Should I Franchise My Business?

By Mark Siebert

Your business is running successfully and is being received well by all. Things are going so well you start to wonder whether you should franchise your business. Here, we will provide some information to help you make that decision in a well-informed, strategic way.

What is a franchise?

Per the Federal Trade Commission (FTC), a franchise is a business relationship consisting of three primary components:

1. The use of a common name or trademark

2. The presence of significant operating assistance or control

3. A required payment by the franchisee

When you franchise your business, you’re opening more outlets or locations via the sale of franchise rights to independent investors (franchisees), and you allow franchisees to use both your name and franchise system of operation for an initial fee. The initial fee gives franchisees:

• Rights to operate the business under a franchise trademark
• Training to learn how to operate the business
• Assistance with site selection (this is dependent on the specific franchise agreement)

Franchise systems may also require franchisees pay an ongoing royalty fee to cover:

• Promotional and sales support and training
• Operational guidance
• Financial and operations consulting
• Other services stipulated in your agreement

Is franchising the right strategy for my business?

As you explore franchising as a growth strategy for your business, questions to ask yourself include:

• Does my concept operate in a market sector with sufficient demand?
• Is my product or service differentiated from my competitors?
• Can my concept be readily duplicated?
• Will my concept provide an adequate return to a franchise even after deducting a royalty?

If you have answered yes to these questions, then franchising could be a good strategy for your business.

Additional franchising advantages include:

• Business expansion using someone else’s capital
• Franchisee responsibility and accountability for hiring, leasing, and opening costs
• Acceleration of business expansion that gets your concept into more markets faster than your competitors as your franchisees will do much of the legwork
• Risk of success or failure assumed by franchisees
• Franchise operators are highly motivated and success-driven, which is great for your brand

Be careful. There have been cases where businesses have expanded through granting some operational or licensing rights and did not even realize they were actually franchising. This could violate the FTC Rule as well as state laws on franchising. Violations can come with significant penalties, so care must be taken before embarking on any expansion plans.

Steps to launching a new franchise

Franchise program development requires an investment of both capital and time. Here are some key steps to developing a franchise system.

1. Develop a prototype

A significant part of the franchising process is having a successful prototype of your business. This is a real-life example of your business and its operations that allow potential franchisees to picture themselves running their very own location.

An original location can be used as a prototype and live training center for franchisees. New services, techniques, and products can also be tested there prior to rolling out to all locations.

2. Protect your trademark

Failure to protect a trademark is a common mistake made by new franchisors. Your brand and its identity are represented by a trademark, so this is an important part of the franchising process.

Your first step should be to develop a name that the U.S. Patent and Trademark Office can approve. Even though some companies do begin franchising prior to their trademark being fully registered, you should make sure the process is underway.

3. Write a franchise operations manual

Another important component of a successful franchise system is having a thorough, well-developed franchise operations manual. The franchise manual is a guide for training and ongoing operations for new franchises with detailed written procedures, sales tools, procedural references, and compliance.

You will most likely need to hire a professional to help write your manual to avoid potential legal issues in the future. At minimum, it’s recommended to have your manual reviewed by a seasoned franchise consultant and expert franchise attorney.

4. Develop a marketing program

To sell your franchise opportunity, you will need to develop strategic marketing tools, such as brochures, websites, and videos. You will also have to create a strategic marketing plan with a budget and recommendations based on your sales goals.

5. Prepare the Franchise Disclosure Document

There are strict guidelines to be followed when preparing your Franchise Disclosure Document (FDD), so it's important that the FDD is prepared by a franchise attorney with relevant experience. The FDD was created to protect potential investors, so it must be submitted to and approved by states that regulate franchising. FDD approval must be received prior to speaking to any potential investors about your franchise program. Be sure to engage an attorney who has experience in drafting FDDs—not just reviewing them for franchisees.

Prior to drafting legal documents, documenting your business decisions with a detailed business plan is highly recommended. Your franchise business plan should be a detailed financial analysis testing a variety of options for organizational structure, growth options, royalties, fees, and territory size.

More articles from AllBusiness.com:

• 3 Biggest Challenges Every Franchisee Faces—And How to Overcome Them
• How Long Does It Really Take to Open a Franchise?
• The Real Cost of Franchising Your Business
• Understanding the Role of the Franchise Area Developer
• Can Franchising and Innovation Go Hand in Hand?

Start selling franchises

After completing all required steps to develop your franchise system, you’re now ready to start selling your franchise! At this point, you should make sure you are well versed in best practices and compliance for selling your franchise program, including legal regulations governing sales.

To sell franchises, some franchisors use a professional franchise consulting company with a sales team while others hire an in-house sales team. Whichever way you go, be sure to thoroughly consider your options as the eventual success of your franchise system rests on this sales strategy.

Take care of your franchisees

As you expand your franchise network, you must continue to support your new franchisees. Your role as a leader and resource for training, marketing support, suppliers, and more is critical to the ongoing success of your franchise system.

Take good care of your franchisees, as their success is the key to a thriving franchise brand.

RELATED: Important Factors to Consider Before Franchising Your Business