If you run a successful company that offers valuable products or services to consumers, you might want to open other locations to reach a larger audience. Not only will you earn a higher profit, you’ll also help countless new customers while you build your brand from a distance.
Instead of owning and operating all the locations yourself, you can offer your business model as a franchise opportunity, and allow other hardworking entrepreneurs to run each establishment under your brand name. Here are four expert tips for turning your startup into a franchise.
Do your homework
While you likely researched your target consumers and location before opening your business, you’ll need to investigate further to familiarize yourself with the world of franchising.
“A company that is franchised is built and operated entirely differently than most businesses,” said Brian Tollefson, CEO and founder of Tikiz Shaved Ice & Ice Cream. “Before making the decision to franchise a concept, it’s crucial to … fully understand the franchise business model. Many don’t realize the time commitment and effort it takes to franchise a company, in addition to the costs associated to properly do it.”
Franchise fees can be overwhelming, but they’re crucial to developing your brand and a network of owners, said David Busker, franchise consultant in the FranChoice national network.
“They must be competitive with other brands in your industry and category as well as other franchises with similar total investments,” he said. “Qualified franchisees will be comparing brands not only among categories but even different industries, and the fees can be a meaningful part of total costs.”
Busker added that most fees range from $25,000 to $50,000 per unit, with discounts for multiple-unit owners or regional developers.
Before hiring any franchisees or even considering opening an additional location, ensure that you also have the right documents and agreements in place:
The franchise agreement exists so you and your franchisees are on the same page. Busker noted that it should be legally sound and not dependent on the franchise location. [Interested in starting a franchise? Check out our guide on how to choose the right one for you.]
“You might allow things specific to a franchisee to be negotiated, like territory, credit or other items normally handled in an addendum,” he said. “But to maintain a brand, all of your franchisees need to be signing the same agreement.”
Franchise Disclosure Document (FDD)
The franchise disclosure document, or the FDD, provides potential franchisees with everything they need to know about your company, your sales figures and other key business information.
You should update the document each year, outlining the requirements of the Federal Trade Commission (FTC) and any state that has a separate registration, said Busker, who advised hiring a franchise attorney for assistance.
“Don’t get tempted to start franchising without having your legal responsibilities buttoned up,” he said. “It can be expensive, but potential liabilities in this area can be even bigger if your process isn’t in proper compliance.”
Most companies require franchisors to pay a one-time initial fee. So you’ll want to set that cost. The average or typical range is generally $20,000 to $35,000. Plus, there is often an ongoing franchise fee or royalty that franchisees must pay. The price for these is often related directly to a percentage of the gross revenue. These may bring the need for a potential franchisor to seek a loan.
Experiment before you expand
Evaluate your business’s success before investing in other places, taking it one step at a time to ensure you’re not getting ahead of yourself.
“We studied the numbers [in our flagship location], compared them to new stores that opened and made adjustments in our franchise model accordingly,” said Rosalie Guillem, founder of the Le Macaron French Pastries franchise. “Write down notes, findings and areas for improvement to perfect the process. This may result in several trials and errors, but the goal is to streamline and move on to opening a second location.”
Once you feel prepared to expand, you can carry these lessons with you and continue to make smart decisions for your company, like hiring the right managers and staff, she added. It might take some time to feel confident in your decisions, but don’t let any errors dissuade you from growing.
Hire professional help
The franchise journey should not be endured alone. One location is enough of a responsibility on its own, but opening multiple is a nearly impossible endeavor to accomplish as one person. Between updating your FDD and managing day-to-day operations, you’ll want to have guidance on your side.
“Franchise consultant groups will help with operations manuals, marketing tools, etc.,” said Guillem. “Lawyers will advise … compiling a sound FDD and explain regulations that vary state by state – things small business owners don’t have common knowledge on. Brokers will help your franchise grow with new owners. You may have a great idea for a franchise business, but it takes a team to grow that to reality.”
Create a marketing strategy
As a franchise owner, you are responsible for marketing both your product to consumers and your business to prospective franchisees. Coming up with a solid marketing plan for both will keep you on track as you grow.
“We prioritized and budgeted for marketing above all else,” added Guillem. “We felt without proper marketing and awareness of our brand, we would not be able expand through franchising.”
Tollefson advised franchisors to keep their business models as simple as possible, so they’re easier for franchisees to understand. In larger companies, franchises often require its members to participate in a common advertising fund. This can be a fixed dollar amount or it may be a percentage of review, such as the 1 to 4 percent range.
“When marketing a new franchise concept, the more a prospective franchise partner has to grasp to understand the whole business model, the harder it will be to recruit good franchise partners,” he said. “You will have a much better chance at succeeding if you fully understand what it takes to be a successful franchisor and to have successful franchisees.”