If you’re looking to learn how to franchise your business, the first thing you should know is that turning your business into a franchise is all about the process, not the destination. There are a multitude of steps to take just to open your first franchise. And then, a whole new journey begins as you grow and support your franchisees. But that’s far down the road.
For now, simply focus on how to franchise your own business and worry about your future franchisees when you get there.
Franchising is a business model used to grow your enterprise. A franchise is a type of business license that allows your intellectual property—which can include proprietary knowledge, processes, and trademarks—to be shared with third parties (known as franchisees) so more businesses can open under your business name and branding.
This business model allows you to retain control over your brand while expanding it to franchisees. As a franchisor, you provide franchisees with a brand name, operating manual, advertising, and sometimes even business mentorship. In exchange for all of this, franchisees will pay you franchise fees, from initial costs to buy into your franchise to ongoing fees such as royalties.
There are a lot of steps that go into starting a franchise business before you even go looking for a prospective franchisee. Let’s take a closer look.
As a business owner, you probably know quite a lot about your business. When learning how to franchise your business and taking steps to become a franchisor, you needed to know every minute detail about your business, its finances, and its operations.
While you make business decisions on knowledge and intuition, franchisees won’t have your know-how, nor will they think like you. You’ll need to be able to instruct franchisees on every small aspect of operating a business, from ordering supplies to accounting to customer service.
Get to know your business inside and out so you can write down how you expect franchisees to operate their franchise of your business. This manual will serve as a guide for any new franchisee so you can ensure that while they’re run by different people, every franchise under your business’s name has the same standards and commitment to their customers.
As you go through the process of franchising your business, you will likely have a lot of questions. It’s a good idea to tap into your business network to find other franchisors who can offer tips and firsthand knowledge of their experiences. And you may also want to find some franchisees to better understand some of their common pain points, so you can avoid them in your own franchise business.
While opening a franchise business is a great way to earn more money and expand your business, it’s also not an easy road to plow. You need to figure out if your business is ready to be franchised as well as if it’s a good fit for the franchise business model.
What makes for a successful franchise? A business that will be successful as a franchise should be something familiar (with a unique twist) that is universally necessary and in demand.
In addition to a good business concept, a franchise must be cloneable. If you’re the reason that your business is successful—you’ve fostered a loyal customer base in your community, for example—it might not be ready to become a franchise. To clone your business, everything needs to operate on a system and be able to be replicated.
Plus, the demand should be significant enough that you can’t keep up with it yourself. People want to buy into a franchise because it’s a proven business model that has already seen great success, making it almost a surefire bet to succeed in additional outposts.
Another way to ensure there is enough demand for your franchise business is to conduct market research. By diving into the details of your market, where consumers are spending their money, what businesses are finding the most (and least) success, and more, you’ll have a better idea of how your business will fare with several locations—and which locations will be the best fit.
Market research or market analysis also helps you determine who your competitors are and whether or not there’s room in the marketplace for a new competitor. Knowing your competitors will also help you to determine your unique value and how you’ll differentiate yourself within the market.
There’s a cost—both in time and money—to start a franchise business. You’ll need to create a lot of document resources for future franchisees, you’ll need to hire a lawyer to review those documents, and you’ll need to be available to support new franchisees.
Before you start a franchise business, check in with yourself to see how prepared you are—both financially and mentally—to start this process.
While you might think that franchising your business is the best way to grow your business, you should also consider alternatives before diving in.
Instead of franchising your business, you might consider opening additional units yourself, expanding your product line, taking on debt to finance growth, or seeking partners. No matter which avenue you choose, do your due diligence to make sure you understand all of the pros and cons before you get started.
Being a franchise owner requires a different skill set than being a business owner. You’ll spend a decent amount of time speaking with prospective franchisees, answering their questions, guiding their franchise openings, and more. This will mean you’ll have less time for the day-to-day responsibilities of your business. Make sure you’re ready for this change before you decide to franchise your business.
One of the hardest parts for many franchise owners is the lack of control. While you’ll create strict agreements with franchisees on how the business is run, that gives you only so much control. Even the best franchisees won’t do everything like you would. And while each franchisee will operate a little differently, their businesses will all bear your business name. Make sure you’re comfortable with this shift, as well.
Once you’re certain you want to franchise your business, you’d be wise to seek some help to support you along your journey.
If you want guidance on how to franchise your own business, you can hire a franchise consultant. A franchise consultant will help guide you through the process of franchising your business—including how to attract potential franchisees. Keep in mind, though, this service comes at a price and is one more thing you should factor into your financial considerations. There are many experts who believe it’s almost impossible to franchise your business without the help of a consultant, and if you have uncertainties about the process, it’s a good idea to seek professional help.
If you don’t have the expendable cash to hire a franchise consultant and are willing to DIY the process, consider looking for a mentor or two. If you’re wondering how to find a mentor, start by networking with other franchise owners. You just might be surprised how willing they are to share free advice.
Just as you created a business plan when you first launched your business to take your business from a concept to a profitable enterprise, you’ll want to develop a franchise plan.
Not every business should or is able to scale coast to coast or internationally. For some businesses, the right growth is just to open a few more storefronts in nearby communities. Decide how many franchisees you’re willing to take on (at least in the beginning) to make sure you’re not stretching your own resources too thin.
In addition to the rate of growth, you want to get a good understanding of where your business concept will be successful. Not every market will be open to your business. As you plan how to grow your small business, know your market and where your success can be replicated.
One of the biggest steps you’ll need to complete when franchising your business is creating a franchise disclosure document (FDD).
An FDD is a legal document that is required to comply with federal and state law. The FDD is part of the franchise agreement documentation that must be submitted to the potential franchisee at least 14 days before signing the agreement.
While you don’t have to file the FDD with the federal government, you do have to file with some states. As well, state law varies as to what must be included in the FDD. If you plan to expand across state lines, you’ll need to consider filing a multi-state FDD that complies with all state laws.
While you technically don’t have to hire a franchise lawyer, your FDD is a legal document, and if you want to franchise the right way the first time, it’s highly encouraged to seek legal help. While hiring a lawyer can be expensive, you might also be able to find legal services online for more affordable prices.
Everything you do as a franchisor is regulated by both federal and state laws. Your goal is business growth, not lawbreaking.
The FDD will contain legal information that’s required by state and federal law, but it will also share with your franchisee a lot of the requirements you expect from them. Some examples of what might be included in your FDD:
It’s important to recognize how each of these requirements can affect your overall success and profitability. Each small decision can make a big difference. Choosing between a 9% or 10% royalty won’t make much difference when you have two franchisees, but it makes a huge difference when you have 100.
Deciding what on franchise costs will depend upon a number of factors. Get to know the surrounding market by studying other franchises in your industry. This will help you determine what fees you’ll charge franchisees. And keep in mind, you may want to offer some incentives for your first few franchisees, such as lower fees, to incentivize prospective partners.
You don’t need to register your FDD with any federal agency and may not need to file with your state, depending on which state you reside in and where you plan to expand.
There are two levels of state FDD registration, franchise registration and franchise filing.
Franchise filing states require you to file the FDD once or annually. Those states include:
Franchise registration states require annual FDD filing. Those states include:
Even among franchise registration states, the requirements vary for what must be included in the FDD. California and Illinois are considered some of the most stringent states for registering an FDD.
The filing or registration of your FDD with the state (if required) is just the first step. You’ll now need to wait for state approval and comments. If there are comments, you may need to address concerns and re-file your FDD.
Once you’ve received the go-ahead from the state, your FDD is ready to be shared with franchisees. Though, there’s more to do before you get to that step.
An operations manual is essentially a how-to guide for franchisees to operate their franchise. Writing your operations manual will take a lot of planning and strategizing. This document will be confidential and should only be shared with franchisees once you’ve both signed your franchise agreement and are legally in business together.
Your operations manual should include:
Your operations manual will be a living document. As you work with franchisees, you’ll find pieces that are missing and will update the document accordingly.
While there are many requirements set out in the FDD and the owner’s manual, you do have to give franchisees some freedom. They’re small business owners too and need to be able to make some decisions on their own. Being a franchisor is about balancing your own profitability, the opportunity to teach, and not being an overly controlling boss.
A franchise is only as good as its brand. If no one knows or likes the brand, additional franchise locations won’t succeed. Once you’ve done the work to establish your brand as one consumers know and love, you want to make sure your brand is protected. This is especially important with franchises, as the reason franchisees are willing to buy into your business is to access your brand. This means you’ll need to file for trademarks for your business name, logo, and slogan.
You can file for a trademark with the U.S. Patent and Trademark Office. Filing for trademarks is important to ensure your ownership over your brand. As well, this will simplify your life as a franchisor because you’ll be licensing or loaning your brand elements to your franchisees for their use.
As part of establishing your franchise business, you’ll need to create a new company which will be separate from your original company and denote that this is a franchise. Additionally, you’ll want to open a separate bank account to keep your franchise finances separate. This will also be used for the financial portion of your FDD.
Once all of your legal documents are completed, then you have to move forward with actually selling your franchise to potential franchisees. Selling franchises will require a specific sales strategy and potentially new staff.
Just like marketing any business, you need to think about the best way to position your business and your unique selling point that will hook buyers. Once you know those key pieces of information, finding the right franchisee will be a little bit easier. If you’re working with a consultant, this will be another area where they can lend their expertise.
After all the work you’ve put into writing legal documents and creating your franchise business, it’s understandable that you’ll be excited when you get your first interested franchisee. But, just because someone is interested in franchising your business doesn’t mean they’re ready to be a franchisee—or that they’re the right fit for your business.
You want to thoroughly vet each franchisee who applies to your program and to make sure they’re a good fit. Watch out for those franchisees who are overly enthusiastic and may not realize just how much work they’re going to need to put into the business. Establishing a screening process ahead of time will help you objectively evaluate each potential franchisee. Not only do you want to make sure they can do the job, but you also want to get a feel for their personality and values. After all, while they will be running their own business, it will still have your name on it and be an extension of your brand.
Once you’ve found an interested potential franchisee and have established that they’re a good fit, it’s time to get into the franchise terms and legal matters. You’re now going to share with them the franchise disclosure document and get to signing.
Once your FDD has been approved by the states where it’s required to be submitted. It’s ready to be shared with your potential franchisees. Federal law states that the FDD must be shared with potential franchisees at least 14 days prior to the signing of paperwork. This gives them plenty of time to review the documents. This isn’t a process you want either party to feel rushed into, after all, so you may want to give them additional time.
Once the paperwork is signed, you might be thinking that the hard part is done. Well, some of it is. Now, you’re tasked with supporting your new franchisees in starting their business. While you won’t be the boots on the ground, you will need to be available to answer their questions and offer support where you can. Especially when you’re new to the franchise industry, you’ll likely be learning as much as they are.
Your initial training is key to getting a new franchisee started, don’t forget to also implement ongoing training to ensure that franchisees are always in lock-step with your business’s brand and mission.
Your most valuable asset as a franchisor is your brand. While you want to teach new franchisees how to be business owners, see them be successful, and give them the room to fail, your number one concern also has to be the success of your brand and enforcing intellectual property rights for your brand.
Each franchisee and their success is important, but it should never outweigh the importance of the brand. When you’re faced with tough decisions, you as the franchisor have to step back and assess what’s best for the overall brand, not the individual franchisee.
While in the beginning you might be focused on finding one franchisee, learning how to franchise your business is just the beginning. It’s important that from the minute you find your first franchisee that you’re focused on the long game. Franchising is about the success of your brand and growth over a long period of time.
Choosing the wrong franchisee, not creating the right environment for franchisees to thrive, and not being there to support them along the way can mean failure, not only for the individual franchisee, but for your business as a whole.
Now that you’ve learned all the steps in how to turn your business into a franchise, you’re ready to put thought into action. While there are a lot of steps in the franchising process, you’re now armed with a lot of information that will help guide you along the way. And remember, seeking professional help—from franchise consultants to a good business attorney with franchise experience—can be another valuable resource in this process.
Sally Lauckner is the editor-in-chief of the Fundera Ledger and the editorial director at Fundera.
Sally has over a decade of experience in print and online journalism. Previously she was the senior editor at SmartAsset—a Y Combinator-backed fintech startup that provides personal finance advice. There she edited articles and data reports on topics including taxes, mortgages, banking, credit cards, investing, insurance, and retirement planning. She has also held various editorial roles at AOL.com, Huffington Post, and Glamour magazine. Her work has also appeared in Marie Claire, Teen Vogue, and Cosmopolitan magazines.