A lot of work goes into starting a franchise business. Even though a franchise has an established and proven business model, it doesn’t mean you should assume starting a franchise is easier than starting a brand-new business from scratch. Both involve a lot of hard work on your end. If you are interested in starting a franchise, there are steps you should take to achieve this goal.
What Is a Franchise?
First off, you need to understand what a franchise is. A franchise is essentially a form of license that one party — you, the franchisee — acquires in order to receive access to the proprietary knowledge, processes and, crucially, trademarks of the business — the franchisor. With a franchise, you’re able to sell the products or services under the franchisor’s name, while paying an upfront startup fee and annual licensing fees in return. Common examples of franchises include McDonald’s, Subway, Taco Bell and many other familiar names.
Read on to find out how to start a franchise.
How to Open a Franchise: 8 Steps to Starting a Franchise
A preliminary step you should take, and one that will overlap with the first step in starting a franchise business, is figuring out your budget. Franchises always have an upfront franchise fee. On top of that, they usually have financial requirements, such as a certain net worth threshold, that you’ll need to meet in order to be approved. Determining your budget is interconnected with the franchise you choose to open, so it’s good to at least have an outline of your finances before you get too deep into the process.
Here are eight steps to follow to open a franchise:
1. Research Franchises and Franchising
The first step to starting a franchise requires completing extensive homework learning about franchising in general and about the franchises you are considering.
Entrepreneurs often choose to start a franchise instead of starting a business from scratch for many reasons. A major one is the fact that the franchisor already has a proven business model set and your job as the franchisee is to execute on it. While this may limit creativity and entrepreneurial freedom, it also eliminates the big uncertainty of proving out a business model yourself. Another big reason for starting a franchise over your own business idea is gaining access to an established brand. This can save a lot of time, energy and resources that go into marketing and building a new brand from scratch.
Beyond understanding the general nature of franchises, the next step is choosing a specific franchise to open. Fast food businesses are prime examples, but there are many different franchise businesses to choose from. Here are some of the major categories of franchises and examples of companies available to franchise:
- Automotive: Meineke, Maaco, Jiffy Lube
- Education: Mathnasium, Kumon, School of Rock
- Hotels: Holiday Inn, Hampton by Hilton, Red Roof
- Personal Care: Sport Clips, Planet Fitness, Pure Barre
- Retail: 7-Eleven, Ace Hardware, the UPS Store
2. Reach Out to Franchisors and Franchisees
Once you have your research done, you should follow up by reaching out to franchisors directly. External sources of information can only go so far, so getting as much firsthand information as you can about actually operating a specific franchise is critical.
When you let a franchisor know you’re interested in opening one of their franchises, they will provide you with a Franchise Disclosure Document, also called a Uniform Franchise Offering Circular (UFOC). This a regulatory document that lays out the franchise opportunity, including the franchise agreement, disclosure agreement, financial statements and other information, for prospective franchisees before they sign any paperwork or pay any money. Reading through these documents informs you about the franchise business and allows you to determine if you can fulfill all the necessary obligations to the franchise.
As part of this step, you should also connect with franchisees, in general, as well as those specifically who operate a franchise business you’re interested in. First-hand reviews and accounts about the experience are invaluable and will help narrow down your options to the one that makes the most sense.
3. Attend Discovery Day
Once you’ve settled on a franchise, the franchisor will usually invite you to Discovery Day, which is a day-long event where you can meet personally with the franchise’s top people. Your initial research in step two helps you understand the franchisor, but it’s the face-to-face nature of Discovery Day where you can learn more about the franchise’s corporate culture, values, policies and the people you’ll be dealing with. On the flip side, the franchisor uses Discovery Day to get to know you better and size you up as a potential business partner.
Just as you should use Discovery Day to learn more about the franchisor, the franchisor will use the day to learn more about you, the franchisee. There aren’t consistent criteria that all franchisors use to judge you, but they’ll typically look at qualifications such as a college degree, business experience, trade certifications and sufficient capital to invest in opening one of their franchises. In addition, they’ll want to know that you’re committed and passionate about their products or services and that you’ll follow their policies. Since you’re meeting with the franchisor in person, Discovery Day is an ideal opportunity to have any of your questions about the franchise answered. Be sure to ask questions like the following, plus any specific questions you may have:
- Has the franchise terminated any franchisees?
- Will the franchisor help me find a good location?
- What are the long-term plans, such as for expansion or growth, of the franchise?
- Does this system support and encourage multi-unit ownership?
- Can the franchisor tell me more about your training program?
- How are disagreements resolved between franchisees and franchisors?
4. Review Your Franchise Agreement
If you and the franchisor are on the same page with working together, the next step is that they’ll present you with the franchise agreement. Unlike the UFOC, the franchise agreement is a legal, binding contract that gives you the legal rights to open a franchise, dependent on a list of their rules and regulations. At this step, consulting an attorney is highly advisable, especially one with experience with franchise businesses.
The franchise agreement is a good opportunity to see if there are any discrepancies between any verbal promises made by the franchisor during your meetings and the points outlined in the contract. For example, if the franchisor promised to provide additional financial assistance, make sure that this is clearly stated in the contract. Thoroughly review all information in the contract on suppliers, pricing, hiring of staff and training, change of ownership, protection of territory, royalty fees and similar points.
5. Get Franchise Financing
A major step to take before you sign the franchise agreement is to make sure that you have enough money to cover the franchise cost and other expenses involved. This links back to your preparatory homework for determining your budget. Typically, franchisors expect you to send your franchise fee payment along with the signed contract. Thus, before committing you should have your methods of funding to start a franchise all lined up.
Here are some of the most common financing options to open your franchise:
- SBA loan
- Startup business loan
- Loan from friends or family
- Personal or business credit cards
- Partners or investors
6. Choose a Location for Your Franchise
As with starting any kind of business, choosing a location is one of the most important decisions to make. Usually, the franchisor will provide some guidelines and recommendations for helping you find an ideal location based on an analysis of their business. Franchisors also usually have some strict requirements in terms of commercial real estate sites for their establishments, including factors like minimum square footage and the number of parking spots required. What’s more, most franchisors have territory requirements, such as having a storefront that is a certain distance away from other franchises.
On your end, you should choose a location based on more general factors. For instance, you’ll want to choose a location based on traffic, access, surrounding infrastructure and the demographics of the neighborhood since it is going to affect who your customers will be.
7. Participate in the Franchise Training Program
Even before you get to this step, you should research the franchisor’s franchise training program. Depending on the franchisor, this may occur before you sign a lease, or while you’re in the process of finding a location. A great franchise training course should enable you to walk into your new business after training and have all the tools necessary to make it successful.
The best franchise training programs will teach you much more than just the products or services offered by the franchisor. It should also train you in marketing, hiring employees, employee management, working with suppliers, business procedures, filing for permits and licenses, accounting, reporting and more. Franchise training programs are iterative, meaning they tend to evolve over time, so be sure to stay current on all aspects of running the franchise.
8. Prepare to Launch
With all the other steps done, the last step is to prepare your franchise to open for business. What’s involved in this final step will vary from franchise to franchise. However, common tasks and issues to work out include leasing or purchasing equipment, filling inventory, renovating the interior or exterior, advertising open positions, hiring staff and training your employees. Since franchises have the business model worked out for you, the hiring and training of good employees is one of the most important parts of starting a franchise for you personally. Learn about building your team using this checklist for starting a business.
The Bottom Line
Starting a franchise does have some inherent advantages over starting a business from scratch. By having an established and proven business model, a franchise business takes care of an otherwise major part of starting a new business. However, franchising doesn’t completely eliminate the risk of starting a business. While starting and operating a franchise provides you with a proven model to follow, this same advantage can also limit you in many ways. Hence, when choosing to open a franchise, researching, reading and understanding all the various aspects of the franchise business is essential. Go through each one of these steps with plenty of time and energy allocated to executing them correctly.