Starting your own business is an unparalleled achievement. It takes a lot of dedication and time, most often at great personal effort and start-up costs.
So when you finally reach a point where you've built a recognized brand name, your company is doing well, and you’re considering franchising your business, you know you've arrived. Well done!
Franchise businesses — selling franchises, in particular — can be a great way to scale your growth strategy, increase future profitability, and help it reach new people and newer heights.
A standalone business can become an incredibly successful, revenue-generating machine.
But if you aim to expand your business to newer locations and grow your customer base with franchise marketing, learning how to franchise a business is something small business owners should consider.
Business franchising is a practice that allows business owners to grant licensees the right to open new franchise locations using the same proven business model, trademarks, products, services, intellectual property, and supply-chain networks.
In exchange, the licensee pays the owner a royalty and an initial fee for the right to do business in their name.
In this article, we will help you understand how you, too, can franchise your business in seven easy-to-understand steps. Read on for an in-depth understanding of the finer details of the franchise model and how it can take your business plan to a new level.
But before we get to any of this, let’s clear up a common misconception about franchise development and licensing.
Licensing vs franchising
At first glance, it can be easy to think that licensing and franchising are one in the same. This makes sense since there are aspects of franchising that overlap with licensing such as getting permission to use the reputation and assets of a recognized brand name for a certain price.
So what’s the difference between franchising and licensing for a business owner?
Franchise agreements give the prospective franchisee the right to run the business in a particular location with complete access to the brand’s business model, intellectual property, and operations.
For example, franchise brands like McDonald’s can operate at so many different locations all over the world by allowing small businesses to purchase franchises in exchange for a fee.
A licensing agreement, on the other hand, applies only to registered trademarks and intellectual property. A licensee does not have the right to open up another branch of the business in the way that a franchisee does.
Disney, for example, sells licenses for its many cartoon characters to manufacturers, who then produce and sell merchandise with these characters on them.
Disney itself doesn’t manufacture any of these products but gives out licenses to other companies, allowing them to use its intellectual property.
There are many franchise advantages and disadvantages, so here’s a chart listing the differences between the two business models in detail:
|Grounds for comparison||Franchising||Licensing|
|Type of business||Consumer product or service-based businesses||Intellectual property or service-related businesses|
|Legal framework||Contract law||Contract law|
|Control||Franchisor has significant control over how the franchise is run||Licensor has very little control over how the licensee runs their business|
|Limitations||Broader agreement||Limited agreement|
Now that we know what franchising is and how it differs from licensing, let’s take a look at the different types of franchising deals you can enter into.
What are the 4 types of franchises?
Most types of businesses can be turned into a franchise brand. Whether you run a food and beverage company or a car repair shop, the franchising model is flexible enough to allow businesses to expand into new territories smoothly.
Broadly, there are four types of franchising models based on factors such as level of investment (including an initial franchise fee), growth strategy, and operations that a business owner should know.
Job Franchise – A low-investment franchise, this business model suits people who want to run a solo operation, typically from home.
Small businesses that are run by one or more people, typically using a vehicle, often fit this business model. Examples include lawn care, cleaning services, cell phone repair, pool maintenance, and children’s classes.
Distribution Franchise – In this format, the franchisor grants the right to distribute its product to customers. Such franchises typically deal with large products such as vending machines, cars, car parts, computers, machines, and appliances.
In addition to distribution, such franchises might also grant production rights. For example, a franchise brand like Coca-Cola can give an existing business the right to bottle and sell the drink locally.
Business Format Franchise – Here, the franchisor provides a prospective franchisee with all operational, administrative, intellectual property, and strategic marketing plan support to run the business.
Business franchising is popular in fast food, personal care, restaurants, and retail industries.
Investment Franchise – Franchisors using this format invest significantly large sums of money (including a franchise fee) into start-up costs to get the business entity off the ground.
Typically, new franchisees will not be too involved in the day-to-day running of the business and the franchisor will engage their own management and marketing team. Usually, large restaurants and hotels are franchised in this way.
With that in mind, let’s jump into the section you’re most interested in!
How to franchise your business in 7 steps for small business owners
For a small business owner, taking the leap and expanding the business to new territories can be a challenging task. Entering the world of franchise brands is one way to scale up without having to do all the work on your own.
Bringing in stakeholders who replicate your business concept and set up branches for your business in locations you wouldn’t have been able to access otherwise — or at least not easily — makes the job of growing your business much simpler.
So, where do you start? Let’s take a look at seven simple steps to franchise your business.
1. Figure out if your business is ready to franchise
Before you start franchising your business, you need to be sure that it's ready to be replicated. If you're unsure of the answer, meeting with an experienced franchise consultant to discuss your options can help.
After all, franchise development is a long-term business decision that will require you to support, train, manage, and organize multiple franchises.
To ensure that your entry into the franchising industry is an absolute success, you also need to sit down and evaluate if this is the right time for you to explore franchise opportunities.
You should be able to answer all the following questions in the affirmative if you are in a position to grant new franchise opportunities:
Can my business model be replicated by franchisees?
Will franchising substantially improve the profitability of my business?
Can I afford the time and resources to start franchising?
Do I have the bandwidth to support and train new franchisees?
Remember: it’s not just brick and mortar buildings that new franchisors need to manage. It’s human beings, too!
2. Register your trademarks
The entire point of franchising revolves around granting third-party businesses access to your intellectual property so that they can run their enterprise based on your trademarks, logos, and other trade secrets.
To be able to franchise your business, you need to first legally register your intellectual property with a trademark office.
This industry can be a complex one to navigate for emerging franchisors. So, if you can, we advise that you meet with franchise lawyers (not just expert franchise consultants).
You can register your brand name, logo, and trademarks with a legal entity such as the United States Patent and Trademark Office.
This will help protect your brand identity and take legal action against businesses that illegally use your name or logo without securing a franchise agreement from you.
3. Issue a franchise disclosure document
A Franchise Disclosure Document (FDD) is a legal document that every business that wants to sell franchises must prepare. It must be written in accordance with local and federal franchise laws and is typically prepared by franchise lawyers.
The document must include 23 disclosure items that tell potential franchisees everything about your existing business and your expectations from them.
What are the 23 items your Franchise Disclosure Document must include?
The Franchisor and Any Parents, Predecessors and Affiliates
Estimated Initial Investment
Restrictions on Sources of Products and Services
Franchisor's Assistance, Advertising, Computer Systems and Training
Patents, Copyrights and Proprietary Information
Obligation to Participate in the Actual Operation of the Franchise Business
Restrictions on What the Franchisee May Sell
Renewal, Termination, Transfer and Dispute Resolution
Financial Performance Representations
Outlets and Franchisee Information
Franchise laws also dictate that the FDD must be presented to prospective franchisees at least two weeks before signing any franchise agreement.
4. Establish your franchise company
To sell franchises, new franchisors need to set up a separate limited liability company or corporation.
This new business entity will be separate from your registered company and will work towards selling and supporting franchises while managing fees, royalties, and profits generated from them.
5. Write a franchise operations manual
A business operations manual is like a toolkit for supporting franchisees. It's an amazing resource to have before you start selling franchises that helps them implement different systems and processes as they set up their business.
It tells them about your overall brand, target markets, and business plan while also serving as a handy how-to guide on product and service requirements, operations standards, supplier information, administrative requirements, and inventory management.
A franchise operations manual is not a legal document, but an important internal communications tool that can support franchisees in replicating and implementing your proven business model in their franchise location as closely as possible.
6. Register your FDD
Once you’ve completed the FDD, you may need to file or register it. In the United States, the FDD is registered with the state government.
Interestingly, different states have different franchise laws regarding FDDs.
While some states require franchise owners to register the FDD with the government, others require you to simply file it with them, no approval required. Others do not require any registration or filing of the FDD at all.
Here’s a resource where you can check state-specific franchise laws about FDD registration.
7. Draft a franchise agreement
Finally, once you’ve completed all legal obligations and you’ve found someone who's interested in your franchise opportunity, you can draft a franchising agreement that will be signed by you and the franchisee.
This legal document sets rules and expectations for your business relationship with prospective franchisees. It includes terms about:
Duration of contract
Suppliers and inventory management
Termination of the agreement
The franchise agreement may also include other specifications agreed upon during negotiations between the franchisor and franchisee.
The road to franchising your business
And just like that, you know the steps of how to franchise a business and can confidently start building your own business empire!
From running a small business at a single location to managing a vast network of businesses – being a franchise business owner allows you to enter new markets and transform your brand into a larger and more successful enterprise.
While franchising can seem like a scary and overwhelming step, it isn’t quite as complicated as you might have thought. We hope this article has given you a sense of how to successfully get started on the right foot if you’re considering franchising your business.
When your business is profitable and running like a well-oiled machine, there’s good reason to try to replicate it in other locations by giving others the opportunity to start a franchise in your company’s name.
If you want to learn more about how to franchise your business successfully and sustainably, check out we helped grow You Move Me's franchise or listen to this podcast episode about Franchising Your Business: How to Start and Grow a Successful Franchise.
In it, community member Cameron Carson talks about how he started his Worried Bird franchise and found success!