How to Franchise a BusinessApril 7, 2022
UPDATED FOR 2021 LINK: https://youtu.be/QoD6aHQmxfI
Wondering how to franchise a Business? Franchising can can be a great way to build a global empire. When you look at brands like Subway, with about 45,000 locations and 7-Eleven with almost 65,000 stores, and consider those corporations receive 10% to 50% or more in royalties, that is a huge amount of money. But even if your business is well suited to franchising – and not all are, there are many steps required before taking your idea to market
There are several benefits of franchising your business.
the most notable being expansion capital, speed of expansion and reduced risk. Franchisees pay for leasehold improvements, FF&E, (furniture, fixtures and equipment) leasing, employee costs and more. This allows you to grow faster and with far less financial outlay and risk than on your own. Of course in exchange you will be trading the revenue from those stores, but gaining royalties.
Another advantage provided by franchising is the benefit of partnering with Local Experts who have Skin in the Game. When expanding to new cities, towns and demographics it is difficult to be intimately familiar with every cities individual culture and landscape. By partnering with franchisees in local regions however you typically partner with someone who has a strong knowledge of local markets and the pulse of the city. Also important, when someone invests thousands of dollars of their own money, they are far more likely to give 100% effort to the business vs if you just hired a manager. Franchisees are also likely going to require less supervision than an employee manager.
Another option to generate expansion capital for your franchise is the awarding of master franchises or area developer licensing. In these situations you sell rights to an entire territory, which could be a city, state or even an entire country, for a fee. Many franchises use this model and we have worked on many deals throughout North America and the world. These licensing rights often amount to hundreds of thousands of dollars, providing you with an instant cash infusion for your business. So for example you might sell rights for your brand to the entire Middle East, or Europe to an experienced local business developer. Or on a smaller scale licenses for a single city, say Houston for example. Your master franchisee then can open a single store or multiple stores in their own territory while simultaneously selling single unit franchises in their area The master franchisee then helps train and support those local franchisees while sharing in the franchise fees and ongoing royalties from franchisees in their area for the lifetime of their agreement. By selling master franchises it is not rare to be able to raise a million dollars or more if you have a solid offer.
Before you franchise you’ll need what is called an FDD, or Franchise Disclosure Document. The FDD is a massive document that you must create before you offer to sell a franchise that outlines in great detail much of your companies information. for example any bankruptcies the company or directors have faced, any lawsuits, the range of investment of your franchise, other fees, your companies audited financials and a ton more. Ever year you are obligated to update that FDD and file again with applicable agencies. You also need to report any franchises that have closed – and list the names of franchisees that have left the system in the past year. For buyers this is great data – for you it is a huge amount of work. Now if you think just creating that FDD and registering it is not so hard…. not so fast. There are certain states that require additional registrations or filing if you want to sell in those states. There are also states with supplemental laws that differ from other states. Here is where it gets confusing. There are 36 states that are considered “non registration states” meaning if you are federally compliant with your FDD you are eligible to sell in these states. There are 10 “filing states” meaning you have to pay a fee to file, and then there are 13 “registration states” that require you to register and obtain approval for your FDD at state level. To further confuse matters each state has a different governing body. In New York you will deal with the Attorney General while in California you will be working with the California Department of Business Oversight. Each Governmental office has different requirements and different process making compliance for the newbie somewhat perplexing.
So you can see why most companies will hire a lawyer and/or a development company to assist in franchising their business. There are also many “sharks” in this industry that will tell you how amazing your franchise is, charge you a fee only to never sell a franchise. Not all groups are bad – but be careful.