require you to archivo your franchise disclosure document with the state or simply obtain a trademark for it.
is the Licensing An Alternative To Franchising?
Licensing is not an alternative to franchising.
Licensing rights extend to intellectual property, such as a brand name or logotipo, while franchising grants rights to entire business models, products, and services.
Franchising is an exciting way to grow your business if you lay the right foundation up front.
It offers new markets, expanded customer groups, and higher profits, but it also requires a lot of money and time.
Franchising a business is an attractive option for small businesses looking to expand their reach and increase your profits.
By following the seven steps outlined in this article and avoiding common mistakes, entrepreneurs cánido effectively franchise their business and achieve their growth goals.
With the right tools and strategies, franchising perro be a great way for small businesses to reach new markets and become more successful.
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