Starting a franchise seems like a smart move to earn brand recognition and customer trust quickly, but it can prove more challenging than anticipated. This article will tell you more about how to start a franchise efficiently for successful results.
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Some of the most challenging aspects of opening a business are building brand recognition, establishing customer trust, and reaching profitability.
If you’re looking for something simpler, you may want to consider a franchise. Starting a franchise certainly has its challenges, but you’ll have access to built-in structure and support, a proven business model, and an established customer base.
Even though franchises can provide a shortcut to making a profit — you’ll be trodding a well-worn path rather than blazing a new trail — starting one can be overwhelming.
If you want to learn how to start a franchise business efficiently, this article will cover everything you need to know.
What Is a Franchise?
Before we go through how to start a franchise business, let’s cover the basics.
A franchise is a business model that allows you, the franchisee, to start a business that’s part of a larger brand. As a franchisee, you can leverage the resources, systems, and brand recognition of an established company to operate your business. When you open a franchise, you pay a fee to the franchise owner to use the brand’s name and sell its products or services.
For instance, McDonald’s is one of the most well-known franchises. About 90% of McDonald’s restaurants are franchises — they’re independently owned and operated, and each local business owner pays the McDonald’s corporation to use its logo and branding and sell its menu items. This fee is usually a combination of an upfront fee and royalty payments that make a percentage of the profits.
The franchising arrangement offers a unique blend of entrepreneurial independence and the support and resources of a proven business model. And it’s popular — in 2022, there were 792,000 franchises in the U.S. They produced around $827 billion in output.
What Are the Main Elements of a Franchise?
If you want to ensure success when opening a franchise, you must follow established protocols covering all aspects of its business operations. The main elements of a franchise agreement are discussed in detail below.
The franchisor and franchisee enter into a legal contract known as a franchise agreement. This document outlines the rights and responsibilities of the two entities, including the use of the franchisor’s trademarks, business systems, marketing strategies, and ongoing support services.
Franchise Fee and Royalties
To become a franchisee, you must pay an upfront franchise fee, which gives you the right to use the franchisor’s brand and resources. On average, franchise fees are between $25,000 and $50,000. In many cases, you must also pay ongoing royalties, usually as a percentage of your revenue, to the franchisor for continued support and access to the business system.
Training and Support
Many franchisors provide initial training on how to operate and manage your business effectively and in line with the brand’s guidelines. They might also offer ongoing support in areas such as marketing, product development, and operational improvements — that way, you don’t have to reinvent the wheel.
Territory and Location
With a franchise, you typically get exclusive rights to operate within a specific geographic area or territory. The franchisor might also help you select the ideal location for your business.
Branding and Marketing
Using the franchisor’s established brand recognition and reputation puts you several steps ahead in starting a business. You can, and often will be required to, use marketing materials and campaigns designed by the franchisor to attract customers and drive sales instead of creating your own.
A franchise opportunity may not be the best for you if you prefer to do things your way. You also must adhere to the franchisor’s operational manual and procedures, which help ensure a consistent customer experience across all franchise locations. This standardization helps to maintain the brand’s image and reputation.
Pros and Cons of Starting a Franchise
Independently starting a business can give you more control over your life — you’re the boss, and you can reap the financial rewards of a successful company. However, it’s also risky. Most new businesses are destined to fail, with 20% doing so during the first two years, 45% in the first five years, and 65% before their 10th anniversary.
Prospective franchisees may get tempted to reduce the uncertainty and challenges associated with a new business by choosing a model with a track record of success. However, while there are many benefits to buying a franchise, you should carefully consider the drawbacks as well.
With a franchise, you’ll get:
- An established brand and customer base
- A proven business model
- Continued training and support
- An existing logo, brand, and design guidelines
- Possible access to business loans
- Vendor contracts pre-negotiated for you
However, starting a franchise can result in some of the following challenges:
- Potentially expensive startup costs and ongoing franchise fees
- Limited ability to innovate
- Restricted choice of location — you’ll have to avoid competing with current franchisees in the franchisor’s territories
- Lack of control over your brand image — the reputation of other franchisees can reflect poorly on yours
- Dependence on the franchisor
Common Types of Franchises
Although fast-food restaurants may first pop into your mind when you think of franchise companies, the model applies to different types of products or services. Some common types of franchises include:
- Ice cream shops such as Cold Stone Creamery and Baskin Robbins
- Restaurants such as Buffalo Wild Wings
- Bubble tea places such as Chaitime
- Business services such as The UPS Store
- Gyms such as Planet Fitness
- Hardware stores such as ACE Hardware
- Real estate offices such as RE/MAX
- Daycares such as The Goddard School
- Retail stores such as Pet Supplies Plus
When looking at how to start a franchise business, you can use these profitable franchises as a reference.
But opening a franchise will take more than that, as shown below.
How To Open a Franchise
Now that you understand how franchises work, what types of businesses you can franchise, and the pros and cons, here’s what you need to know about how to franchise a business.
Research Franchise Opportunities
The first step of starting a franchise is to narrow down your choices. If you don’t already have a franchise opportunity in mind, research options aligning with your interests and business goals.
The following exercises can help you discover franchises that may be a good fit for you:
Evaluate the costs:
Franchise fees can vary widely, so it’s a good idea to consider how much you’re willing to spend and how you’ll secure financing.
Outline your interests and skills:
When thinking about how to franchise a business, consider where your interests and experiences lie. You’ll spend a lot of time in your new business, so pick something you’ll enjoy.
Explore the franchise market:
You can start by searching franchise directories such as Franchise Direct. You can also attend franchise trade shows and conferences or consult a franchise consulting company.
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Evaluate the franchisor:
After you find a few franchises that appeal to you, research the franchisor’s history and reputation. Look for reports on their financial stability, litigation history, and franchisee satisfaction.
Talk to current and former franchisees:
No matter how much you research, you can usually learn the most by talking to people living the experience. Reach out to existing franchisees to determine if they’d do it again. Consider talking to former franchisees to get insight into why they quit.
Review the franchise agreement:
Before you get too attached to a franchise, review the franchise disclosure document, including fees, royalties, and other requirements.
Determine Market Interest
Although the franchisor does a lot of work for you, you’re still the business owner with the most to lose. Conducting your own market research will help you determine if your franchise will succeed.
Here are some steps to help you gauge market interest:
- Research the industry: Study the industry your franchise operates in to understand its trends, growth prospects, and major players. This will give you a good starting point to identify the market potential.
- Analyze local demographics: Examine the demographics of the target area, including population, age distribution, income levels, and lifestyle preferences. This information can help you determine if there’s a large enough target market to be successful.
- Assess competition: Identify both direct and indirect competitors in your area. Analyze their strengths, weaknesses, and market share so you can determine if the market is saturated or if there are gaps that your franchise could fill.
- Conduct surveys and interviews: Conduct surveys or interviews with potential customers in the target area to gauge their interest in your franchise. Ask questions about their needs, preferences, and spending habits.
- Use online analytics: Tools like Google Trends, social media insights, or industry-specific forums can help gauge potential interest in your franchise or its product or service category.
- Consult with experts: Seek advice from franchise consultants, industry experts, and successful franchisees to gain insights into the potential of your franchise in the target market.
Write a Business Plan
When thinking about how to open a franchise, strategy is key. That’s why a comprehensive business plan is your roadmap to success. Taking the time to create a solid business plan before opening a franchise will reduce your risks and increase your chances of success.
By the time you finish, you’ll have realistic expectations and know what to do to make your new business work.
Read and Sign the Franchise Agreement
The franchise contract will outline the terms and conditions of your partnership, including fees, royalties, marketing support, and other expectations. This document is legally binding, so review it carefully and consult a franchise attorney if necessary.
Establish Your Business
There are a lot of legalities involved in launching a new business. You should consult an attorney to ensure you have all your bases covered. When you meet, ask for guidance in several key areas outlined below.
Choosing a Legal Structure
A franchise business most commonly uses the legal structures of sole proprietorships, partnerships, corporations, and limited liability companies (LLCs). Each has its advantages and disadvantages regarding liability protection, tax implications, and administrative complexity.
Registering Your Business Entity
Once you select a legal structure, you must register your business with the appropriate federal, state, and local agencies. This typically involves filing articles of incorporation or organization, obtaining an employer identification number (EIN) from the Internal Revenue Service (IRS), and registering for state and local taxes.
In addition to your startup costs, you’ll need enough capital to cover operating expenses until your franchise starts producing a profit. You have several options for funding your business:
- Personal savings: Using your savings is the most straightforward method for buying a franchise. However, this is not feasible for many people and involves a lot of risk.
- Traditional bank loans: Most banks offer commercial loans. To get a traditional bank loan, you’ll typically need good credit, a down payment, a solid business plan, and collateral.
- Small Business Association (SBA) loans: You may also want to consider loans from the U.S. SBA. SBA loans are tailored to small businesses and may have more favorable terms than traditional banks.
- Franchisor financing: Some franchisors may offer financing programs or may have established relationships with lenders who work with their franchisees.
- Investors or partners: Working with investors or partners can help you get funding you may not be able to get on your own, but it involves sharing ownership of your business.
Get the Required Permits and Licenses
Depending on your location and the type of franchise, you may need various permits and licenses to operate, such as business licenses, health permits, zoning approvals, and other industry-specific licenses. Your franchisor can often help you identify the requirements.
Secure Your Location
Once you have your business plan and documentation together, choose a location that’s easily accessible and strategic. Be sure to consider your franchisor’s location requirements before signing any agreement.
You’ll also need to staff your franchise. Employees are crucial to the success of your business, so you should have a plan for attracting and retaining the most talented employees.
🧠 Did You Know?
Connecteam’s all-in-one solution has all the features you need to schedule, manage, train, and engage employees that will help take your franchise to the next level.
10. Launch Your Business
Once you’ve got all your documentation, financing, infrastructure, and employees in place, you’ll be ready to open your franchise location’s doors. Your franchisor should provide guidance about holding a grand opening and advertising your new business.
You can also network with other local businesses through your local Chamber of Commerce for support in building your brand.
Next Steps in Buying a Franchise
Although many people think starting a franchise is an easy way to own a business, it can take as much work as starting a business from scratch. That’s why it’s important to understand every step of how to open a franchise.
While you’ll receive help in some areas from the franchisor, you’ll still have to put in a lot of time, effort, and resources to build a thriving business.
Regardless of the business type you have, Connecteam can relieve much of this burden off your shoulders.
We provide a one-stop shop for all your business processes, including operations, communications, and HR functions — from employee time tracking and payroll management to customizable checklists and document management, we’ve got you covered.
Best of all, Connecteam is 100% free for small businesses with 10 or fewer employees.