If you have a successful business that\u2019s relatively easy to replicate, you\u2019re probably eager to start expanding your operations. That said, growth is generally easier said than done. In many cases, particularly when it comes to consumer services, the most effective \u2013 or only \u2013 way to expand is to open new locations. <\/p>\n\n\n\n
Franchising is the best way to grow for small to medium-sized businesses without the necessary resources to expand to multiple locations quickly.<\/p>\n\n\n\n
If you are asking yourself, \u201cHow exactly do I franchise my business?\u201d you have come to the right place. In this article, I’ll walk you through everything you need to know about franchising your business. <\/p>\n\n\n\n
Franchising your business essentially allows you to lease the rights to your intellectual property and trademarked services to other \u201cinvestors\u201d (or franchisees). Franchisees sign a franchise agreement, which allows them to open and run a new branch of your business under your strict guidelines.<\/p>\n\n\n\n
McDonald’s is one of the most famous and successful examples of a franchise. In fact, the fast food chain helped bring the business model to the mainstream. A whopping 95% of McDonald\u2019s<\/a> are owned by franchisees, who pay the corporation for the rights to their intellectual property. In most cases, franchisees also get access to the franchisor\u2019s training programs, supply chain networks, support services, and more.<\/p>\n\n\n\n It\u2019s worth noting that franchise agreements differ from licensing agreements<\/a>: While a franchise agreement provides franchisees with limited rights to replicate the entire business model, licensing agreements allow third-party companies rights to specific elements of your intellectual property. For example, Disney may allow clothing companies to display their characters as part of a licensing agreement.<\/p>\n\n\n\n So, you have a successful business model and want to expand your empire as quickly as possible through franchising. How exactly do you do that? Here are my key steps for successfully franchising your business<\/a>.<\/p>\n\n\n\n On the surface, it might seem as if franchising is the fastest route to vast wealth if you\u2019ve operated with a successful business model for years. But, it is important not to rush things. Take your time and ask yourself a few key questions<\/a> before pressing ahead with what can be a life-changing and \u2013 in many cases \u2013 risky decision.<\/p>\n\n\n\n For starters, though not always necessary, you should consider whether franchising is a realistic option. Have you already expanded to multiple locations? Without duplicating your business model at least a couple of times, franchising will likely pose far more hurdles than you expect.<\/p>\n\n\n\n When considering whether franchising is the right way forward for your business, ask yourself these questions:<\/p>\n\n\n\n The answer to these questions doesn\u2019t necessarily need to be yes, but be honest with yourself. If you\u2019re finding gaps and weaknesses, you might need to do more homework. After all, franchising can be risky without the proper precautions.<\/p>\n\n\n\n If you have a successful business, you likely already have a business plan. But, it is a good idea to update and rework your business plan to cater directly to the new franchise business model. You may already have a proven business model for potential franchisees to replicate, but far more goes into business planning than that when franchising. Your business plan needs to include your goals regarding your training programs, your supply network, manuals, guidelines, and much more. Just as importantly, you need to think about your fees.<\/p>\n\n\n\n You should carefully plan and consider the initial franchise fee and ongoing royalties<\/a>. You might think the difference between 8 and 9% is negligible, but it could equate to hundreds of thousands of dollars within the space of a few years. At the end of the day, these fees are how you will earn money as a franchisor, so I recommend putting some thought into the amounts.<\/p>\n\n\n\n Franchising your business means giving third-party investors access to a lot of your intellectual property. Naturally, you need to go to great and meticulous lengths to ensure your intellectual property is safeguarded.<\/p>\n\n\n\n For example, there are cases when franchisees open copycat stores once their agreements are over. This isn\u2019t all that challenging given that they already have access to your business model and, potentially, many of your trade secrets.<\/p>\n\n\n\n Before signing any franchise agreements, make sure you\u2019re legally covered and that your brand and services are unique and recognizable.<\/p>\n\n\n\n You should formally establish your franchise company as a legal entity<\/a> during the franchising process. Ideally, you might want to handle this step before issuing your FDD.<\/p>\n\n\n\n In most cases, you\u2019ll register as a limited liability company or a corporation. Once you\u2019re a formally registered franchise, your business can begin selling franchises, supporting your franchisees, and collecting revenue in the form of royalties.<\/p>\n\n\n\n Formally establishing your franchise shields you from future obligations that were not agreed upon initially. It can also help streamline your financial reporting requirements.<\/p>\n\n\n\n You are legally required to provide potential franchisees with a Franchise Disclosure Document (FDD)<\/a> at least 14 days prior to having them sign the franchise agreement. The FDD gives investors the information they need to get to know your business before tying the knot.<\/p>\n\n\n\n FDDs can be pretty hefty documents, containing 23 sections as required by the Federal Trade Commission<\/a>. In addition to essential information like your business name and franchisee obligations, some key sections include any past history of litigation, bankruptcy, business experience, patents and trademarks, restrictions, and audited financial statements. The FDD will also include information about the franchise fees and royalty payments, as well as the license term limit.<\/p>\n\n\n\n It\u2019s worth noting that the FDD doesn\u2019t necessarily need to disclose your financial performance, though doing so can help build trust with potential investors.<\/p>\n\n\n\n In 13 US states, known as Franchise Registration States, you need to register your FDD usually every year. These states include:<\/p>\n\n\n\n If you live in one of these states, you\u2019ll need to file your franchise with a state regulator before you can start selling franchise agreements. The rules and authorities to which you must submit your FDD vary by state. For example, in California, you must register your FDD with the California Department of Corporations.<\/p>\n\n\n\n The Franchise Agreement is a legally binding document<\/a> that sets out the roles, responsibilities, and expectations of the franchisee and franchisor. While there isn\u2019t a strict legal format for the Franchise Agreement, the document should generally include:<\/p>\n\n\n\n Your operations manual is crucial \u2013 it will act as your brand\u2019s bible for your franchisees, providing them with operating instructions and minimum standards and requirements. I urge you to put a good amount of effort into creating your manual. The more versed a franchisee is in your franchise operating systems, the better equipped they will be to effectively run a branch of your business.<\/p>\n\n\n\n You can put quite a lot of information in an operations manual, but at the minimum, it should include:<\/p>\n\n\n\n The operations manual is confidential \u2013 you shouldn\u2019t include it with your FDD. Only give your operations manual to franchisees after<\/em> the Franchise Agreement has been signed.<\/p>\n\n\n\n Last but not least, you need to make your franchise attractive to potential investors. How are you going to instill investors with confidence that your brand will bring them lucrative returns? Why should a business owner operate under your brand instead of building their own?<\/p>\n\n\n\n After you get them on board, that’s when the hard work comes in. We’re creating more operating manuals soon and tips like our article on franchisee performance monitoring<\/a>.<\/p>\n\n\n\n Getting potential franchisees interested in your business is no easy feat, as there is a lot of competition in just about every industry. Franzy<\/a> is one of the best ways to get your franchise in front of interested eyes. The platform connects you with franchisees and gives you the opportunity to sell the dream of your franchise to prospective buyers.<\/p>\n\n\n Sign up for our free email newsletter. It’s a 5-minute read once a week to help you level up on the franchising industry.<\/p>\n\n\n\nHow to Franchise a Business: Step-by-Step Guide<\/h2>\n\n\n\n
Step One: Ask Yourself, \u201cIs Franchising Right For My Business?\u201d <\/h3>\n\n\n\n
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Step Two: Draft a Business Plan <\/h3>\n\n\n\n
Step Three: Create Trademarks and Set Up Necessary Precautions<\/h3>\n\n\n\n
Step Four: Formally Establish Your Franchise Company<\/h3>\n\n\n\n
Step Five: Draft a Franchise Disclosure Document<\/h3>\n\n\n\n
Step Six: File\/Register Your FDD With Your State (If Necessary)<\/h3>\n\n\n\n
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Step Seven: Create a Franchise Agreement<\/h3>\n\n\n\n
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Step Eight: Create an Operations Manual<\/h3>\n\n\n\n
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Step Nine: Market Your Franchise to Attract Franchisees<\/h3>\n\n\n\n
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