- If your service-based small business is successful, you may consider franchising as part of your expansion plans.
- Franchising means allowing others to run a copy of your business, paying you royalties while you provide the business model, branding, training, and other essentials for success.
- Find out if franchising is a good idea for your business and how to turn a business into a franchise in our article from Nav’s experts.
Is Your Business Ready to Franchise?
If you’re a service-based small business owner who has consistently outpaced your revenue goals and built a loyal customer base, you may be wondering about franchising. Maybe you’ve expanded to another location or two, and those are doing well. You’re considering expanding, but aren’t necessarily interested in doing all the legwork of opening another location or multiple new locations. Is it a good idea to franchise?
There are a few considerations you should take into account when you’re thinking about franchising your business:
- Is my business model suited for franchising? Not every business type can succeed as a new franchise. Franchising works best for service-based businesses, like restaurants, travel agencies, and automobile service centers. On the other hand, complex business models may not be easy to franchise.
- How healthy is my business? A healthy brand is more likely to succeed as a franchise. The more profitable your business is, the more attractive it will be to prospective franchisees. If you run a successful business, you’re far more likely to be able to create a successful franchise company.
- Is there a large enough market for my business? Determining community need for your services across a wider local area can be difficult, but it’s important to set your franchisees up for success. You’ll need to conduct market research to determine if there’s a market for your franchise.
Advantages of Franchising a Small Business
There are many advantages to franchising your small business.
- Expand your brand recognition quickly without having to invest too much upfront.
- Get extra payments in the form of royalty fees and franchise fees.
- Open up more free time to work on other business opportunities as a franchisor.
- Gain information about the business from franchisees as they run the franchise.
Disadvantages of Franchising
While franchising can be an attractive way to expand your business and make some extra money, there are drawbacks.
- Royalty fees from franchisees won’t bring in as much profit as owning the business outright.
- Franchise owners aren’t your direct employees, so you don’t have as much control.
- Startup costs for new franchises can be steep.
Process of Franchising a Small Business
In order to franchise a small business, you have to follow a few important steps.
First, determine whether or not you’re ready to franchise. If you have a proven business model with a track record of success and you know there’s a market for your business, you may be ready.
Next, consider hiring a lawyer to help you determine what intellectual property you need to protect and how. If you’re going to have a successful franchise, your business plan will be unique and interesting — but also vulnerable to theft.
A lawyer can also help you in the next step: Creating your franchise disclosure document (FDD). This is required by the Federal Trade Commission (FTC) in order to get your franchise off the ground. You’ll also have to update it annually and give it to potential franchisees at least two weeks before they start.
The FDD defines the franchise opportunity based on 23 separate factors:
- Business experience
- Initial fees
- Other fees
- Initial investment
- Restrictions on sources of products and services
- Franchisee obligations
- Assistance, advertising, computer systems, and training
- Territory, including where franchise locations can be established
- Patents, copyrights, and proprietary information
- Obligation to participate in the actual operation of the franchise business
- Restrictions on what the franchisee may sell
- Renewal, termination, transfer, and dispute
- Public figures
- Financial performance representations
- Outlets and franchisee information
- Financial statements
Once you have the FDD ready, create an operating manual for franchisees to follow. You’ll also want to provide a training program, but the operation manual gives the franchisee the instructions on how to operate the franchise on a daily basis.
After all the documentation is ready, it’s time to file or register your FDD with the FTC and possibly the government. This depends on which state you live in, and may require a fee. There are three common registration/filing scenarios depending on the state:
|States that Require Registration||States that Require Filing||Non-Registration States|
|Register FDD with the state||File FDD with the state||Trademark for FDD required|
|State must approve FDD||No approval required||No registration with the state|
|Pay franchise fee ($125-$750)||May require filing fee (one-time) or annual fee||No filing with the state|
You can find individual laws on franchises by state here.
Now that you’re ready to franchise your business, you’ll want to outline your revenue goals and how you’re going to get your business franchise up and running. You may want to find ways to encourage franchise ownership, such as offering training programs, referral bonuses, or even dream vacations to first time franchise owners. You may also want to devise a marketing plan to create buzz around your business concept.
Franchising vs. Licensing: What’s the Difference
Franchising and licensing may appear related, but there are some key differences.
|Franchisor owns the business||Licensor owns trademarks to a brand.|
|Franchisee buys rights to sell products or services under the franchise name, basically copying the business||Licensee pays royalty fees to use the trademarks such as brand name or logo.|
|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.|
|Usually a service-based business.||Usually deals with products.|
|Highly regulated legally.||Less stringent legal regulation.|
How Long Does It Take to Franchise a Business
In general, it can take anywhere from three months to five months to get your franchise off the ground.
How Much Should It Cost to Franchise a Business
In order to franchise your business, you’ll need to incur some expenses, such as legal help with creating your FDD. Depending on the franchise type, scope, and industry, the costs can vary from under $20,000 to as much as $90,000.
Some common costs associated with setting up a new business franchise include:
- Creating the FDD
- Creating the operations manual
- Filing fees
- Preparation of financial statements
- Marketing costs, such as sales website, advertising, brand preparation, and public relations
- Networking costs like franchise organization fees and conference attendance
You can cut costs by preparing documents yourself, but sometimes hiring an expert can save you time and money in the long run, especially if it’s your first time starting a franchise.
Do You Need a Franchise Attorney
Overall, hiring a franchise attorney is a good idea, even if you only hire them to review your documents after you’ve prepared them. Including the lawyer in your process from the start can help you avoid costly mistakes over the long term.
How to Franchise a Business: Step by Step
To recap, in order to franchise your business, follow these steps:
- Ensure you’re ready to franchise the business
- Hire a lawyer to protect your intellectual property
- Write out your FDD
- Create the franchise agreement
- Make a manual for franchise operations
- Register the FDD with the FTC
- Create a business plan for sales goals
Financing a Newly Franchised Business
While there are many options for financing a franchise as a franchisee, many entrepreneurs may not consider financing as a franchisor. There are many financing options available to help you get your franchise business started, including:
- Traditional bank loans
- Alternative lenders or short-term loans
- Lines of credit
Regardless of what kind of financing you need, Nav can help you determine which one is best suited to your specific needs and qualifications. Whether it’s small business loans or business credit cards, Nav makes it easy to compare your best options instantly. Sign up for a free account to see your options.