Do you want to expand your small business through franchising? If YES, here is a complete guide on how to franchise your business, make it work and make money.
One of the surest ways of multiplying the returns on your investment as a business owner is through franchising your business. But you would have to put in time and of course workable strategies if you want to be successful with your franchising plans. With franchising, you will be able to get a lion share of the available market in your industry.
If you are interested in franchising your business, then you should answer yes to the following questions. Have you been able to build a successful business model overtime that can survive beyond your present location? Is your brand known and well accepted in your area of operation? If you answered yes to these questions, then you may consider leveraging on the franchising business model to expand your business frontiers, so as to make some great profits.
Table of Content
- 1 What is Business Franchising?
- 2 How Franchise Business Work?
- 3 How Business Franchises Make Money
- 4 Licensing Vs Franchising: What’s the Difference?
- 5 5 Questions You Must Ask Yourself Before Deciding to Franchise Your Business
- 6 How Much Does It Cost to Franchise your Business?
- 7 Franchising your Own Business – How to Maximize Profits
What is Business Franchising?
A franchise is a type of license that allows people have access to a business’s proprietary knowledge, processes and trademarks in order to allow the person to sell a product or provide a service under the business’s name. Franchising is simply selling your business model and brand name to an entrepreneur or investor that can run same business in other locations.
In exchange for gaining the franchise, the franchisee usually pays the franchisor initial start-up and annual licensing fees. Franchising, broadly speaking, is a means of running a commercial operation using some or all aspects of another business, including its name, brand and products.
But with industry innovations recently, franchising now means getting permission to do business under the same name as the parent company and to make use of all or some specific parts that helped that business succeed to enable you lay a foundation for yours.
Franchises are becoming very popular that even most of the most successful businesses in the world are franchises. In this arrangement, the individual who grants the license is called a franchisor, while the individual who was given the license to run a business is called the franchisee. It is very important to state that this mutual agreement means that the franchisee gains all aspects of the franchised business.
The franchisee agrees to pay the franchisor for what he/she will be gaining. Sometimes this payment tends to be an upfront payment plus staged payments so that they are paying as the business develops. A lot of franchise agreements note that the franchisee must pay more if the business gets more successful, but sometimes it is just a regular flat fee for the period.
The terms and conditions for various franchises may differ, but the fact remains that in most cases, it is a win – win situation for both parties. With the advent of franchising license, people who have capital but are scared of starting their business from the very scratch can easily own a business and make good profits from it.
How Franchise Business Work?
The partners in a franchise agreement are the franchisor, who grants the franchise licence, and the franchisee, who invests in it. Do not forget that a franchise is not an independent business. With mutual understanding, a franchisee buys the permission to run a business based on the franchisor’s tried and trusted operational methods, often detailed in an Operations Manual.
Note that this manual makes sure that all the products and services offered by the franchisor aligns with consistent quality standards. The business logistics, such as marketing, product assembly, service delivery, accounting, store layout, employee recruitment and training, are all detailed and explained. A lot of franchisors make available extensive training to the franchisee to make sure the business is managed according to proven methods, making it more likely to succeed.
Also note that the duties and obligations of both the franchisor and the franchisee are fully agreed and written in the Franchise Agreement. A lot of franchisors also make use of a standard agreement.
How Business Franchises Make Money
Franchising is a tested and trusted method of business expansion. Those aspects of the business that helped it succeed are the things people will be paying for. Sometimes franchisors run corporate stores which replicate to various degrees the original business. The profitability model of this business is usually equivalent to the financial model applicable to the original business.
You should have it in mind that there are many potential charges a franchisor can bill to a franchisee’s business. But each franchisor will have to decide which charges best suit its system and its financial goals. Note that their choices will, in a very large way, affect the attractiveness of their system to potential franchisees. But sometimes, these costs are directly linked to some of the primary silos listed below.
- Franchise Fee (Initial)
This is simply the initial fee paid to allow the franchisee make use of the franchisor’s system and trademark(s). Franchise fees range in size. This fee would be used to offset expenses such as brokerage fees and the cost of compliance with the applicable statutory disclosure regime.
- Transfer and Renewal Fees
They also get money by charging their franchisees fees if they wish to transfer their agreements or renew them. A lot of of these costs will be applied to the costs the franchisor will gain in the transfer/renewal processes.
- Build out/Purchase Costs
They also make money by controlling how the franchised stores are built out or renovated. They may have affiliated businesses responsible for build outs or renovations, or they might even contract out the work and charge an upcharge to the franchisee in charge for paying for the work. Note that these charges can be large costs such as the salaries of employees taking care of this construction. It might well exceed the franchisor’s costs for being involved in the construction, which is how the construction or renovation of a store can be a way for a franchisor to make money.
4. Compliance Systems
Indeed a franchisor is predominantly engaged in the monitoring of his franchisee performance in business and all ramifications. All these processes, including staff visits, secret shopper programs, audits and compliance software programs, are an expense to the franchisor. A lot of franchisors tend to pass on the expense or other charges relating to the activity. Have it in mind that these charges may or may not include a profit component.
5. Events – Opening Date/Conventions
Some franchisors mandate their franchisees to participation in opening store promotions and system conventions. They can choose to charge for these events which is another source of profit for them.
6. Initial and Ongoing Training
Franchisors make use of employees and others to train new franchisee operators/managers. Franchisees typically bear the cost in the form of a training fee. Franchisors may add a profit component to the training fee.
7. Ongoing Royalties/Fees
They also charge a royalty as a percentage of the franchisor’s gross sales or as fixed fees charged periodically (usually monthly). The royalty or fee is reflective of the underlying licensing arrangement. Note that franchisees most times pay these amounts without regard to their own profitability.
8. Supplies and Equipment
Franchisees tend to utilize supplies and equipment advised or suggested by the franchisor. A lot of franchisors impose this use for purposes of quality control and consistency of customer experience. Note that they also do this to be able to take advantage of collective buyer power. We believe that the advantage of this buyer power may or may not be shared with franchisees. Franchisors can also upsell products to their franchisees directly or indirectly.
We also believe that they can also ask for rebates from the system suppliers which they may decide to keep for themselves or share with their franchisees. They might establish private label programs where they supply their goods for use to the system at prices they choose. A lot of franchisors ask their franchisees to only procure supplies from approved suppliers enabling these arrangements. The franchisor’s expenses in its role in the supply chain can be covered through these arrangements.
9. Advertising Fund
Note that franchises maintain a fund to which franchisees contribute to allow the business carry out advertising campaigns locally, regionally and nationally for the advantage of the system in general. It is very possible for franchisees to contribute a percentage of their gross sales, again without regard to their own profitability. We believe that these contributions are made for advertising but they are also often applied to cover the wages of employees administering the fund and other head office costs.
Licensing Vs Franchising: What’s the Difference?
i. The franchising business model allows the franchisor to dictate the exact methods and systems (such as building style, uniforms, menus (for food related businesses), fit-out and where the business is to be located.
Whilst in the licensing business model, the buyer of the license which is known as the licensees is free to develop their own business model. They are free to choose the building style, uniform and the location they want to operate from, but they cannot alter the logo, trademark or business name of the licensing company.
ii. The franchising business model allows the owner of the company i.e. the franchisor, to effectively monitor the franchisee in the running of the business. As a matter of fact, they go all the way to enforce the performance criteria or quota requirements that the franchisee must meet and maintain.
While in the business licensing model, the buyer of the license (the licensee) is not obliged to meet any requirement criteria or even comply with performance standards from any overseeing organization.
iii. In the franchising business model, the franchisees are expected to pay certain fees, which could include payments to a marketing fund. If you are the owner of a franchise, you are paid a fee, usually an upfront fee, plus an ongoing royalty payment plan that could be a percentage of sales or a fee per product sold et al.
While in licensing business model, the buyer of the business license pays certain fees which is usually one-off and in this case, the owner of the company will not be permitted to operate a marketing fund.
iv. Anyone who buys a franchise from a company is allowed by the agreement to make use of the company’s (the franchisor’s) intellectual property (e.g. trade marks, menus, advertisement jingles, logos and every brand identity). So also, a Licensee is expected to use the trademarks and intellectual property of the licensor if they so want.
So, if you have done a proper research, and it is obvious that your business model can easily be run by someone in a different location without your supervision, then you should consider franchising your business cum brand. Franchising is indeed one highly workable strategy that can help you capture new markets and get multiple returns on your investment.
Here are some of the steps you would need to follow if you want to franchise your business in the United States of America.
5 Questions You Must Ask Yourself Before Deciding to Franchise Your Business
If your goal is to ensure that your business continues to grow and thrive after franchising it, then you must ask yourself these five important questions to help you prepare.
a. Have You Made Enough Profit to be Able to Attract Franchisees?
If you want people to invest in your franchise, you need to be able to show them that they can make an impressive amount of profit from their investments, so the first question you need to ask yourself is “Am I making a lot of profit?”
You don’t want your franchisees to get frustrated when they are not getting enough profits and you also don’t want your business to get a bad reputation or collapse under the weight of a poor franchise deal, so make sure you are not just making profits, but a lot of profit, before you go ahead with franchising your business.
b. Do You Have Enough Business Experience?
To be able to successfully sell a business franchise, you must understand the nitty-gritty of your business. You must be able to reasonably predict the challenges that your franchisees would experience, and proffer tested solutions to those challenges. A business that has grown rapidly, but hasn’t been in the market for a sufficient amount of time might not be ripe enough for franchising.
If you are just starting out, consider taking sometime to really learn more about your business, customers, and the industry in which you operate so that you can easily help your franchisees overcome any potential challenges that they may face along the way.
c. What is the Best Franchising Model for You?
There are two major types of franchising models, and you would have to choose the most suitable option for your business and industry.
The first one is product/trade name franchising where you sell the trademark, or the right to the name of your business or products to the franchisee. This means that they are now able to go ahead and manufacture products using the name of your business.
The second model is known as business format franchising. For this model, you would have to stay involved in the franchisees business. You would continue to supply them with the products, training, marketing assistance, and anything else that is necessary to keep the businesses operating (your business and that of your franchisees) as one.
Business format franchising makes it seem like the franchisees business is a branch of your own business.
You would have to decide on the most suitable model for you depending on how much time and resources you have to spare, and how deeply you want to be involved in helping your franchisees run their businesses, and keep both businesses in sync.
d. How Much Will You Charge as Franchise Royalty Percentage?
When you sell a business franchise, you get to make money from the franchise royalty percentage that you would be paid by your franchisee. This is usually between 4-6% of their gross sales, however, some companies charge higher. You have to pre-determine how much you would charge, which fees would be covered in the charges (cost of entry, operating license, insurance, etc.), and whether you want to be charging these fees monthly, or on a yearly basis.
You would also need to know how much profit you stand to make from the franchise deal along the line so that you can determine whether it is worth a try or not.
e. Are You Ready for the Legal Implications?
Franchising your business is not as easy as the franchising consultants make it sound. There are a lot of legalities involved depending on the state your business and your franchisee’s business would be located.
There are several documents that would need to be prepared and signed, and you would also need a legal expert, as well as a business consultant to help you put things together. It helps to be sure that you can afford to pay these bills before commencing your plans to sell your business franchise.
Don’t ever go into a franchise deal thinking that you would be able to make plenty of money without spending some money too. Franchising your business is a process that requires a lot of paperwork, planning and execution and even though it is true that you can earn a lot of money from it, you would also have to invest some money too, especially in the initial stages.
How to Franchise your Business, Make it Work and Make Money – A Complete Guide
- Re-Examine Your Business Plan
In the real sense of things, if you want to franchise your business, then you must start the process from the very foundation, and that means you must re-examine your business plan to be sure it can accommodate franchising; if not, then you would have to rejig it.
Your business plan should be able to guide you on the kind of expansion that suits your business model and all the options that are available to you. The fact remains that if you have a comprehensive and highly workable business plan in place; it becomes a lot easier to talk investors into buying a franchise from your company when you start selling.
- Build a Workable Business Model and a Highly Sellable Brand
Another thing you need to do if you want to franchise your business is to build a workable business model that is highly sellable. From the very first day you start your business, ensure that all the processes of running the business is well documented and easy to understand.
Any employee that picks up the Standard Operating Process (S.O.P) of any unit of your business should be able to understand it and work with it with only minimal training or orientation. You should also be deliberate about building a brand that can easily be accepted by the public. The truth is that the perception of the public about your brand is a key factor that will determine how easy you can sell your franchise.
- Carry out Survey in Different Locations
If you have plans of selling the franchise of your business, it would not be a bad idea if you deliberately test the waters to have first-hand information of the acceptability of your brand outside your business location. What you need to do is hire experts to help you design questionnaires that would help you get facts about your brand.
The questionnaires should be administered in the location where you intend branching out to. You are required to pay some professional fee, but the result you get from the exercise will help you market your franchise to potential investors especially if the reports are favorable.
- Closely Study Businesses That Have Sold Franchise
It is important to state that franchising is one of the easiest means of expanding your business frontiers and make huge returns on your investment, but the truth is that it can give you sleepless nights if things go wrong. If you get things wrong, the business can collapse sooner than you expect.
So therefore, the best thing you need to do if you intend leveraging on franchise to gain market share is to study and closely monitor existing businesses that are into franchising. If you do this, you will be able to know the challenges they face and how you can map out strategies to overcome such challenges when you start selling your own franchise.
- Hire a Lawyer to Help You Draft the Terms and Conditions
Business consultants will inform you for free that franchising your business can be challenging and can cause an outbreak of troubles if you sell your franchise to a wrong investor. So also, if your terms and conditions aren’t clearly stated in the contract document, there might be an issue when it comes to regulating the business. If you are looking towards selling the franchise of your business, then you should look for lawyers who specialize in drafting terms and conditions for businesses that sell franchise; they are in the best position to tie up that aspect for you.
- Market and Advertise Your Franchise to Potential Investors
If you have put everything in proper perspective, and you are convinced that franchising your company is the right thing to do, then you should employ all avenues to market and sell your franchise to potential investors. You can list your franchise on online platforms that advertise businesses and franchises for sale. You may consider the option of both print and electronic media to advertise your franchise, you can approach potential investors to market your franchise, and you can as well attend exhibitions to publicize your franchise.
- Mentor and Train Those Who Bought Your Franchise
One of the keys that will help you do pretty well when it comes to franchising is that you must design training models that would be used to train those who buy your franchise. In as much as all the processes and recipes (in some cases) of running your business will be documented and handed over to the person that buys your franchise, it is very important to set aside days to train key staff on how to run and manage the business.
You can also create mentoring sessions for those who bought your franchise. The truth is that there are competitions out there, and if your contract agreement is loaded with this largesse, then you will have the upper hand in the market place.
Lastly, even though franchising your company is your sure bet to make more money from your business, you must endeavor to critically study the above points and still do more research if you truly want to make an outstanding success from your business franchise.
Now for the issue of duration, getting a business franchise involves some complicated processes. So on average, it takes between 3 to 12 months to complete the processes involved in getting a franchise. The next question now is ‘how much does it cost to get a franchise in the United States?’
How Much Does It Cost to Franchise your Business?
The amount you spend on getting a franchise for your business depends on some factors. For instance, you are likely going to pay a higher cost to get your franchise if you use the services of a development Company or franchise lawyers. This is because you will pay some extra service charges to the development Company you use. On the other hand, if you go through the process on your own, you can save some cost here and there.
Let us break down the cost involved in registering a franchise into stages to help you get an idea of the costs involved. Note that the amount outlined in this post is just an estimate, and you may get a lower or higher rate depending on factors like the current economic situation in the country.
Break Down of The Cost of Getting A Franchise For Your Business in The United States
Stage One: This stage involves some pre-franchise registrations you need to make before you apply for the actual franchise process. The amount involved in this stage is not much, and you can get through this stage in a couple of weeks depending on who you are working with.
- Trademark Registration: Before you start the process of registering your company as a franchise, you have to ensure that your business is registered as a trademark. It will cost you between $100 to $200 to get a state trademark, while it will cost between $300 to $500 to get a Federal trademark for each service or product you want to protect. It is preferable to go for a Federal trademark because the protection it offers extends to all states in the country. But a trademark attorney will charge at least $1,000 to get this done.
- Creating The Franchise Manual: This manual is a document that contains instructions and processes for training new franchisees on steps to open a successful business. It is otherwise known as the franchise operation manual. Some companies develop their franchise manual internally. If you decide to develop a franchise manual for your company, you will spend nothing to get it done. If on the other hand, you outsource the project to a development Company, some can charge as much as $20,000 to handle the project.
- Audited Financial Statement: One of the documents required for the preparation of a Franchise Disclosure Document is the financial statement of the company. This must be audited by a reputable Audit firm. The fees charged for auditing a company’s financial statement starts from $3,000. This amount depends on the firm and the complexity of the account.
- Franchise Disclosure Document: In order to sell a franchise, you need to comply with a federal regulation. This law makes it mandatory for every business intending to sell its franchise to have a Franchise Disclosure Document. This document takes up a bulk of the money for registering a franchise. You need the services of a legal practitioner to put together this document. Due to the complicated nature of compiling this document, most law firms charge at least $20,000 to get it done. This is not surprising since the document in question runs into hundreds of pages most times.
Stage Two: This covers the main process of registering the franchise and other subsequent activities you need to get your franchise going.
- Franchise Registration: Basically, some states offer free registration for a franchise, but about 14 states charge a fee for the process. The fee charged varies from state to state. It costs from $300 to $1,000 for state registrations. Also, you need to make an additional budget for the lawyers that will undertake the registration and filing process. The you should budget about $1,500 for each state registration. You can start with a state and proceed to other states as time goes on.
- Your Team: You need set aside an additional budget to hire a franchise team. The job description of your franchise team is to train your franchisees and help them set up the business effectively and within the bounds of the law. The amount you spend on this depends on how many people you want on the team and the level of skill and expertise you need. You can sublet this job to your existing employees to save cost.
- Market Your Franchise: Your franchise won’t sell itself unless you have built a nationwide brand for your business already. Thus, you need to set aside some amount to get the word out about the existence of your franchise. The money will be spent on internet ads, media ads, and franchise trade shows. For this, you can set aside at least $10,000 for the first year.
This is basically what it costs to register a franchise in the United States. You should budget at least $70,000 if you wish to outsource the entire process to a development company or a law firm which is easier. On the other hand, you should budget at least $35,000 if you are going to actively handle most of the stages of developing the franchise training manual yourself.
Franchising your Own Business – How to Maximize Profits
A lot of entrepreneurs who are new to franchising, or who are thinking of becoming a franchisor, may think that the main source of income for a franchise is from franchise fees. But a lot of franchisors have been kind enough to acknowledge that their primary source of income is far more bigger than royalties. The main selling of a franchise itself can be a loss-leader for a franchisor, which is why it is necessary you understand how to maximize your profits as a franchisor.
i. Create a Strong Communication with Franchisees and Have Difficult Conversations with Them
We believe that a lot of franchisors are holding themselves back from having difficult conversations with their franchisees for fear of affecting the franchisee’s self-confidence which may result to further problems with time. But note that it is generally better for the franchisor to hold these difficult conversations as soon as it comes to their attention that the franchisee is having problems, as it would serve the interest of both the franchisor and the franchisee.
It is always best for the franchisor to raise the issue with the franchisee, instead of waiting for the franchisee to come to you. We believe that the earlier you have a conversation with the franchisee, the earlier both parties can resolve the issue.
ii. Be Quick to Note Low Performers as Early as Possible
Immediately you discover that one of your franchisees is under-performing, investigate the franchise system first, and then the franchisee. We believe that low performers come in two main categories: franchisees that are finding it very hard to meet sales targets, or franchisees who have bad attitudes over time.
Note that the former is relatively easy to take care of, via boost programs and the like. But the latter is a more deep, less concrete kind of problem that may damage the franchise system in subtle ways. We suggest that when you are signing on a franchisee, carefully remove potential candidates who have big egos or unrealistic expectations, as these characteristics are unsuited to working within the narrow constraints of a franchise system. Do not forget that your franchisees are representing your identity in their various locations.
iii. You Will Have to Understand High-performance Franchisees
To maximize profits, you have to take a long-term view of your franchisees and the revenue they will produce for you. Have it in mind that being too focused on short-term goals and revenue can cost the you money a few months or years down the line.
If a promising or high performance franchisee falls on hard times dues to ill health or staff turnover, the franchisor might think of cancelling some of the franchisee’s debt or offering the franchisee a loan in order to assist them with cash flow problems. Do not forget the franchisee-franchisor relationship falls within the specific terms of the franchise agreement, and the franchisor can bend the terms of the agreement in ways that both the franchisor and the franchisee gains.
iv. Provide Help Programs for Struggling Franchisees
These programs can be a very helpful for franchisees who are still finding it hard to reach their sales target nine months or more after opening their franchise, or who were initially successful but have hit a stumbling block. We suggest that you offer them help programs free of charge, provided that they agree to do the work and meet the requirements of the program.
Also note that these help program will differ depending on the industry and the nature of the franchise system, but it should be made up of additional training for your franchisee and their management team.
In conclusion, running a franchise is indeed attractive and lucrative too, but there are things you need not joke with if you plan to be successful. For example, when preparing your yearly budget, always prepare for three possible scenarios.
If your franchise system is just starting off, these three scenarios should be worst-case, target case and best-case; but if your franchise system has been running for a few years and you have achieved royalty self-sufficiency, these scenarios can be good, better and best. You need to understand that getting these budgets prepared in advance will help you adjust your business plans if your sales are better or worse than expected.
You also need to research the industry you hope to venture into and the key drivers of the franchise. By understanding some of the key drivers and factors that affect the success of your franchise system, you can then devise means to make your business more profitable.