Franchising a business is a distinct business model that can be a scary yet greatly rewarding decision. With it comes wonderful benefits such as speeding up the growth of your business, reduced time and efforts spent day-to-day, increased advertising and promotions for better exposure, and ultimately building your brand.
To franchise your business, there’s a lot to consider, plan, and accomplish.
What Does It Mean To “Franchise” A Business?
When you franchise a business, you’re essentially creating an agreement with a franchisee and expanding your business across various locations. They acquire limited rights and then open a new location for this business. One of the greatest examples of a franchise agreement is McDonald’s and 7-Eleven.
So, how exactly do you franchise your business the right way?
Step 1: Are You Ready?
First, be sure to ask yourself – are you ready? Or, better yet, is your business ready to franchise?
To answer that question alone, consider:
- Whether your business is in a stable & profitable enough position to franchise
- If you are able to clone your business model in an effective and successful way
- If you can afford to franchise and expand your business, or if you can borrow the required funds to do so
- Whether you are capable of marketing your franchise opportunities to the right franchisees
- If you have expanded successfully before (and did you learn from it?)
- If you have the capacity to teach and support franchisees
These are all very important questions to ask before you make any immediate decisions. There might be a “maybe” here or a “no” there, and that’s OK. Be honest with yourself and your business. If you can pinpoint weaknesses, you can learn to strengthen them.
Step 2: Protecting the Intellectual Property of Your Business
The next essential step in franchising any business is taking the right course of action to protect your business’s intellectual property – the parts of your business that are unique. This allows franchisees to brand their franchise in accordance with your given advisement and regulations while promoting your business’s growth.
Keep in mind that if you don’t take this step seriously, your business will almost certainly be exposed to risks, such as theft. You’ll want to avoid that at all costs.
Step 3: Franchise Disclosure Document
A Franchise Disclosure Document, also known as an “FDD,” is comparable to articles of organization. This addresses many important details, including financial statements, franchise agreement obligations, introducing key players, and defining operating terms.
In accordance with the Franchise Rule, it must contain 23 particular sections. Once it is in compliance with FTC rules and regulations, it is then appropriately used in the sale to a franchisee.
Remember that the FTC rules for franchisors include providing an FDD to franchisees a minimum of 2 weeks prior to signing the agreement and updating the FDD annually. This will prevent misinformation and continually maintains the FDD as a living, updated document. Always try to give the franchisee as long as you can to review the FDD so you can both determine if it’s a good match.
Step 4: Franchise Agreement
This is an important contract that binds you and your franchisee together with specific expectations that detail how this franchise should operate.
Since a franchisee is considered an independent contractor, they must sign this franchise agreement, which will then be live in the FDD that we mentioned in the last step.
We suggest you consider including the following agreements in your franchise agreement (depending on your business model):
- Specifications of equipment, inventory, & supply
- Franchise fees
- Sales requirements (minimum)
- Terms & Conditions for agreement renewal
- Termination & post-termination conditions/terms
- Protections for franchise territory
- Opening timeline
- Rules regarding the transfer of the franchise
Be clear and precise with these agreements. While they don’t need to be in a specific format, and they might include more or less of the above examples, it’s important to be thorough.
Step 5: Franchisee Operations Manual
Constructing an operations manual for your franchisees will provide them with plenty of details regarding the expected day-to-day operations of the business. This manual should be entirely confidential to the franchisee only.
Ideally, you want this operations manual to be digital with any supporting links and videos, as well as consistently updated in alignment with any business changes.
While this isn’t a legal document per se, the manual is integrated with the franchise agreement, thus becoming the franchisee’s obligation to follow these responsibilities. With that in mind, though, we’d like to remind and reassure you that a franchisee won’t operate in precisely the same manner as you, so expect some slight changes in how things are executed. However, if all proper requirements are met, this is satisfactory.
Step 6: FDD Filing or Registering
The FDD is an essential and necessary document, but you may or may not need to file it with the government. This will depend on your state, as each comes with its own registration, filing, or non-registration regulations for franchisors. It’s crucial to confirm this before you proceed forward – and if you’re unsure, don’t stress! We recommend getting in touch with an expert to help you take the proper, required action.
Furthermore, after you have prepared your franchise disclosure document, keep it safe and secure for easy access when updates are required.
Step 7: Strategize for Success
We’ve discussed the benefits of franchising your business following a good plan, but now it’s time to see those plans come to fruition so you can reap the rewards!
To get the best results, always have an excellent strategy planned out so you can reach your sales and expansion goals. Keep it realistic but challenging at the same time – it’ll be 100% unique to you, your business model, audience, and goals.
Whether this be hiring experienced and familiarized salespeople, offering referral bonuses, or even simply creating a clever marketing plan from the get-go. These are all ideas you can implement into a successful franchise strategy.
Learn more about franchise business operations with Service Works – we have plenty of helpful articles to discover, regardless of whether you’re experienced or a beginner in this field.