How to franchise your small business

What is a franchise business?

Before you decide whether or not to franchise your small business, it’s important to understand what franchising means.

A franchise is a business that uses branding and rules created by a parent company, but runs largely independently of that parent organization. There is often some overlap, such as trickle-down marketing campaigns or assets that are included in the initial franchising fees, but individual owners also have some freedom to make decisions based on their respective markets.

Franchisees can benefit from the success their parent company has already seen. Take chain restaurants, as an example. Most people recognize the Golden Arches of McDonald’s from a mile away. Franchisees can piggyback off that worldwide popularity and instant brand recognition to advance the success of their business compared to launching a brand-new concept entirely on their own.

Pros and cons of franchising

Whilefranchising may not be for everyone, it can be beneficial for the right business.

PROS:

• Spreading out the responsibility: When you franchise, you’re essentially delegating leadership to dozens or even hundreds of individual owners brought into your network. Instead of being directly responsible for every location, you have someone who will run the business entirely. And, since the franchisee is an owner instead of a manager, he or she has a vested interest in success.
• Rapid expansion: Because you don’t have to be hands on at every franchised location, you can expand at a far more rapid pace than if you had to attend every groundbreaking, oversee every decision, and do all the hiring yourself.
• You maintain some control: Franchising your business rather than licensing it (more on the difference between those two options later) means that you divide up the workload without losing control over your brand. You still have tons of say-so over logos, colors, menu items, recipes, products, and service offerings, so there’s consistency from location to location.
• Collective buying power: Creating a large network of storefronts can give you greater buying power. You may even be able to open regional warehouses, buying ingredients, products, or supplies in bulk and then dividing them up between individual locations.

CONS:

• Loss of profits: Sharing the responsibility means you share the profits, too. Franchised locations may not bring in as much money as a location wholly owned by the parent company, but then you won’t put in the same amount of expenses (labor, materials, etc.), either.
• Dubious control: People who do not like to relinquish control or who have trouble trusting strangers may have issues signing up franchisees. Franchise owners are allowed to make some decisions without direct management control, and that may not always come with the best results (whether that’s a matter of fact or opinion).
• Red tape: Once your franchises spread outside of the geographical boundaries your concept originated in, you may find yourself dealing with laws and licensing issues you’re unfamiliar with. All those hurdles must be crossed in order for your organization to continue to grow.
• Additional costs: Franchisees pay hefty fees to leverage your concept, but that doesn’t mean it’s completely free on your side. You may have to invest in upfront costs associated with lawyers’ fees, licensing advice, marketing strategies, etc.

How to turn your small business into a franchise

1. Evaluate business readiness

Is your business ready to franchise? One way to be sure is to hire someone to conduct an objective business analysis. This includes examining your financials, seeing whether your concept is competitive enough to translate into new markets, and seeing whether the amount you’d have to charge in fees makes sense compared to other franchising opportunities.

You may want to test readiness yourself by expanding to multiple locations on your own before dipping your toes into the world of franchising. This “test case” can help you see from a potential franchisors’ point of view and address potential hurdles ahead of time.

2. Create a followable operations manual

Uniformity is a vital part of any franchising agreement. To create consistency, you need to establish standards and then make sure there is a crystal-clear way for franchisees to understand those standards and execute on them each and every time.

An operations manual serves as a concrete, indisputable guidebook that tells the reader exactly what needs to happen. Don’t know how the lobby should look? The manual will tell you. Unsure about proper closing procedures? Look at the manual. Wondering how to hire the best cooks? Check the manual.

3. Prepare a financial disclosure document (FDD)

A financial disclosure document (FDD) isn’t just a nice thing to have, it’s actually required by the Federal Trade Commission’s Franchise Rule. The idea is to create a document that allows potential franchisees to fully understand the potential risks and benefits that come with their investment.

This FDD must address 23 specific points that cover information about the franchise itself, as well as the parent company’s officers and other franchisees who have already signed up. With one read through, potential candidates should be able to find out everything from how much experience management has, to whether anyone in charge has ever filed for bankruptcy, to what fees are being charged, and how those fees are broken down.

4. Draft franchise agreements

Franchise agreements are the contracts signed by both parties — parent company and new franchisee — outlining the agreement and details such as terms and conditions, transfer rules, opening timeline, minimum sales requirements, territory protections, and so on.

5. Trademark your brand and register for patents

Protect your intellectual property by trademarking all the items associated with your company’s core branding, including your business’s name, logo, and tagline. While you’ll allow franchisees to use these elements, you want to make sure people can only use them with your permission and according to the guidelines set forth in the FDD.

You’ll also want to safeguard any other sensitive information. This might mean getting a patent for specialty equipment that will soon be installed in all franchise locations or finding ways to protect your recipes. It’s not easy to copyright a simple recipe, but you may be able to find a way to patent a particular production method.

6. Establish your franchise company

In some states, a franchise company is subject to different rules and tax liabilities than a single-entity company. Check if you need to register your franchise company with the secretary of state. If so, you may need to investigate separate bank accounts and other dedicated accounting measures as well.

7. File or register your franchise disclosure document

All franchises are subject to state requirements for franchise disclosure. The exact requirements differ, with some states requiring documents to be registered with and approved by the state, others only asking for registration but not approval, and still more states skipping the registration requirement altogether. Non-registration states still require the FDD to be trademarked.

8. Create a franchise sales & marketing strategy

Before you can start signing up franchisees, you’ll need to create a comprehensive sales and marketing strategy that can help attract the right people. To start, write a marketing plan that speaks to your brand and your ideal franchisee. Then decide how you’ll execute on that plan. Will you use digital marketing? Billboards? Word of mouth? Will you offer referral bonuses?

9. Hire a service to find franchisees

Another route is to hire a service that specializes in connecting would-be franchisees with companies offering franchise opportunities. There are fees associated with these services, but in return, they can help screen applicants, facilitate legal documentation, and assist with negotiations.

10. Market and sell your franchise

It’s finally time to go out and find the people who will help take your concept to the next level. Launch your marketing plan, talk with applicants, get organized, and sign the right people.

Be strategic about who you sign on and which markets you expand to first. The stronger your successes are at the beginning, the sturdier your foundation will be when you’re ready to ramp up.

Is licensing different than franchising?

Before franchising your small business, think about whether you really want to franchise or if you might be better off licensing your business.

While franchising gives franchisees the rights to the parent business’s entire operational model, including that all-important manual and links to vendors, licensing agreements only include the right to use trademarked items such as the business name and logo.

Typically, franchising’s all-in-one approach works much better for service-based businesses, where the “how” is every bit as important as the “what.” Licensing tends to work better for product-based businesses, like selling a certain type of toy or a particular piece of clothing.

Other franchising considerations

Here are a few other important points of consideration that don’t fall into the categories above.

1. Success is collective: When you franchise, the success of those new franchise owners directly relates to the success you can experience as the overall owner. You need every outlet to run at its best for your entire model to work. In other words, you’re only as strong as your weakest locations.
2. Be an active partner: Building on the previous point, it’s crucial that you be active in your business and give plenty of facetime to new franchises. Be a strong representative of the original brand and advocate not only for your concept, but for the people who are relying on you to help make their own dreams come true.
3. Provide lots of advice: Listen to your franchisees. Differences in background, education, geographic location, vendors, and clientele can make some of your guidelines less effective for some franchisees. Be open to feedback, provide advice as needed, and collaborate on solutions. You can also make recommendations, such as suggesting a reliable trusted POS system vendor to accept payments, to help pave the way to success.

Franchising a business can be a huge undertaking, but knowing the steps involved and how to prepare your business for expansion can go a long way toward easing stress and facilitating a strong, profitable future. Another way to help ensure success is by partnering with the right brands.

Whether you’re franchising your business or just trying to improve operations in your current location, Clover can help you streamline your business and improve consistency from location to location. For more information, reach out to a Clover business consultant today.

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This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.