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How to Franchise a Startup: 5 Tips for Success

Sammi Caramela
Sammi Caramela

Expansion is expensive and time-consuming. By franchising your company, you can reach new locales without having to closely manage the new operation.

  • Franchising your business allows you to quickly expand without having to closely manage the new locations.
  • Careful consideration of how your franchisees will operate their third-party locations is imperative to ensure brand consistency.
  • The benefits of franchising your business include expanding the reach of your business and gaining additional revenue streams.
  • This article is for any small business owner looking to franchise a startup company.

If you run a successful company that offers valuable products or services to consumers, you may want to open other locations to reach a broader audience. Not only can additional locations bring in a higher profit, but you'll help countless new customers while you build your brand from a distance.

How to franchise your business

Instead of owning and operating all the locations yourself, you can offer your business model as a franchise opportunity, and allow other entrepreneurs to run each establishment under your brand name. Here are five expert tips for turning your startup into a franchise.

1. Do your homework.

While you likely researched your target consumers and location before opening your business, you'll need to learn about franchising.

"A company that is franchised is built and operated entirely differently than most businesses," said Brian Tollefson, CEO and founder of Tikiz Shaved Ice & Ice Cream. "Before making the decision to franchise a concept, it's crucial to ... fully understand the franchise business model. Many don't realize the time commitment and effort it takes to franchise a company, in addition to the costs associated to properly do it."

 

Editor's note: Considering opening a franchise? If you're looking for information to help you choose the right one, use the questionnaire below to have our sister site provide you with information from a variety of vendors for free: 

 

Understanding – and setting – franchise fees can be overwhelming, but they're crucial to developing your brand and a network of owners, said David Busker, franchise consultant in the FranChoice national network.

"They must be competitive with other brands in your industry and category as well as other franchises with similar total investments," he said. "Qualified franchisees will be comparing brands not only among categories but even different industries, and the fees can be a meaningful part of total costs."

According to Busker, the average franchise fee ranges from $25,000 to $50,000 per unit, with discounts for multiple franchise unit owners or regional developers.

Before hiring any franchisees or even considering opening an additional location, there are certain documents and agreements you'll need to draw up and have in place. These include the franchise agreement and the franchise disclose document:

Franchise Agreement

The franchise agreement exists so you and your franchisees are on the same page. Busker noted that it should be legally sound and not dependent on the franchise location. [Interested in starting a franchise? Check out our guide on how to choose the right one for you.]

"You might allow things specific to a franchisee to be negotiated, like territory, credit or other items normally handled in an addendum," he said. "But to maintain a brand, all of your franchisees need to be signing the same agreement."

Franchise Disclosure Document

The franchise disclosure document, or the FDD, provides potential franchisees with everything they need to know about your company, your sales figures and other key business information.

You should update the document each year, outlining the requirements of the Federal Trade Commission and any state that has a separate registration, said Busker, who advised hiring a franchise attorney for assistance.

"Don't get tempted to start franchising without having your legal responsibilities buttoned up," he said. "It can be expensive, but potential liabilities in this area can be even bigger if your process isn't in proper compliance."

Franchise fees

Most companies require franchisees to pay fees. Typically, there is an initial one-time franchise fee and then ongoing annual fees. As the franchisor, you need to determine what your initial franchise fee will be. The range is generally $20,000 to $35,000.

Ongoing franchise fees are often based on a percentage of the monthly gross revenue. Because these fees may be beyond what most entrepreneurs have in their savings, it's likely that a potential franchisee will need to apply for a loan.

2. Experiment before you expand.

Evaluate your business's success – and challenges – before investing in other locations, taking it one step at a time to ensure you're not getting ahead of yourself.

"We studied the numbers [in our flagship location], compared them to new stores that opened and made adjustments in our franchise model accordingly," said Rosalie Guillem, founder of the Le Macaron French Pastries franchise. "Write down notes, findings and areas for improvement to perfect the process. This may result in several trials and errors, but the goal is to streamline and move on to opening a second location."

Once you feel prepared to expand, you can carry these lessons with you and continue to make smart decisions for your company, like hiring the right managers and staff, she added.

3. Hire professional help.

The franchise journey should not be endured alone. One location is enough responsibility on its own, but opening multiple is a nearly impossible endeavor to accomplish as one person. Between updating your FDD and managing day-to-day operations, you'll need guidance.

"Franchise consultant groups will help with operations manuals, marketing tools, etc.," said Guillem. "Lawyers will advise … compiling a sound FDD and explain regulations that vary state by state – things small business owners don't have common knowledge on. Brokers will help your franchise grow with new owners. You may have a great idea for a franchise business, but it takes a team to grow that to reality."

4. Create a marketing strategy.

 As a franchise owner, you are responsible for marketing your product to consumers and your franchise opportunity to prospective franchisees. Coming up with a solid marketing plan for both will keep you on track as you grow your brand.

"We prioritized and budgeted for marketing above all else," added Guillem. "We felt without proper marketing and awareness of our brand, we would not be able to expand through franchising."

Tollefson advised franchisors to keep their business models as simple as possible so they're easier for franchisees to understand. Larger franchises often require its members to participate in a common advertising fund. This can be a fixed dollar amount or it may be a percentage, such as 1-4%.

"When marketing a new franchise concept, the more a prospective franchise partner has to grasp to understand the whole business model, the harder it will be to recruit good franchise partners," he said. "You will have a much better chance at succeeding if you fully understand what it takes to be a successful franchisor and to have successful franchisees."

5. Establish franchisee training.

When a prospective franchisee joins your company, you want to ensure they are well suited for your brand and mission. One way to do that is by training each new franchisee and their employees to follow the guidelines you've set.

"Perfecting your training for new franchisees is critical to overall brand success and maintaining brand standards across all of your franchised locations," said Maureen Anders, CEO and founder of AR Workshop. "It also helps the franchisees feel confident and capable of running their own business. Start working on your training materials before you land your first franchise signing."

Key takeaway: Important steps to turning your startup into a franchise include conducting research on what franchising entails, obtaining all of the required franchise documents, hiring professional help to assist you in the process, and creating a marketing plan for the entire franchise system.

What is a franchise?

A franchise allows business owners to expand the reach of their business to new locations without having to run the new locations themselves. Instead, they turn their business into a franchise, which allows others to purchase the rights to that company's branding, trademarks and business practices.

In addition to the upfront fee that is paid by those who buy into the franchise, franchise owners, also known as franchisors, are paid monthly royalty fees based on how much the franchise locations earn.  Franchising is fairly common in the United States, with more than 773,000 franchises in operation throughout the country as recently as 2019.

Owners of a franchise location, known as a franchisee, enter the market with some of the harder aspects of entrepreneurship already taken care of. They don't have to come up with a name, logo or branding style – that's been taken care of by the franchiser. They also don't need to define the company culture, set their own best practices or build a market share – the franchiser already has that set. The only thing franchisees need to worry about is the day-to-day operation of their third-party retail establishments.

Key takeaway: A franchise is a third-party location that is licensed out to a franchisee. It's a great way for an existing business owner to expand their business without having to personally run every location while still reaping the benefits.

What are the benefits of franchising your business?

By making your company's processes, likeness and other facets of its operation available for franchising, you can reap the rewards without having to manage everything.

"When you franchise your business, you're able to expand to areas that would have been more challenging to grow in as a company, and you're able to do it faster," Anders said. "This growth helps spread your brand to new corners of the country, helping you to build a reputation and recognition."

In addition to the possibility of rapid expansion, franchising your business can result in a steady stream of incoming royalties, as franchisees continue to operate your expansion locations, while the increased market presence results in more advertising dollars and better buying power.

Key takeaway: Franchising your brand can benefit you in several ways, from increased brand recognition to increased revenue.

How long does it take to franchise a business?

When deciding whether you should franchise your business or not, one major consideration is how long the entire process will take. The length of time varies depending on factors that could be unique to your business or industry.

While some experts estimate that it could take between 90 to 120 days to complete the franchising process, Anders suggests that time frame isn't always accurate.

"When you franchise a business, you want to make sure you do it the right way the first time, or else you could end up with problems for years to come where you leave yourself and your concept vulnerable," she said. "Fortunately, there are so many experienced franchise industry professionals that you can look to for assistance, just bring your passion for your business. The International Franchise Association website is a great place to start to learn about franchising and find professional services, like a lawyer, sales department and more."

Franchising your business entails taking on risk, since you won't be in complete control of how things operate on a daily business. By taking the time needed to ensure you're protected, either through the assistance of a franchise lawyer or franchise broker, you may need more time than others, but you'll at least cover your bases.

Key takeaway: Franchising your business could take up to four months or more. It isn't a process that should be rushed. 

Editor's note: Considering opening a franchise? If you're looking for information to help you choose the right one, use the questionnaire below to have our sister site provide you with information from a variety of vendors for free:

 

Additional reporting by Andrew Martins and Nicole Fallon. Some source interviews were conducted for a previous version of this article.

Image Credit: monkeybusinessimages / Getty Images
Sammi Caramela
Sammi Caramela
Business News Daily Contributing Writer
Sammi Caramela has always loved words. When she isn't writing for business.com and Business News Daily, she's writing (and furiously editing) her first novel, reading a YA book with a third cup of coffee, or attending local pop-punk concerts. She is also the content manager for Lightning Media Partners. Check out her short stories in "Night Light: Haunted Tales of Terror," which is sold on Amazon.