Is your business successful? Are you interested in opening new locations? Do you want to expand the reach of your brand? If so, franchising is an important expansion option to consider. In this article, you'll learn what franchising is and how to franchise your business.
What is Franchising?
Franchising is a legal and business model that allows you to expand your business by recruiting other individuals that invest their own money and time in developing, opening and managing new locations. When you franchise your business you are taking the legal and business steps necessary to sell franchises to individuals who will become your franchisees. As a franchisor you will grant franchisees a license to use your trademarks, duplicate your business model, and benefit from your training and on-going support. In turn, franchisees will pay to you a one-time initial franchise fee, and on-going royalty fees. The legal agreement that creates a franchise relationship is the franchise agreement and the pre-sales disclosure document that must be disclosed to franchisees before they pay any fees or sign a franchise agreement is the franchise disclosure document.
In our Ultimate Guide to Franchising Your Business, we discuss everything you need to know about franchising your business, including franchise laws, marketing strategies for selling franchises, and the steps involved in the franchising process. In this article, we'll explore and provide a deeper analysis into the steps for franchising your business and how to franchise your business the right way.
How to Franchise a Business?
To franchise your business, follow these steps:
- Determine if Franchising is Right for your Business
- Legally Prepare and Issue your Franchise Disclosure Document
- Develop Your Franchise Operations Manual
- Register Your Trademarks with the USPTO
- Establish Your Franchise Company
- Register and File Your FDD
- Create Your Franchise Sales Strategy and Budget
1. Determine if Franchising is Right for Your Business
The most important step in the franchising process is to first determine if your business is ready for franchising and if franchising is right for you.
“Like every good business decision, franchising – and the decision to franchise your business – needs to align with your long-term goals,” says Charles N. Internicola, an attorney with over 25 years of experience in franchising and the founder of The Internicola Law Firm, P.C. “Aligning your goals has as much to do with your business goals as it does with your personal goals. As a business owner and founder when you franchise your business you're starting a new journey of learning franchising, entering the franchise industry, and building an organization that, in time, will be training, supporting, and helping future franchises succeed.”
Because of that, it’s important that your business has a strong track record of financial success with strong systems in place to train and support future franchisees as your system grows.
“Franchising is scalable and, as a franchise founder and leader, you'll be building an organization that is very different from the business that you are operating today. The good news is that franchising works and many of today's successful and large franchisors started off just like you, making a decision about franchising their business,” Internicola says.
Beyond franchisability, timing is everything when it comes to franchising. After you’ve determined that the franchising model is a good fit for your business, make sure to evaluate whether it’s the right time to franchise. As a prospective franchisor, you can do this by assessing your personal goals and evaluating your business’ track record, operational systems, industry and funding.
“If you franchise your business and you're not ready to support franchisees or your business model is not scalable enough for franchisee success, then you have both a moral and legal issue. Morally, you now have an ethical obligation to a franchisee that puts their trust in you and your business. They're relying on you, and if you don't hold up your end of the deal you'll have a bad relationship and, potentially, legal issues,” Internicola says.
While some of the legal issues related to franchising can be buffered by properly-prepared legal documents and the establishment of a strong legal framework for your business, Internicola stresses that prospective franchisors should still take time to make sure franchising is right for them before getting started.
2. Legally Prepare and Issue Your Franchise Disclosure Document
Franchising is regulated by federal and state franchise laws and, under these franchise laws, before offering or selling a franchise you must first prepare and issue a franchise disclosure document ("FDD").
The FDD contains 23 important legal disclosure items that enable prospective franchisees to weigh the benefits and risks of a franchise opportunity before making a purchase and joining the franchise system. These disclosures include information about who you are as the franchisor, your management team, the franchise that you are offering, the fees you charge, estimated start-up expenses, territory rights, and legal obligations between you as the franchisor and your franchisees.
Because the FDD is an important legal document, it should be prepared by an experienced franchise attorney to comply with federal and state franchise laws. Its contents should also relate specifically to your business and the franchise that you are offering.
“The FDD forms the foundation and legal underpinnings of the franchise system that you are building and investing in. Three, four and five years from now, the value of your entire franchise system will rest on the strength and enforceability of your FDD and franchise agreements. When you franchise your business, having the right franchise lawyer develop and prepare your FDD is a critical task,” Internicola says.
3. Develop Your Franchise Operations Manual
The franchise operations manual is the how-to guide for your franchise system and its the communication tool that will be used by you, as franchisor, to officially communicate to your franchisees system standards, methods of operation, supply chain, training obligations, and other requirements for developing, opening, and operating the franchised business.
Under the terms of the franchise agreement (the legal document that establishes a legal relationship between you and your franchisees), franchisees are required to follow the systems and procedures laid out in the franchise operations manual. Because of that, it’s important to make sure your operations manual includes comprehensive information, contacts and resources for opening, developing, operating and marketing a franchise location.
“In addition to the basics of business development, operations, and supply chain, key components to a successful franchise operations manual include a focus on core values and KPI's for measuring success. Core values can include everything from founder story, mission statements, elements that make the brand unique, and how franchisees will be improving the lives of their customers. The operations manual should also provide franchisees with key performance indicators (KPIs) for tracking and measuring whether or not they are on-track or off-track and what success looks like,” Internicola says.
As a confidential business document, franchisors should wait until after a franchise agreement has been signed to disclose their confidential operations manual to new franchisees.
4. Register Your Trademarks with the USPTO
Because your entire franchise system will revolve around your brand’s trademarks, including licensing them to franchisees, registering your trademarks is an important part of the initial franchising process.
“When you franchise your business, one of the most important legal rights that you will be granting to your franchisees is a license to use your trademarks. Your trademarks, your business name and logo are your brand, and if they are not registered with the United States Patent and Trademark Office (USPTO), they may not be protectable. One of the worst things that could happen is that you have a franchisee spend hundreds of thousands of dollars in a new franchise location and for this franchisee to find out that a local business owner is using the same or similar name, and not being able to stop them. With the proper USPTO registration you will be protecting your trademarks throughout the United States. USPTO registration and franchising go hand-in-hand,” Internicola says.
Make sure to work with a qualified attorney to conduct trademark searches early on in the franchising process. If it’s determined that your trademarks aren’t protectable, you’ll need to pivot and establish an alternative.
Once you’ve determined that your trademarks are protectable, it’s important to register them with the United States Patent and Trademark Office. This will legally protect your brand’s trademark rights nationally, preventing competitors from using them in a confusingly similar way in the future.
Despite those protections, franchisors will still need to police their trademarks and be on the lookout for use by other businesses. New franchisors should also be aware that businesses in some jurisdictions may have the common law right to operate under their name if they existed before the trademark was registered. In some circumstances, this can expose the franchise to potential legal consequences. A qualified attorney can help you navigate trademark laws, including rights and possible infringements.
5. Establish Your Franchise Company
Your franchise company is the legal entity that will offer and sell franchises and should be formed during the franchising process and before issuing your FDD. Usually a corporation or limited liability company, your new franchise company will be in the business of selling franchises, supporting franchisees and building franchise systems to grow.
The new franchisor business entity will own – and be legally responsible for – your entire franchise system, including its sales, operations, activities and franchisees. Establishing a separate business entity for your franchise can help limit potential legal liabilities related to its activities, and can also be beneficial for compliance with financial audits.
“The benefit (of establishing a franchisor entity) is that you are segregating your current business operations from the new franchise system that you are establishing. Forming a new franchise company is a smart legal decision because it allows you to shield your current business from future franchising obligations and streamlines the franchising process.
Within FDD Item 21 franchisors must include audited financial statements of their franchise company. By forming a new franchise company, you'll be starting off fresh with a new company that has very little to no financial activity. This means that your initial financial statements will be easier and less expensive to create. Over time, your new franchise company will be in the business of selling franchises, supporting franchisees, receiving revenue in the form of initial franchise fees and royalties. So it's important that your franchising activity take place in a legally distinct corporate entity,” Internicola explains.
6. Register and File Your FDD
In addition to complying with federal franchise laws, as a franchisor, before you can offer or sell franchises in the Franchise Registration States (including California, Illinois, Maryland, New York, Virginia, and others) or franchise filing states (including Florida, North Carolina, South Carolina, Texas, and others), you must first file and register within each registration state.
“One common misconception that many new franchisors have is that the FDD needs to be registered with the federal government. Under the franchise laws, FDDs are not registered at the federal level. Rather, they must be registered at the state-specific level within the franchise registration states.
Common mistakes that are made during the FDD development stage include legal mistakes and franchise development mistakes. Legal mistakes include not preparing the FDD so that it is multi-state compliant and missing regulatory requirements that will cause FDD registration delays and create legal exposure and liability.
From a franchise development perspective, mistakes include a failure to properly benchmark the FDD so that it is competitive and includes important differentiators like well prepared Item 19 financial performance representations,” Internicola says.
To learn more about state-specific franchise laws, including FDD registration and filing requirements, check out our interactive franchise registration registration map.
7. Create Your Franchise Sales Strategy and Set a Budget
As a new franchisor, once you’ve finished preparing and filing your legal documents, you’ll need to set a budget and establish a franchise sales strategy for selling franchises to qualified and properly capitalized franchisees.
Setting a budget
Depending on your team, industry, and the level of support you need, the cost of franchising a business can range from $18,500 to $84,500.
Before selling your first franchise, plan to set aside funds for legal fees related to the preparation of your FDD, the development of your operations manual and financial statements, and filing and registration fees. You should also set a budget for training, marketing and operating expenses after your FDD is issued.
“Understand the long-term game plan. Understand that franchising is all about long-term success and wins. Understand that no matter how much you invest in your franchise sales process, initially, you need time for your new franchise brand to season and take root. What sells franchises is unit level economics and franchisee validation. As a startup franchisor, your unit level economics will be coming from your Item 19 financial performance representations. As you sell franchises and your franchisees get up and running, in time, your Item 19 will include the financial performance of your franchisee. If your franchisees are financially successful and, when contacted by brokers and franchisee candidates, they validate their decision in selecting your franchise, you'll grow,” Internicola explains.
As a franchisor, it’s important to make sure your franchise budget reflects those goals with a long-term game plan as its foundation.
“When budgeting, consider costs associated with building your franchise sales website, building your franchise brand story, franchise PR that will validate your brand story, training and supporting franchisees, and your franchise sales goals. Your costs will directly reflect your franchise sales goals and whether or not your brand has organic reach with customers and others that know about your business and may be interested in buying a franchise,” Internicola says.
Developing a sales strategy
To generate revenue and continue expanding the franchise system, new franchisors must develop an effective sales strategy to sell franchise opportunities to franchisees.
“Franchise success takes time and requires planning. Focus on a one-, two-, three- and five-year plan. You need to season your franchise offering, and in your first year after issuing your FDD, it's important to focus franchise sales on the organic reach of your brand – people that know about your business – and to build out your brand assets, including a compelling franchise brand story, franchise sales website, and third-party validation that comes from PR and stories about your brand. Years one and two should be focused on building a strong franchise brand, onboarding and over-supporting franchisees. Years three to five should be focused on acceleration and growth,” Internicola says.
As a new franchisor, you can get started by evaluating your target franchisees, target markets, interest in your brand and a realistic budget for attracting, training and supporting franchisees. Check out our tips for selling franchises after your FDD is issued to learn more.