How to Start a Franchise

If you have a successful small business, you may be thinking of ways to grow your company. One option is to franchise your business, enabling you to open new locations without spending too much capital. If you have a business that’s doing well and you think your model is replicable, then starting a franchise may be the right option for you.

Starting a franchise, however, takes a lot of work. The key is to have the necessary knowledge before you launch, in order to avoid the common pitfalls. This step-by-step guide will help you turn your business into a successful franchise.

Step 1: Decide if the Business 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.

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

Now that you know what’s involved in starting a franchise, it’s a good idea to hone your idea in preparation to enter a competitive market.

Market research will give you the upper hand, even if you’re already positive that you have a perfect product or service. Conducting market research is important, because it can help you understand your customers better, who your competitors are, and your business landscape.

Why? Identify an opportunity

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.

What? Determine your products or services

When you draft your Franchise Disclosure Document, it will specify exactly what kind of support you will offer your franchisees and for what fee. In addition to the initial franchise fee, you may require a periodic franchise fee to support marketing, sales, operations, training, and other services.

Developing a thorough model will give your franchises the best chance of success, and your best chance of maximizing your revenue.

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. 

Once you know your costs, you can use this Step By Step profit margin calculator to determine your mark-up and final price points. Remember, the prices you use at launch should be subject to change if warranted by the market.

Who? Identify your target market

Your target market will be people who want to own a business but do not want to start from scratch, and who believe in your business model. Millennials represent the fastest-growing segment of franchise buyers, but you also need to look at who might be the target buyer for your particular type of business. Those people may have similar characteristics to your customers.

For example, if you have a shoe store that targets a younger demographic, your potential franchise buyers will probably fall in the sale age group. You can target your franchise advertising to the same places that you target your customer marketing – perhaps platforms like Instagram and TikTok.

Where? Choose your business premises

In the early stages, you may want to operate your franchise from home or your current business location to keep expenses relatively low. But as your business grows you’ll likely need to hire workers for various roles, particularly a franchise development team, and rent out an office or storage facility. You can find commercial space to rent in your area on Craigslist, Crexi, and Commercial Cafe.

When choosing a commercial space, you may want to follow these rules of thumb:

• Central location accessible via public transport
• Ventilated and spacious, with good natural light
• Flexible lease that can be extended as your business grows
• Ready-to-use space with no major renovations or repairs needed

Step 3: Brainstorm a Business Name

Your business name is your business identity, so choose one that encapsulates your objectives, services, and mission in just a few words. You probably want a name that’s short and easy to remember, since much of your business, and your initial business in particular, will come from word-of-mouth referrals.

• Here are some ideas for brainstorming your business name:
• Short, unique, and catchy names tend to stand out
• Names that are easy to say and spell tend to do better
• The name should be relevant to your product or service offerings
• Ask around — family, friends, colleagues, social media — for suggestions
• Including keywords relevant to your line of work boosts SEO
• Choose a name that allows for expansion: “NextGen Franchise Partners” over “Pet Services Franchise Group”
• Avoid location-based names that might hinder future expansion
• Use online tools like the Step by Step business name generator. Just type in a few keywords and hit “generate” and you’ll have dozens of suggestions at your fingertips.

Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names using our Domain Name Search tool. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these. 

Finally, make your choice among the names that pass this screening and go ahead with domain registration and social media account creation. Your business name is one of the key differentiators that set your business apart. Once you pick your company name, and start with the branding, it is hard to change the business name. Therefore, it’s important to carefully consider your choice before you start a business entity.

Step 4: Create a Business Plan

Every business needs a plan. This will function as a guidebook to take your startup through the launch process and maintain focus on your key goals. A business plan also enables potential partners and investors to better understand your company and its vision:

• Executive Summary: Brief overview of the entire business plan; should be written after the plan is complete.
• Business Overview: Overview of the company, vision, mission, ownership, and corporate goals.
• Product and Services: Describe your products or services in detail.
• Market Analysis: Assess market trends such as variations in demand and prospects for growth, and do a SWOT analysis.
• Competitive Analysis: Analyze main competitors, assessing their strengths and weaknesses, and create a list of the advantages of your services.
• Sales and Marketing: Examine your companies’ unique selling propositions (USPs) and develop sales, marketing, and promotional strategies.
• Management Team: Overview of management team, detailing their roles and professional background, along with a corporate hierarchy.
• Operations Plan: Your company’s operational plan includes procurement, office location, key assets and equipment, and other logistical details.
• Financial Plan: Three years of financial planning, including startup costs, break-even analysis, profit and loss estimates, cash flow, and balance sheet.
• Appendix: Include any additional financial or business-related documents.

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 5: 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 6: 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 7: Fund your Business

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 8: Apply for Licenses/Permits

Starting a franchise business requires obtaining a number of licenses and permits from local, state, and federal governments.

Federal regulations, licenses, and permits associated with starting your business include doing business as (DBA), health licenses and permits from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents, and other intellectual properties, as well as industry-specific licenses and permits. 

You may also need state-level and local county or city-based licenses and permits. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments or contact the appropriate person to learn more. 

You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.

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 9: 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 10: 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 11: Prepare to Launch

As opening day nears, prepare for launch by reviewing and improving some key elements of your business.

Essential software and tools

Being an entrepreneur often means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, many websites and digital tools are available to help simplify many business tasks. 

Take advantage of services, such as Naranga, Chetu, and FranchiseSoft, to simplify franchisee and operations management and oversee online training.

Accounting

• Popular web-based accounting programs for smaller businesses include Quickbooks, Freshbooks, and Xero.
• If you are unfamiliar with basic accounting, you may want to hire a professional, especially as you begin. The consequences for filing incorrect tax documents can be harsh, so accuracy is crucial.

Develop your website

Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism.

You can create your own website using services like WordPress, Wix, or Squarespace. This route is very affordable, but figuring out how to build a website can be time-consuming. If you lack tech-savvy, you can hire a web designer or developer to create a custom website for your business.

They are unlikely to find your website, however, unless you follow Search Engine Optimization (SEO) practices. These are steps that help pages rank higher in the results of top search engines like Google. 

Marketing

Some of your business will come from online visitors, but still, you should invest in digital marketing! Getting the word out is especially important for new businesses, as it’ll boost customer and brand awareness. 

Once your website is up and running, link it to your social media accounts and vice versa. Social media is a great tool for promoting your business because you can create engaging posts that advertise your products: 

• Facebook: Great platform for paid advertising, allows you to target specific demographics, like men under age 50 in the Cleveland area. 
• Instagram: Same benefits as Facebook but with different target audiences.
• Website: SEO will help your website appear closer to the top in relevant search results, a crucial element for increasing sales. Make sure that you optimize calls to action on your website. Experiment with text, color, size, and position of calls to action such as “Contact Now”. This can sharply increase sales.
• Google and Yelp: For businesses that rely on local clientele, getting listed on Yelp and Google My Business can be crucial to generating awareness and customers.

Kickstart Marketing

Take advantage of your website, social media presence, and real-life activities to increase awareness of your offerings and build your brand. Some suggestions include:

• Signage – Put up eye-catching signage at your store and website. 
• Flyering – Distribute flyers in your neighborhood and at industry events. 
• In-Person Sales – Offer your franchise information at local markets and trade shows. 
• Sponsor events – You can pay to be a sponsor at events that are relevant to your target market.
• Post a video – Post a video about your franchise business. Use humor and maybe it will go viral!
• Email marketing/newsletter – Send regular emails to customers and prospects. Make them personal. 
• Start a blog – Start a blog and post regularly. Change up your content and share on multiple sites.
• Press releases – Do press releases about new franchisees, new stores, etc.
• Paid ads on social media – Choose sites that will reach your target market and do targeted ads.
• Pay–per-click marketing – Use Google AdWords to perform better in searches. Research your keywords first.
• Influencer marketing – Pay people with large social media followings to promote your franchise. You can find micro-influencers with smaller followings and lower rates.
• Create infographics – Post infographics and include them in your content.

Focus on USPs

Unique selling propositions, or USPs, are the unique characteristics of a product or service that set it apart from the competition. Customers today are inundated with buying options, so you’ll have a real advantage if they are able to quickly grasp how your franchise meets their needs or wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire.

Global pizza chain Domino’s is renowned for its USP: “Hot pizza in 30 minutes or less, guaranteed.” Signature USPs for your franchise business could be:

• Unrivaled support for your franchise development
• Top-notch online training
• Sliding royalty scale based on franchise success
• Lightning-fast launch of new franchisees

Networking

You may not like to network or use personal connections for business gain. But your personal and professional networks likely offer considerable untapped business potential. Maybe that Facebook friend you met in college is now running a franchise business, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in franchising for years and can offer invaluable insight and industry connections. 

The possibilities are endless, so it’s a good idea to review your personal and professional networks and reach out to those with possible links to or interest in franchises. You’ll probably generate new customers or find companies with which you could establish a partnership. Online businesses might also consider affiliate marketing as a way to build relationships with potential partners and boost business.

Step 12: 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 13: 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!