The Ultimate Guide to Franchising Your Business
New to franchising? Do you want to learn more about franchising your business, where to start, whether or not you are ready for franchising, and how to know if you are doing it right? If so, you’re in the right place - The Ultimate Guide to Franchising Your Business will help you get there.
What is franchising?
Franchising is a legal and business model to grow your business. Under the franchise business model, as a franchisor, you achieve outlet growth, expanded brand recognition, and increased system efficiencies through the recruitment of qualified franchisees who are granted a license to use your trademarks and duplicate your business within a designated territory or at a specific location. The agreement that creates the franchise relationship is known as the franchise agreement. At the time of signing the franchise agreement, the franchisee will pay you a one-time fee known as a franchise fee. As a franchisor, you will provide continuing training and support to your franchisees, and in return, your franchisees will pay recurring royalty fees.
If you’re interested in franchising your business, you’re in the right place. This guide will provide you with a detailed understanding of franchising and help you become a knowledgeable franchisor. If you are confused about this stuff, you’re not alone, and we’re here to help.
Below are helpful links to assist you in navigating through the topics covered in this Ultimate Guide.
What are the franchise laws, and what is a franchise disclosure document?
Franchising is a regulated industry and requires compliance with federal and state franchise laws. At the center of all franchise regulation is the requirement that franchisors disclose and provide to their prospective franchisees a pre-sale disclosure document called the franchise disclosure document or FDD not less than 14 days prior to entering into any agreement with a franchisee or accepting any payments. The contents of the franchise disclosure document are broken down into 23 sections (each section is referred to as an "Item") that contain disclosure about your franchise offering, including the fees that you charge and the legal obligations between you and your franchisees.
The franchise disclosure document must be updated and issued no less frequently than annually and, in certain states, known as the franchise registration states, the FDD must be approved and registered with state regulators before offering or selling a franchise in that state. Other states require franchise filings or business opportunity filings before selling any franchises. The franchise laws also include state-specific laws that relate to the relationship between franchisor and franchisee.
What does it mean to franchise my business?
When you franchise your business it means you have taken the legal and business steps necessary to allow you to sell franchises. First and foremost, franchising your business means that you have prepared and issued a franchise disclosure document that complies with federal and state law. When dealing with states that require FDD registration and filings, franchising your business also means that you have registered or filed your FDD with the state and that you have been authorized to sell franchises.
When you franchise your business, you have:
a) Prepared and issued your FDD;
b) Registered and filed your FDD;
c) Prepared your operations manual;
d) Protected your trademarks;
e) Established your franchise company; and
f) Developed a road map and plan for selling franchises.
In addition to the significant legal compliance tasks involved, franchising your business also involves implementing business planning and franchise development strategies focused on franchisee support, franchise sales, and the long-term protection of the franchise system that you are creating.
Does my franchise disclosure document have to be registered or filed?
The answer depends on where you will be offering and selling franchises. At the federal level the franchise disclosure document is not registered or filed with any government agency. Although your franchise disclosure document must comply with federal law and the Federal Franchise Rule, compliance is self-regulating, i.e., it is up to you and your franchise lawyer to ensure that your franchise disclosure document is compliant and properly issued. At the state level, in the Franchise Registration States, your franchise disclosure document must be accepted by and registered with a designated state regulator before you may offer or sell a franchise in that state. In the Franchise Filing States, you must make certain filings with the designated state regulator before offering or selling a franchise in those states. In all other states you may offer and sell franchises as long as your franchise disclosure document is current and in compliance with federal law.
See in the glossary below a list of the "Franchise Registration States" and the "Franchise Filing States" or visit our interactive franchise map to learn more about each state and its franchise requirements. Also, learn more about where the FDD gets registered and filed.
How long should it take to franchise my business?
Typically the process for franchising your business will take between 90 to 120 days. Depending on unique factors related to your business or industry, there could be variations, and much will depend on who you are working with and your own internal team. Within this 90-to-120-day period, the following tasks or milestones should be completed:
a) Your FDD is prepared on a multi-state basis and on a multi-level basis, permitting individual unit franchise sales and multi-unit area development sales;
b) Your FDD has been filed for registration in those franchise registration states that you have targeted for initial franchise sales, and in the franchise filing states, the appropriate applications and notices have been filed;
c) Your franchise operations manual has been prepared and your initial franchisee training schedule has been set;
d) Your trademarks have been evaluated and they have either been registered with the United States Patent and Trademark Office or their registration is pending;
e) Your new franchise company, i.e., ABC Franchising, has been established and you have opened a bank account for this new company, and your accountant has prepared an initial opening balance sheet for this new company; and
f) You have identified and determined your initial franchise sales strategy.
Keep in mind that franchising is much more a process than a destination. Once you "franchise your business" what is really happening is that you are just getting started; while you are now authorized and ready to sell franchises, your future success will require making the right connections, relying on honest advisors, and setting a realistic plan and budget for the next one, two, three, four, and five years.
How much should it cost to franchise my business?
Depending on who you are working with and your involvement in the franchising process, the cost to franchise your business can range from $20,000 to $100,000. We charge between $24,000 to $34,000 for a complete franchise development program where we combine legal representation with franchise development planning and support. Many of our clients, with some guidance and support, prepare their own operations manual. If you don’t prepare your own operations manual, the only additional fee would be related to developing your operations manual, which typically costs $15,000.
You need to be careful when selecting a lawyer or franchise developer because many vendors rely on the fact that there are things that you, as a new franchisor, just don’t know about the process. The lower-cost options will end up costing you more in lost opportunity and future franchise violations while, oftentimes, the highest-cost options tend to deliver a lot of "paper and forms" but not much value. You need to look for balance and transparency. Before engaging a team to develop your franchise, ask for a detailed proposal and speak to references. Learn more about the franchise development stages and how much it should cost to franchise your business.
What franchise development strategies should I consider before launching my franchise?
During the franchise development process, you should be evaluating and implementing franchise development strategies that best fit your franchise growth goals. These development strategies involve making legal and business decisions about your franchise disclosure document, and the key franchising metrics that will serve as the underpinnings of your franchise offering.
The following franchise development strategies should be evaluated during the franchise development process "before" you launch your franchise:
a) Set Realistic Goals - Understanding that franchising is more of a marathon than a sprint, at the outset you need to set realistic goals as to what franchise success will look like for you. Determine what realistic goals look like for your franchise sales in your first year and over the next two, three, four, and five years. Before you launch your franchise is the best time to start planning your five-year strategy.
b) Competitively Position Your Franchise Offering - You need to competitively position your franchise offering among your competitors. Within your franchise disclosure document and franchise offering, you will be disclosing important franchising metrics that include things like the initial franchise fee, the ongoing royalty rate, franchisee fee obligations, territory sizes, and a broad range of other legal and business factors that will influence the profitability of your franchisee’s operations and their overall rights. So, before you launch your franchise, it’s important to evaluate your competition, understand their franchising metrics, and work with your lawyer to ensure that your franchise disclosure document is competitively positioned.
c) Develop Your Franchise Offering for Individual and Multi-Unit Sales - Having the ability to sell multiple franchise units to a single franchisee is important. Many times, franchisees want to acquire the right to develop and open multiple franchised locations or operate in multiple territories. That is, they don’t want just one location or one territory. To have the ability to offer and sell both individual unit franchise and multi-unit franchises, your franchise disclosure document must be structured to accommodate the sale of an individual unit franchise to a single franchisee (i.e., where the franchisee wants just one location and signs a single franchise agreement) or the sale of multiple unit franchises or territories to a single franchisee (i.e., where, through a development agreement, the franchisee buys the right to open multiple locations and is given a development schedule). Developing this dual structure will mean more upfront planning and work, but for the vast majority of industries, launching your franchise without the option will cost you sales and put you at a competitive disadvantage in the long run.
d) Develop Your Franchise Offering for Multi-State Compliance - From the start, your franchise disclosure document needs to be multi-state compliant and ready for registration and filing in all the states. To do this, your lawyer needs to prepare your franchise disclosure document on a "multi-state" basis: that is, your franchise disclosure document should include and incorporate - on a state-by-state basis - the required addendums and modifications to make your FDD compliant with various state laws. This is especially important in the franchise registration states. Without this level of multi-state compliance, you risk compliance violations and delays and potential roadblocks to future franchise sales.
e) Learn Franchising and Get Involved in the Franchise Community - Use the franchise development process to also start learning more about the franchising process and get involved in franchise events. While your franchise lawyer is developing your franchise disclosure document, during your development calls and meetings he or she should also be helping you learn franchising and get you involved with franchise organizations, networking events, masterminds, and help you get to know other professionals and supplies that will be of value after your franchise launches. Speak to other franchisors and always be thinking about next steps.
What franchise development and growth strategies should I consider after launching my franchise?
After you franchise your business and launch your franchise, you will need to have a game plan and strategy. Just spending money is not the answer; you need to be strategic. Below are our recommendations:
a) Align Your Brand Value Proposition - Many start-up franchisors launch their franchise without truly positioning and stating their brand value and why they are unique. The result is "me too" advertising and marketing materials that all sound the same and that, in the end, result in wasted marketing dollars. Marketing vendors will be quick to advise you to sign up, spend money on pay-per-click, portals, and other marketing mediums without first spending the time to truly position your marketing message. If your value position sounds just like every other franchisor (i.e., where you are saying things like "be in business for yourself and not by yourself" or touts things like how big your industry is and your great "training and support"), then you’ll be wasting your marketing dollars and generate a poor ROI.
b) Launch Your Franchise Opportunity Website - With the launch of your franchise opportunity, you’ll also need a good webpage or website devoted to your franchise offering. Your webpage or site should have a contact form and the ability to download a guide about your franchise. It should be all about your brand value proposition and how your franchise can transform the lives of your perfect franchisees and help them achieve their financial goals. Start off with a solid base and, over time, build up your site.
c) Develop a Landing Page for Paid Media - In time, you should be marketing your franchise opportunity on paid digital and social media platforms like Facebook and Instagram. Many franchise brands make the mistake of spending money on these paid advertising mediums without first developing a compelling call to action on their franchise opportunity website or through a specific landing page, convincing prospects to give their information and initiate a conversation. Far too many franchise brands spend money on these ads and lose out on conversions because prospects are taken to a webpage that is basic, lacks a call to action, contains no video, and neglects to give the prospect a compelling reason as to why they should be filling out your contact form.
d) Join Franchise Organizations - Now is a great time to start networking in the franchise community. Ask your franchise lawyer about organizations and networks that he or she recommends that you join. We recommend that you start off with organizations like the International Franchise Association and check out their conferences and education.
e) Evaluate Your Public Relations Strategy - Consider PR to be a critical component in developing your story as a franchise brand, and in developing the value proposition as to why your franchise is the best option for your prospects. PR should be viewed as a long-term investment, and working with a reputable PR agency that is focused on emerging brands will be critical.
f) Cost-Effective and Continuing Franchise Compliance - After you launch your franchise, the reality is that you will have ongoing and continuing franchise compliance obligations. Annually, you will need to update your FDD and renew your registrations. Also, over time, you’ll need to make continuous upgrades to keep your brand competitive. Build a relationship with a franchise law firm that is focused on supporting emerging brands, and if possible hire a firm on a fixed-fee basis.
Is licensing an alternative to franchising?
No, licensing is not an alternative to franchising. Sometimes, either based on bad legal advice or a lack of information, a business owner will enter into a license agreement believing that it is not a franchise, and therefore he or she does not have to go through the franchising process. The problem is this almost never works; the reason is that within every franchise is a license, and the definition of what creates a franchise is so broad that these license agreements end up triggering franchise liability and serious legal issues. Learn more about licensing versus franchising; or if you have already sold licenses, learn about how to convert your license system to a franchise system.
Do I have to work with a franchise lawyer?
Technically, you never have to work with a lawyer. But, if you are going to franchise the right way, you absolutely need to work with a lawyer who specializes in franchising and who is experienced in working with new franchisors like you. The reason is simple: although the goal of franchising is business growth and selling franchises, everything you will do as a franchisor - from franchising your business to selling franchises - is regulated by federal and state franchise laws, and requires extensive coordination and integration into the franchise disclosure document and the franchise offering.
A good franchise lawyer will be able to help you through each phase of the franchise development process and should be able to provide you with franchise development insights and strategies that have worked for other brands. He or she will also help you avoid the mistakes and pitfalls of franchising that many start-up franchisors don’t know about or, unfortunately, find out about too late.
The good news is that there are some really good franchise law firms out there. The right lawyer for you should understand your brand, believe in your goal and vision as a brand and founder, and have the systems in place to guide and help you franchise the right way.
Can a franchise developer or consultant prepare my franchise disclosure document instead of a franchise lawyer?
No. Your franchise disclosure document is a legal document that requires the integration of federal and state-specific franchise laws and regulations and should only be prepared by a qualified franchise lawyer.
If you have done a Google search about franchising your business, chances are you have come across search results that not only include franchise lawyers but also franchise consultants and franchise developers. You may not even notice a difference – and this may be intentional on the part of the consultants and developers, who attempt to "appear" as one-stop shops that also offer legal services. Franchise consultants and franchise developers are not franchise lawyers and they can’t provide you with the legal advice; they can’t have their "in-house lawyers" provide you with legal advice; and they don’t possess the necessary training and expertise to prepare your franchise disclosure document, register your franchise offering, and legally protect your brand.
While there are important and valuable skills for reputable franchise consultants, their role should never be to prepare your franchise disclosure document, register your franchise offering, register your trademarks, or guide the legal development of your franchise. Your franchise lawyer should work directly for you and be directly accountable to you.
How do I get started?
By reading this guide, you’ve already taken the first step. Now that you have a solid foundation as to what franchising is all about and the steps involved, start building the right team to help support and guide you in franchising your business. Learn more about our Franchise Launch Program and how we help emerging brands create winning franchise systems.
Below is a glossary of some key franchise terms and definitions:
Area Representative Agreement - an area representative agreement is where a franchisor designates and appoints a third-party area representative as the franchisor’s special agent within a designated territory. Under an area representative agreement, the area representative will pay an upfront fee depending on the scope and size of the area representative’s designated territory and in exchange for meeting franchise sales goals and acting as the franchisor’s agent in training and supporting franchisees. The area representative will typically receive compensation based on a percentage of initial franchise fees and ongoing royalties paid by franchisees within the designated area representative territory.
Designated Territory - a designated territory, also sometimes referred to as an operating territory or protected territory, is a territory within which a franchisee is granted the right to establish and operate its franchised business. For brick-and-mortar franchised businesses, a designated territory is typically defined and measured as a radius or area surrounding the location of the franchised business. For service-based businesses, a designated territory is typically defined as a geographic area within which the franchisee is authorized to offer and sell the services and products of the franchised business. Typically a franchisor will agree to not authorize or establish a competing franchise within the designated territory. The scope of protection afforded to franchisees in their designated territory varies from franchisor to franchisor.
Development Agreement - a development agreement is a form of a franchise agreement and involves the development of multiple franchise outlets and locations by a single franchisee. Under a development agreement, a franchisee is typically assigned a development territory and within the development territory the franchisee is required to establish and operate multiple franchise outlets and locations. The development agreement will include a development schedule that the franchisee must comply with.
FDD - is the abbreviation for Franchise Disclosure Document. See "Franchise Disclosure Document".
Federal Franchise Rule - the federal franchise rule refers to the rules and regulations issued by the Federal Trade Commission titled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures" under 16 CFR Parts 436 and 437.
Federal Trade Commission - in franchising, at the federal level, the Federal Trade Commission is charged with overseeing and regulating franchise sales. As of July 2, 2007, the FTC issued the Federal Franchise Rule.
Financial Performance Representation - a financial performance representation, also referred to as an "earnings claim," is any oral or written statement or representation made by a franchisor or the franchisor’s representations about the actual or potential financial performance of a franchised business. Under the franchise laws, franchisors are not authorized to make financial performance representations unless they are disclosed in Item 19 of the franchisor’s franchise disclosure document. Learn more about financial performance representations.
Franchise - a franchise is a contractual relationship between two parties - typically referred to as the "franchise" and "franchisee" - where the contract or relationship typically (a) involves the payment of an upfront fee, (b) involves the license of a trademark, and (c) involves the franchisor exerting a form of control over the operations of the franchisee, such as in a marketing plan or system that must be followed by the franchisee.
Franchise Agreement - a franchise agreement is the legal agreement that creates the franchise relationship between a franchisor and franchisee. Under a franchise agreement, a franchisee is granted the license, right, and obligation to establish and operate a franchise business / outlet at a particular location or within a designated territory. Development Agreements, Area Representative Agreements, and Master Franchise Agreements are different forms of franchise agreements.
Franchise Disclosure Document - a franchise disclosure document, also referred to as a "FDD", is a legal document that contains detailed disclosures about a franchise offering. Before offering and selling a franchise, a franchisor must disclose its franchise disclosure document to its prospective franchisees not less than 14 days prior to signing a franchise agreement or receiving any fees from the franchisee. The contents of a franchise disclosure document are broken down into 23 disclosure items or sections that are mandated by the Federal Trade Commission. Certain states have enhanced the requirements as to what information and disclosures must be contained in a franchise disclosure document.
Franchise Fee - a franchise fee is the initial upfront one-time fee that a franchisor charges a franchisee at the time of signing a franchise agreement. The franchise fee represents the initial license fee that a franchisee pays to become a part of a franchise system. Franchise fees are typically used by franchisors to compensate themselves for issuing the franchise license and to absorb costs incurred by the franchisor in the franchise sales process and costs that the franchisor will incur in providing the franchisee with initial training and support.
Franchise Filing States - franchise filing states are states that require a franchisor to file a notice with the state before offering or selling a franchise in that state. Some franchise filing states require annual filings and some require one-time filings. The franchise filing states are Connecticut (provided that your trademark is registered with the USPTO) Florida, Kentucky, Maine, Nebraska, North Carolina, South Carolina, South Dakota, Texas, and Utah.
Franchise Laws - the franchise laws are a combination of federal and state laws that govern and relate to the offer and sale of franchises and the relationship between franchisor and franchisee. The franchise laws include the Federal Franchise Rule and an assortment of state-specific laws.
Franchise Registration States - franchise registration states are states that require a franchisor to register its franchise disclosure document with a designated state regulator before the franchisor may offer or sell franchises in that state. Franchise registration states require franchisors to renew their franchise disclosure document registrations no less frequently than annually. Regulators in the franchise registration states will review and comment on the franchisors’ FDDs and in certain instances, impose obligations and restrictions on the franchisor as a condition for registration. The franchise registration states are California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, Virginia, Washington, and Wisconsin. If your primary trademark is not registered with the USPTO, then you must also register your FDD in Connecticut.
Franchisee - a franchisee is the individual or entity who purchases and is granted the right to operate a franchise. A franchisee will sign a franchise agreement giving him or her the right to establish a franchised business. Commonly, a franchisee will pay an upfront franchise fee to obtain the initial license and right to become a franchisee, and the franchisee will pay ongoing royalty fees to the franchisor.
Franchised Business - a franchised business is the business that a franchisee establishes and operates under the terms of the franchise agreement.
Franchisor - a franchisor is an individual or entity that offers or sells a franchise. Through a franchise agreement, the franchisor grants to its franchisees the right to establish and operate a franchised business that is owned by the franchisee.
FTC - is an abbreviation for the Federal Trade Commission. See "Federal Trade Commission."
Master Franchise Agreement - a master franchise agreement is an agreement in which a franchisor transfers its rights in a designated territory as a franchisor to a third-party master franchisee. Within the designated territory, the master franchisee acquires all the rights of the franchisor and possesses the legal authority to directly sell franchises and to sign franchise agreements.
Operating Territory - see "Designated Territory."
Operations Manual - the operations manual is the confidential manual provided by a franchisor to its franchisees. The operations manual serves as a guide for franchisees and includes detailed information about the franchised business, including pre-opening requirements, operational requirements, approved vendors and suppliers, and the franchisor’s systems and procedures for providing the services or products of the franchised business. The table of contents to a franchisor’s operations manual must be disclosed in the FDD.
Protected Territory - see "Designated Territory."
Royalty Fees - royalty fees are ongoing recurring fees that a franchisor charges a franchisee on a periodic basis, such as weekly or monthly. Royalty fees are typically charged as a fixed percentage of the franchisee’s gross sales or as fixed dollar amounts. Royalty fees represent compensation to the franchisor for the franchisee’s continued license and right to operate the franchised business, and to cover costs and expenses incurred by the franchisor in providing franchisee support.
Learn more about the Franchise Launch Program and how we help emerging brands create winning franchise systems.