How to Franchise a Business?: Step by Step Guide

by Business 05 June 2024

how to franchise a business

How to Franchise a Business? Let’s find out the answer in this article.

1. Determine if Franchising is Right for Your Business

Determine if Franchising is Right for Your Business

Do you have an adaptable business model? 

If you said yes, it’s time for you to explore how to franchise a business. 

Assess The Scalability and Adaptability of Systems

The question is not how to franchise a business. Instead, you should ask- Is my business scalable? 

Experts say franchising is a scalable model. According to Statista, 790,500 franchises are working in the US. 

So, franchising is otherwise scalable in the country. 

Does that mean you can start a franchise business immediately?

Maybe No!

You must have an adaptable business model. Brands like McDonald’s and Wendy’s have the most straightforward business models. That’s why their franchises are so successful. 

There are 14300 McDonald’s locations in the US. But most of these are franchise businesses. 

Generally, the vendors will understand how to franchise a business if your business model is simple. 

On average, franchise businesses are 66.3% more likely to achieve success than small businesses. 

Only 2% of franchises belonging to the top 100 brands fail. On the other hand, 40% of individually owned small businesses fail

Evaluate Profitability and Potential Future Profitability

You need to learn some basic steps about how to franchise a business. But can you assure success? 

No. 

The buzzing retail company Blockbuster failed its franchise business. Why?

They did not measure the current or future profitability at all. 

So, how can you measure future profitability?

Follow some basic measures. 

Calculating the RPU (revenue per unit) is the most straightforward measure. It measures the overall sales of a franchise owner in 1 year. 

At the same time, you must evaluate your franchising model. For example, calculate the cost of raw materials. Then, calculate the gross profit margin

After that, you may understand whether franchise partners can scale their business using your model. 

Consider Business Model, Industry, And Growth Opportunities

I will use an example here to help you understand better. 

Let’s consider McDonald’s here. The perks of McDonald’s business model are:

  • Mcdonald’s gets stable revenues from royalties shared by franchises 
  • The operating cost of the McDonald’s franchise is meager. So, it is easy to profit. 

The annual operations cost approximately $500,000 to $1.8 million. But you must scale up your business. A scaling business can make easy profits at such a low operating cost.

In the five years (2024-29), the US fast-food sector’s revenue will grow at a CAGR of 3.4%. So, emerging brands/franchises will also scale up quickly. 

Determine Capital Available for Franchising

If you are thinking about franchising a business, you must know one thing. 

Choose a franchise that gives capital aid for setting up your business. 

All brands under YUM Brands support franchise partners financially in setting up new stores. 

At the same time, you must have the stock capital to cover the contingent costs and buffer for issues downhill.

For instance, you will have to bear the upfront cost. It is the price you need to pay to open a new business. 

Assess Personal Goals and Interest in Learning Franchising

 Now you know how to franchise a business. But it would help if you also found credit franchise partners. Do some ground checks before disbursing franchises. 

For instance, you must find out the personal goals and interests of the applicants. At the same time, you should also encourage aspiring vendors to learn more about your business. 

A company may use paid ads to promote the USPs. You must advertise the standout benefits you will share with the franchise owners. 

2. Issue Your Franchise Disclosure Document (FDD)

Issue Your Franchise Disclosure Document (FDD) 

You must register your Franchise Disclosure Document with the Federal Trade Commission. After that, you can sell franchises in the US. 

Prepare FDD In Compliance with Federal and State Laws

According to federal laws, you must cite six essential things in the FDD documents.

These are:

  • The name of the Legal entity that will sell the franchises (for instance, in the case of KFC, you must clarify if the franchising authority will be YUM Brands or KFC)
  • Disclose your business experience in the given state or territory.
  • Talk about your litigation.
  • Disclose your actions in case of bankruptcy acquittal.
  • Upfront fees charged by franchise owners  
  • Other miscellaneous fees paid/collected

Other than that, there are other relevant parameters in the FDD document. You must include all 23 disclosure items required by the Franchise Rule.

At the same time, the US federal government also wants franchisors to:

  • Update FDD annually and register in franchise registration states
  • Disclose FDD to prospective franchisees 14 days before agreement signing

3. Prepare Your Operations Manual

Prepare Your Operations Manual

Are you done with FDD? Now, head to preparing your operational manual. What is that?

It’s a go-to guide for your franchisees. The OM informs them about the necessary standards and requirements to comply with. 

But what are the topics that you should cover in your OM?

Abide by this list. 

  1. Purpose, vision, and goals of your brand 
  2. Your product details and the service requirements for the franchisors
  3. Who are your suppliers
  4. What are your inventory requirements 
  5. Your operations standards
  6. Marketing needs
  7. Administration requirements 

Important TIP: Provide a manual to franchisees after signing the franchise agreement

4. Register Your Trademarks

Register Your Trademarks

The whole franchising network depends on your trademark. TM is your brand and voice. 

Ensure Trademarks Are Protected Before Franchising

Copying trademarks is an unpardonable offense in the US. So, your brand TM must be organic and original. 

To protect the originality of the brand logo and name, get it registered with the US Patent and Trademark Office. The fees for trademark registration vary between $250 and $750

Trademark registration is the most significant step toward mitigating risks of intellectual property theft or misuse. 

Your work is not done by just registering your TM. 

After that, you should make agreements with your franchisees. You should disclose all clauses about using the brand name, logo, etc.  

5. Establish Your Franchise Company

Establish Your Franchise Company

I have explained how to franchise a business in detail. Here’s a synopsis of the primary steps to set up your franchisee business. 

  • Create legal documents, disclosures, and operational requirements
  • Comply with federal and state franchise laws
  • Set up franchise agreements and FDD for selling franchises

6. File or Register Your FDD

File or Register Your FDD

You may also have to pay some local taxes while setting up the franchising model. Your first step should be registering FDD with local state regulators in franchise registration states. 

Some states have additional formalities for franchisors too. For instance, you must file for a one-time Business Opportunity Exemption Notice with the secretary of state in Texas. 

Update FDD Annually And Ensure Compliance With Laws

 You must file for revaluation and include changes (if any) in your FDD annually. If you operate in a franchise registration state, you must also register FDD under the local office.

When you sign up for new franchisees, disclose your FDD at least 14 days (about two weeks) before signing.  

7. Set a Strategy to Achieve Your Sales Goals

Set a Strategy to Achieve Your Sales Goals 

Knowing how to franchise a business is not enough. All successful franchisors sit with their franchise owners to set sale growth strategies. 

Develop A Franchise Sales Strategy and Budget

The IFPG states that the average franchise set-up cost for McDonald’s is $464,500 to $2,306,500. In the same way, you must set a projected budget for your franchisees. 

Market And Sell Franchise Opportunities Effectively

To sell franchises, you must release a sales disclaimer. But you must have good marketing tactics. 

McDonald’s gives franchise owners 90% ownership over the operations. It is an appealing marketing strategy to attract clients (to apply for McDonalds franchises).

Provide Training and Support To Franchisees For Success

Training franchisees is perhaps the most critical decision to successfully set up a franchisee business. 

 Inadequately trained franchises cannot sell their brand correctly. Brands like Solar Universe invested $150,000 to provide rigorous classroom-based training to the franchise owners. 

The Bottom Line……..

Following these steps, a business owner can successfully franchise their business and expand their brand through a franchising model.

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Ankita Tripathy loves to write about food and the Hallyu Wave in particular. During her free time, she enjoys looking at the sky or reading books while sipping a cup of hot coffee. Her favourite niches are food, music, lifestyle, travel, and Korean Pop music and drama.

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