How to Start a Franchise for Your Small Business in 2024

How to Start a Franchise for Your Small Business in 2024

How to Start a Franchise for Your Small Business in 2024

There are nearly 800,000 franchise establishments in the United States. Behind each of those individual franchises is a franchisor, the business that started it all. If you’ve developed a proven business model you believe can be replicated elsewhere, you may want to consider turning it into a franchise.

That’s what Steven Montgomery did. He has grown his one-person home painting business, That 1 Painter, to a three-brand franchise with over 200 franchisees for the painting business alone. He’s also added two other service business franchises under the umbrella, Resibrands. In an interview for Contrarian Thinking, he shares that he only started franchising in the fall of 2021, and has experienced rapid growth. 

While his explosive business growth may not be typical, it does illustrate the potential power of franchising. Here we’ll talk about how franchising works, the pros and cons, and what to consider if you want to franchise your own business. 

How to Franchise a Business: Step by Step

To recap, in order to franchise your business, you’ll follow these steps:

  1. Ensure you’re ready to franchise the business
  2. Hire a lawyer to protect your intellectual property
  3. Create a franchise disclosure document (FDD)
  4. Create the franchise agreement
  5. Make a manual for franchise operations
  6. Register the FDD with the FTC
  7. Create a business plan for sales goals

What Does It Mean to ‘Start a Franchise’?

Franchising a business is a strategy for expanding a business. It involves a franchisor (the owner of the business concept) granting a license to a franchisee (an independent business owner) to conduct business using the franchisor’s brand and system. 

Here are the basic elements of franchising:

1. Brand and System Usage: The franchisee gets the right to use the franchisor’s brand name, logo, and business system. This includes operating methods, products or services, marketing strategies, and more.

2. Initial and Ongoing Support: The franchisor provides initial training, support, and resources to help the franchisee start and run the business. This support often continues through the relationship, including training, marketing, and business advice.

3. Fees and Royalties: The franchisee typically pays an initial franchise fee and ongoing royalties, which are a percentage of their revenue, to the franchisor. These fees fund the support services provided by the franchisor and also contribute to the overall brand development.

But fees and royalties aren’t the only way a franchisor can make money. It may also profit from the sales of supplies or inventory to the franchisees. 

The article, People Think Domino’s Makes Money by Selling Pizza, but 60% of Its Revenue Comes From Something Else Entirely, explains that Domino’s makes most of its money as a supplier to its franchisees. It explains that over the past year, “Domino’s has generated $2.7 billion in trailing-12-month supply chain revenue. This is a whopping 60% of its top line for this period.”

4. Compliance with Standards: Franchisees are required to adhere to the franchisor’s operational standards and guidelines to ensure consistency and quality across all franchise locations. This includes product quality, service standards, pricing, and store layout.

5. Territorial Rights: The franchise agreement usually includes territorial rights, granting the franchisee exclusive rights to operate in a certain geographic area.

While franchisees operate their own businesses, they are able to do so within the framework provided by the franchisor. This can be a benefit: there’s a shorter learning curve for new entrepreneurs who purchase franchises, and they benefit from brand recognition and proven business models.

When done right, both parties benefit. The franchisor expands its brand and reach with lower capital risk, and the franchisee gets to start a business with a recognized brand and a proven operating system.

But there are also stories of franchisors who allegedly misled franchisees, and failed. That’s not the kind of franchise you’ll want to create. 

Is Your Business Ready to Franchise?

If you’re a 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? The top five types of franchises in the US are full service restaurants, real estate, and commercial and residential services. Your business doesn’t have to fall in those types of businesses to franchise, but keep in mind that some 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. 

Pros of Franchising a Small Business

There are many advantages to franchising your small business.

Cons of Franchising  

While franchising can be an attractive way to expand your business and make some extra money, there are drawbacks.

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:

  1. Franchisor 
  2. Business experience 
  3. Litigation 
  4. Bankruptcy
  5. Initial fees 
  6. Other fees
  7. Initial investment 
  8. Restrictions on sources of products and services
  9. Franchisee obligations
  10. Financing
  11. Assistance, advertising, computer systems, and training
  12. Territory, including where franchise locations can be established
  13. Trademarks
  14. Patents, copyrights, and proprietary information
  15. Obligation to participate in the actual operation of the franchise business
  16. Restrictions on what the franchisee may sell
  17. Renewal, termination, transfer, and dispute 
  18. Public figures
  19. Financial performance representations
  20. Outlets and franchisee information
  21. Financial statements
  22. Contracts
  23. Receipts

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 RegistrationStates that Require FilingNon-Registration States
Register FDD with the stateFile FDD with the stateTrademark for FDD required
State must approve FDDNo approval requiredNo registration with the state
Pay franchise fee ($125-$750)May require filing fee (one-time) or annual feeNo filing with the state
State franchise registration requirements

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 businessLicensor owns trademarks to a brand.
Franchisee buys rights to sell products or services under the franchise name, basically copying the businessLicensee 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. 
Franchising vs Licensing

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 Does It Cost to Franchise a Business?

To franchise your business, you’ll incur 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 $90,000 or much more. 

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 some documents yourself, but that can be incredibly risky, especially if you’re new to franchising. Get good legal and business advice to make sure you set up your franchise system correctly.

Do You Need a Franchise Attorney

Hiring an attorney who specializes in franchising 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. 

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.

If you have a successful business that you’re going to franchise, you should have the qualifications many lenders look for including strong cash flow, time in business and good business credit scores.

There are many financing options available to help you get your franchise business started, including:

  • Traditional bank loans (including certain SBA 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. Get started now.

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