How to Start a Franchise: Learn From Real Entrepreneurs

Here are the most important things to consider when starting your franchise:

1. Find a franchise — Research various franchise opportunities to find one that aligns with your interests, skills, and financial capacity. Consider industries you are passionate about and have experience in.
2. Legal review — Carefully review the franchise agreement and Franchise Disclosure Document (FDD). Consider hiring a franchise attorney to help you understand the terms and obligations.
3. Location — Choose a strategic location that maximizes visibility and accessibility for your target customers. The franchisor may provide guidelines or assistance in site selection.
4. Register your business — A limited liability company (LLC) is the best legal structure for new businesses because it is fast and simple. Form your business immediately using ZenBusiness LLC formation service or hire one of the best LLC services on the market.
5. Legal business aspects — Register for taxes, open a business bank account, and get an EIN.
6. Hire and train staff — Hire qualified staff and ensure they receive proper training. Create an employee handbook that outlines policies and procedures.

You May Also Wonder:

How much money do you need to franchise a business?

Costs generally range from $18,000 to $85,000, as you’ll need special documents drafted by an attorney, including an operations manual, which you could create internally to cut costs.

Is it profitable to franchise your business?

Franchising can be very profitable if you’re successful. You receive fees from the purchase of your franchise and ongoing royalties. Annual profits can be $200,000 to $350,000 or more.

Can a small business be a franchise?

Any successful business with a replicable model can be franchised. It just takes capital and a franchise development team to manage the process.

Do I need an attorney to help me franchise my business?

It is highly recommended that you have an attorney that specializes in franchising to help you. They can help draw up important franchise documents without any gray areas and review other documents during the franchise development process.

How easy is it to start a franchise?

Starting a franchise can vary in terms of ease, depending on factors such as the specific franchise system, your level of experience, and your ability to meet the requirements set by the franchisor. Franchises typically provide a proven business model, established brand recognition, training, and ongoing support, which can make the process of starting a franchise easier compared to starting a business from scratch. 

Is it stressful to run a franchise?

Running a franchise can be stressful, as it involves managing various aspects of the business, such as operations, finances, marketing, and personnel. Franchise owners must ensure compliance with franchisor requirements, handle day-to-day operations, maintain customer satisfaction, and address any challenges that arise.

How often do franchises fail?

While franchises generally have a higher success rate compared to independent startups, there is still a level of risk involved. It’s important to thoroughly research and evaluate the franchise opportunity, review the franchisor’s track record, and carefully consider factors such as initial investment, ongoing fees, and the market demand for the franchise’s products or services. 

Step 1: Decide if a Franchise Is Right for You

Starting a franchise requires time and effort. You will be taking a significant risk, so educating yourself is critical before making the decision to launch your business.

What does it mean to franchise a business?

Franchising a business means a business owner (the franchisor) grants permission to individuals or entities (the franchisees) to operate a business using the franchisor’s brand, model, and resources. This arrangement has several key characteristics:

• Brand Use: The franchisee uses the franchisor’s brand name, trademarks, and business identity, benefiting from established brand recognition.

• Business Model: The franchisee adopts the franchisor’s business model and operating procedures, ensuring consistency across all locations.
• Training and Support: The franchisor usually provides extensive training, support, and guidance to the franchisee. This can include marketing strategies, operational guidelines, and business development.
• Financial Arrangement: The franchisee pays the franchisor an initial franchise fee and ongoing royalties, which are typically a percentage of the franchise’s sales revenue.
• Quality Control: The franchisor sets certain standards and guidelines to maintain quality and consistency across all franchise units.
• Independence within a Framework: While franchisees operate their own businesses, they must adhere to the franchisor’s rules and guidelines.

Types of franchises

The four common types of franchises are:

• Business Format Franchises: These offer a complete business format including brand name, products, and operational procedures. Examples include McDonald’s, Subway, and 7-Eleven.
• Product Distribution Franchises: These focus on the distribution of the franchisor’s products but not necessarily the full business system. Examples include Coca-Cola bottlers and automotive brands like Ford.
• Management Franchises: These involve the franchisee managing the business, often in the service sector. Examples include janitorial services like Jan-Pro and hotel franchises like Hilton.
• Manufacturing Franchises: The franchisee manufactures the products using the franchisor’s recipe or formula. An example is the food industry, like PepsiCo bottlers.

Pros and cons

Every business has its pros and cons. You will need to weigh these factors to decide if starting a franchise is your best choice. Here are some basic pros and cons of starting and running a franchise.

Franchise industry trends

Fastfood restaurants represent the franchise market’s largest segment, followed by business services, full-service restaurants, real estate, and commercial and residential services.

Industry size and growth

• Industry size and past growth – The total output of franchise businesses in the US  jumped 16% to just under $800 billion in 2021, according to the International Franchise Association.((https://www.franchise.org/sites/default/files/2022-02/2022%20Franchising%20Economic%20Outlook.pdf))  
• Growth forecast – The market is predicted to grow 5% to more than $825 billion in 2022 as the number of franchised establishments and employment expand further.
• Number of businesses – Franchise establishments in the US increased around 3% to almost 775,000 in 2021.
• Number of people employed – Employment crossed 8 million by the end of 2021.

Trends and challenges

Franchising trends include:

• “Green” and healthcare-related franchises are on the rise
• Increasing demand for plant-based, gluten-free, low-fat, low-sugar, and other healthy food products
• More new franchise brands and establishments are expected as a result of The Great Resignation

Challenges in the franchise industry include:

• Shortage of qualified employees
• Accelerating prices of goods and services

What kind of people work in franchising?

• Gender – 69% of franchise owners in the US are male, while 31% are female.((https://www.zippia.com/franchise-owner-jobs/demographics/#gender-statistics))
• Average level of education – 62% of franchise owners hold a bachelor’s degree.((https://www.zippia.com/franchise-owner-jobs/demographics/#degree-level-types))
• Average age – The average age of a franchise owner is 44 years old.((https://www.zippia.com/franchise-owner-jobs/demographics/#age-statistics))

How much does it cost to start a franchise?

The startup costs for a franchise range from around $18,000 to $85,000, with the primary expense being the one-time preparation of franchise documents and operations manual. This cost may seem high, but franchise documents are specific and extensive and require significant legal advice and guidance, while the operations manual is a very detailed guide to setting up and running franchises.

Both are crucial to the success of your franchise and must be done right. Keep in mind, these costs will only be incurred once, as the documents and manual will be used every time you sell a franchise.

Startup Costs	Ballpark Range	Average
Franchise Disclosure Document (FDD) development legal fees	$15,000 - $45,000	$30,000
Operations manual development	$0 - $30,000	$15,000
Start a new business entity name registration and entity formation	$150 - $200	$175
Financial statement preparation for FDD	$2,500 - $5,000	$3,750
Trademark and FDD registration per state	$1,000 - $3,000	$2,000
Total	$18,650 - $83,200	$50,925

How much can you earn from a franchise?

Your profit will depend on how many franchises you operate and how much revenue each generates, which means it’s very hard to predict. The franchise fee, which the franchisee pays to you, the owner or franchisor, varies widely depending on the type of business, but generally ranges from $75,000 to $200,000, according to industry advisor Franchising.((https://www.franchising.com/guides/the_cost_of_opening_a_franchise.html)) Monthly royalties paid to you by the franchisee usually range from 4-8% of the franchisee’s revenues.

The franchisor’s costs to launch a new franchise — including training, support, location selection, marketing, and payroll for your franchise development team — should come to about 75% or three-fourths of the franchise fee. So if your franchise fee is $100,000, after expenses your profit will be $25,000, or a 25% margin.

Let’s say you sell five franchises for $100,000 each, and each franchise sees $250,000 in annual revenue and sends you 6% in royalties. You’d receive $15,000 in royalties from each franchisee, or $75,000 in combined annual royalties, and $575,000 in total. Since you’ll keep 25% of the franchise fees after startup costs, your profit will be $125,000 from the franchise fees plus $75,000 in royalties, for a total of $200,000.

As your brand gains popularity, you might be able to sell 10 more franchises, bringing in additional $1 million in franchise fees and $150,000 in royalties. You’d now be receiving total royalties of $225,000. Including the additional $250,000 profit from the sale of the additional 10 franchises, you’d be making a cool $475,000.

The more franchises you sell and the bigger their earnings, the bigger the royalties and total profit.

What barriers to entry are there?

There are several barriers to entry for a franchise. Your biggest challenges will be:

• Must already have a successful, replicable business
• Requires significant capital upfront due to legal fees & document preparation
• Franchise development team needed to guide, support franchisees

Step 2: Hone Your Idea

Franchising can be a lucrative step, but it’s not suitable for every business. Begin by asking yourself: Is your business model successful and can it be replicated? A thriving local business may not always translate into a successful franchise.

The key lies in a proven track record, a strong brand identity, and a business model that can be duplicated across various locations. Ensure that your business processes are standardized and that your brand has a unique selling proposition that stands out in the marketplace.

Evaluate if your business is ready to franchise

You need to know that your business is replicable and that there is a big enough market to support your franchise. If you are the business, meaning that the business is dependent on your work, it’s probably not replicable. Replicable means that your business as it exists now has a formula for success that can be followed, and that your brand can expand.

You may want to target buyers in areas where you are certain there’s a market, such as places where a market gap exists for your products or services.

Read how John Garretson transformed his military skills into a thriving lawn care franchise empire.

Research franchises

In-depth research is your roadmap to successful franchising. Start by analyzing the franchise market. What are the trends? Who are your direct competitors within the franchising space? This research should encompass the legal and financial aspects of franchising as well, giving you a clear understanding of what it takes to become a franchisor. Look into different franchise models and study the success stories and challenges of existing franchises.

Evaluate costs

Franchising requires significant financial investment. It’s essential to evaluate all potential costs, including legal fees, marketing, training programs, support systems, and more. Consider the ongoing costs of maintaining a franchise system, which may include regular updates to training and operational manuals, marketing support, and quality control systems.

How much should you charge for your franchise?

Franchise fees, which range from $10,000 to more than $5,000,000, will depend on your type of business. You may want to research your industry to learn about its typical franchise fees — both the initial fee and ongoing fees. Royalties are more standard, usually between 4-8%, though they also vary by industry. 

Decide how you’ll operate as a franchisor

Your role as a franchisor will be vastly different from that of a business owner. It involves providing continuous support to your franchisees, ensuring brand consistency, and maintaining quality across all units. Decide on the level of control and support you’ll offer. Will you provide extensive training, marketing assistance, or operational guidance? The success of your franchisees directly impacts your brand, making it crucial to establish a well-thought-out franchisor strategy.

Prepare a Franchise Disclosure Document (FDD)

A Franchise Disclosure Document is legally required in many regions. It’s a comprehensive document that provides potential franchisees with essential information about your business. The FDD includes details about your business history, financial statements, litigation history, initial and ongoing costs, and the support you will provide. Preparing an FDD is a complex process that typically requires legal expertise. Ensure your FDD is clear, thorough, and complies with all legal requirements.

Choose a business location

The location can make or break a franchise. Guide your franchisees in choosing the right location. This involves market research, understanding the demographics, assessing competition, and evaluating the accessibility and visibility of the site. Provide your franchisees with a set of criteria or a location strategy to help them in selecting the best possible sites for their franchises.

Step 3: Create a Business Plan

Here are the key components of a business plan:

• Executive Summary: A brief overview of the franchise business, summarizing its key aspects and goals.
• Business Overview: Detailed information about the franchise, including its mission, vision, and the problem it solves in the market.
• Product and Services: Clear description of the products and services offered by the franchise, highlighting their unique selling points.
• Market Analysis: Examination of the target market, including demographics, trends, and potential growth opportunities.
• Competitive Analysis: Assessment of competitors in the industry, outlining strengths, weaknesses, and the franchise’s competitive advantage.
• Sales and Marketing: Strategies for promoting and selling the franchise’s products or services, including target audience and marketing channels.
• Management Team: Introduction of the key individuals responsible for running the franchise, emphasizing their relevant experience and skills.
• Operations Plan: Detailed plan outlining day-to-day operations, production processes, and logistics to ensure efficient business functioning.
• Financial Plan: Financial projections, budgeting, and funding requirements for the franchise business.
• Appendix: Supplementary materials such as additional data, charts, or supporting documents to provide more comprehensive information.

If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist to create a top-notch business plan for you.

Step 4: Register Your Business

Plus, registration is exciting because it makes the entire process official. Once it’s complete, you’ll have your own business!

Choose where to register your company

Your business location is important because it can affect taxes, legal requirements, and revenue. Most people will register their business in the state where they live, but if you are planning to expand, you might consider looking elsewhere, as some states offer real advantages when it comes to franchising.

If you’re willing to move, you could really maximize your business! Keep in mind, it’s relatively easy to transfer your business to another state. 

Choose your business structure

Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your franchise will shape your taxes, personal liability, and business registration requirements, so choose wisely.

Here are the main options:

• Sole Proprietorship – The most common structure for small businesses makes no legal distinction between company and owner. All income goes to the owner, who’s also liable for any debts, losses, or liabilities incurred by the business. The owner pays taxes on business income on his or her personal tax return.
• General Partnership – Similar to a sole proprietorship, but for two or more people. Again, owners keep the profits and are liable for losses. The partners pay taxes on their share of business income on their personal tax returns.
• Limited Liability Company (LLC) – Combines the characteristics of corporations with those of sole proprietorships or partnerships. Again, the owners are not personally liable for debts.
• C Corp – Under this structure, the business is a distinct legal entity and the owner or owners are not personally liable for its debts. Owners take profits through shareholder dividends, rather than directly. The corporation pays taxes, and owners pay taxes on their dividends, which is sometimes referred to as double taxation.
• S Corp – An S-Corporation refers to the tax classification of the business but is not a business entity. An S-Corp can be either a corporation or an LLC, which just needs to elect to be an S-Corp for tax status. In an S-Corp, income is passed through directly to shareholders, who pay taxes on their share of business income on their personal tax returns.

We recommend that new business owners choose LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can form an LLC in as little as five minutes using an online LLC formation service. They will check that your business name is available before filing, submit your articles of organization, and answer any questions you might have.

Step 5: Register for Taxes

The final step before you’re able to pay taxes is getting an Employer Identification Number, or EIN. You can file for your EIN online or by mail or fax: visit the IRS website to learn more. Keep in mind, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN.

Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate in a calendar year (January–December) or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.

It is important to consult an accountant or other professional to help you with your taxes to ensure you are completing them correctly.

Step 6: Fund your Franchise

Securing financing is your next step and there are plenty of ways to raise capital:

• Bank loans: This is the most common method, but getting approved requires a rock-solid business plan and strong credit history.
• SBA-guaranteed loans: The Small Business Administration can act as guarantor, helping gain that elusive bank approval via an SBA-guaranteed loan.
• Government grants: A handful of financial assistance programs help fund entrepreneurs. Visit Grants.gov to learn which might work for you.
• Venture capital: Offer potential investors an ownership stake in exchange for funds, keeping in mind that you would be sacrificing some control over your business.
• Friends and Family: Reach out to friends and family to provide a business loan or investment in your concept. It’s a good idea to have legal advice when doing so because SEC regulations apply.
• Personal: Self-fund your business via your savings or the sale of property or other assets.

Bank and SBA loans are probably the best option, other than friends and family, for funding a franchise business.

Step 7: Get the Franchise License Agreement

Starting a franchise business requires obtaining a franchise license agreement. It should include the following:

• Grant of License: Specifies the rights being granted to the franchisee to use the franchisor’s trademarks, name, and business systems.
• Duration of Agreement: How long the agreement will last, including the terms of renewal.
• Initial and Ongoing Fees: Details on the initial franchise fee, royalties, advertising fees, and any other ongoing costs.
• Territory: Defines the geographic area in which the franchisee can operate and whether exclusivity is granted.
• Training and Support: Details the training and ongoing support the franchisor will provide.
• Operations Manual: Reference to the operations manual that outlines the standards and procedures to be followed.
• Marketing and Advertising: Guidelines and obligations for local and national marketing efforts.
• Restrictions on Products/Services Offered: Outlines any limitations on what can be sold or services provided.
• Quality Control: Standards and procedures for maintaining product and service quality.
• Renewal, Termination, and Transfer Conditions: Conditions under which the agreement can be renewed, terminated, or transferred.
• Dispute Resolution: Procedures for resolving disputes between the franchisor and franchisee.
• Insurance and Liability: Insurance requirements and liability clauses.

If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.

Step 8: Open a Business Bank Account

Before you start making money you’ll need a place to keep it, and that requires opening a bank account.

Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you’re running your franchise business as a sole proprietorship. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.

Banks vary in terms of offerings, so it’s a good idea to consider your options to choose the best plan that works for you. Once you choose your bank, you’ll need to bring your EIN (or Social Security Number if you decide on a sole proprietorship), articles of incorporation, and any other legal documentation that proves your business is registered.

Step 9: Get Business Insurance

Business insurance is an area that often gets overlooked yet is vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business.

Here are some types of insurance to consider:

• General liability: The most comprehensive type of insurance, acting as a catch-all for many business elements that require coverage. If you get just one kind of insurance, this is it. It even protects against bodily injury and property damage.
• Business Property: Provides coverage for your equipment and supplies.
• Equipment Breakdown Insurance: Covers the cost of replacing or repairing equipment that has broken due to mechanical issues.
• Worker’s compensation: Provides compensation to employees injured on the job.
• Property: Covers your physical space, whether it is a cart, storefront, or office.
• Commercial auto: Protection for your company-owned vehicle.
• Professional liability: Protects against claims from a client who says they suffered a loss due to an error or omission in your work.
• Business owner’s policy (BOP): This is an insurance plan that acts as an all-in-one insurance policy, a combination of any of the above insurance types.

Step 10: Build Your Team

If you’re maintaining a home-based office, your new franchise may not need any new employees. But as your business grows, you will likely need workers to fill various roles. Potential positions for a franchise business would include:

• Franchise Development Team – Find, guide, and support franchisees
• Franchise Manager – Lead development team
• Marketing Lead – Social media marketing, SEO, content creation

At some point, you may need to hire all of these positions or simply a few, depending on the size and needs of your business. You might also hire multiple workers for a single role or a single worker for multiple roles, again depending on need.

Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn or Facebook. You can also use free classified sites like Jobs and AngelList. You might also consider a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Further, if you have the resources, you could consider hiring a recruitment agency to help you find talent.

Step 11: Start Making Money!

Franchising is a great way to expand your business, achieve greater market presence, and further strengthen your brand. You’ll be helping other entrepreneurs start a lucrative business too. Your support for your franchisees does not stop at the launching of their stores. You’ll be expected to provide ongoing assistance, further promote your brand through an aggressive marketing campaign, address supply chain issues, and more. 

With adequate preparations, you’re now ready to take your business to the next level. If you do this right, you could easily sell your concept and expand your business to become the next McDonald’s! Good luck!