Franchising offers a business growth, but preparation is key. Here are the seven steps businesses must take before expanding.
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by LegalZoom staff
Updated on: February 9, 2024 · 11 min read
After the initial stages of starting a business, many entrepreneurs begin to consider how to scale. Franchising is one way to grow a successful operation. Read on to learn:
Franchising is a type of agreement that entails reproducing a successful business model across multiple locations. As the business owner and franchisor, you would create a franchise agreement to begin the process and move toward opening a new franchise.
This agreement allows franchisees to attain limited rights to your intellectual property, supply chain networks, training systems, and more in order to open and operate a new location for your business.
Franchising and licensing are two different ways to share your brand information in exchange for a fee. The distinctions between franchising and licensing center around control and operation:
When you franchise your business, you'll likely create one of four different types of franchises:
The type of franchise that's right for you depends on the size and complexity of your business as well as the industry you operate in.
Including preparation, franchising typically requires three to four months of time. The process can move more quickly depending on how complicated your business model is.
The cost to franchise varies depending on industry, state of residence, and more. Sometimes, it can cost less than $20,000 total, but some franchises push costs near $100,000 or higher.
The Federal Trade Commission (FTC) regulates franchise operations at the federal level, but each state has its own rules and requirements for franchise operation. To make sure you don't miss any state-specific requirements, it's best to speak with a franchise attorney who can help you prepare documents in your specific state.
Once you decide to franchise your small business, you'll need to prepare to take on the new independent contractors that will run their individual franchises.
Here are the seven main steps (with explainers) that you'll need to take.
Before embarking on the franchising journey, there are a few questions you should ask yourself to ensure your business is ready to franchise.
The answer doesn't need to be “yes" to every question, but you should aim to give honest answers to highlight any weaknesses that may be in your blind spots.
According to Blair Nicol, CFE, vice chairman and principal of franchise consulting firm FranNet, it's best to start with an original location that already has an established presence. Small business owners, he said, “should have already duplicated the concept a few times. That way, they have a replicable model that has been proven to work anywhere."
A central element to franchising your business is granting franchisees access to a wealth of intellectual property. This allows them to brand their franchise according to your guidelines and also encourages the growth of your business. But it can expose you to risks if your intellectual property isn't adequately protected.
Before delving deeper into the franchise process, make sure you protect the intellectual property that makes your business unique and recognizable.
According to the Franchise Rule, you can only sell a franchise to a prospective franchisee once you provide them an FDD that's in compliance with FTC rules and regulations.
An FDD is like the articles of organization for your franchise—it introduces key players, defines operating terms, includes financial statements, and addresses obligations of your franchise agreement. In fact, it must contain 23 specific sections according to the Franchise Rule:
The FTC mandates that franchisors:
These requirements are important to ensure that your FDD is a living document that keeps franchisees informed with the most current information.
Tip: Give prospective franchisees as much time as possible to review your FDD. It's in your best interest to only align with franchisees who are wholly committed to their investment—their success is your success.
A franchise agreement is a contract binding you and your franchisee to certain expectations that will define how the franchise operates. A franchisee is an independent contractor, not an employee, and must sign this contract to align with the franchise. Once signed, it will live in the FDD that you compile for each franchisee.
The franchise agreement doesn't need to adhere to a certain format, but the best agreements are clear and thorough. Yours might include:
Not all of the conditions above will apply to every business model. Working with a franchise attorney can help you prepare a franchise agreement that's comprehensive and concise, taking the guesswork out of setting up a new franchise.
An operations manual describes in full detail the day-to-day operations of the franchise. The operations manual is:
This manual isn't necessarily a legal document that the franchisee signs, but it is incorporated into the franchise agreement. Therefore, it's the franchisee's responsibility to note and follow all enclosed obligations. Franchisees, however, won't operate in exactly the same way as you. Be ready to give up a little control around your business concept and how it's executed, as long as all requirements are met.
Once your FDD is complete, it should be stored securely so that you can access it and update it when necessary. Your FDD is a required document, but whether or not you need to file your FDD with the government depends on the state you live in.
Registration states, filing states, and non-registration states each have their own requirements for franchisors. For example, non-registration states require you to obtain a registered trademark on your disclosure documents.
No matter what state you live in, consulting an expert can help you determine exactly what to do with your FDD.
Franchising your business is a great opportunity to sell others on your successful idea. The business goals that you set for your franchise should be realistic, and you'll need a realistic strategy in order to hit them.
Your strategy should be unique to your business, your community, and your growth goals. Some good ideas to consider when formulating your strategy include:
A thorough and honest FDD is a useful explanatory tool when attempting to sell your franchise to a new franchisee. It can help answer in-the-moment questions, or it can serve as a resource to tout benefits you offer, such as a special training program for employees.
Business ownership is rewarding work, and it often requires making tough decisions. Weigh the benefits and drawbacks of franchising your business to help inform your decision of whether franchising is right for you.
A franchise is a major asset to a business owner. It's a concept that encourages growth, which can be beneficial to you if scaling your business is possible. The pros of franchising include:
The scalability of your franchise ultimately determines how much diverse, passive income you bring in. Regardless, franchises offer unique opportunities for growth.
Franchises have many benefits, but there are a few drawbacks to operating this kind of business model. The cons to franchising include:
If money is tight, the long game of franchising could prove difficult to sustain. Its high upfront costs and possible legal disputes require ample financial planning.
You may need to register your franchise according to the state you live in. Some states require registration and a franchise fee, while others require that you file your franchise disclosure document with the state or simply obtain a registered trademark for it.
Licensing is not an alternative to franchising. Licensing rights extend to intellectual property, like a brand's name or logo, while franchising grants rights to entire business models, products, and services.
Franchising is an exciting way to grow your business if you lay the proper groundwork in advance. It offers new markets, expanded clientele pools, and larger profits, but it also requires lots of money and time.
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