Did you know that all franchises were once independently-owned businesses? You might be at the point where you have built a successful business from the ground up and are considering franchising.
The first question you should ask: Is your business “franchisable”?
(Generally, you’ll need between $50K – $250K.)
When you decide to franchise your business, you will essentially award investors with the rights to sell your products or services through an approved territory. An initial franchise fee is paid to you (the franchisor) by the investor (the franchisee) for training on how to operate the business, guidance on licensing and site selection if required, in return for the rights to operate a business under the franchise trademark. Ongoing monthly royalties are then paid to the franchisor for continuous support and training for the life of the franchisee’s business.
While franchising may be a great path for growth, it is a long-term investment and could be used with a combination of other distribution means. It is not uncommon for franchise companies to grow with 1 or more of the following channels, in addition to selling franchises:
The initial development of a franchise program requires an investment of both time and funds. However, the cost of professional advisors to help you properly develop your franchise is typically less than the cost of opening one additional company-owned location. Hiring a credible and experienced franchise consultant will help you through the process.
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The main components are the Franchise Disclosure Document and franchise agreement drafted by a franchise attorney, an operations manual, trademark registration, and state registration fees where they apply. Legal work for the FDD alone is commonly quoted in the tens of thousands. Total cost depends heavily on how many registration states you intend to sell in and how much of the operations documentation already exists.
The usual test is whether the business is profitable, repeatable and teachable. Profitable at the unit level without you personally in it. Repeatable, meaning the result does not depend on one location or one market. Teachable, meaning someone else can be trained to run it to the same standard. If the answer to any of those is no, franchising tends to multiply the problem rather than solve it.
Preparing the legal and operational documentation typically takes a few months. Registration states add time on top, since each reviews filings on its own schedule. The longer variable is usually not the paperwork but how much of the operating system needs to be documented before it can be handed to a franchisee.
At minimum, a Franchise Disclosure Document that complies with the FTC Franchise Rule, a franchise agreement, and a registered trademark. The FTC requires you to give a prospective franchisee the FDD at least 14 days before they sign anything or pay you. Around a dozen states additionally require you to register or file before you can offer franchises there. This is franchise attorney work, not general business law.
