Carolyn Young is a business writer who focuses on entrepreneurial concepts and the business formation. She has over 25 years of experience in business roles, and has authored several entrepreneurship textbooks.
David has been writing and learning about business, finance and globalization for a quarter-century, starting with a small New York consulting firm in the 1990s.
Published on November 12, 2021 Updated on November 23, 2023
$18,650 - $83,200
$575,000 - $1.2 million p.a.
Time to build
3 - 6 months
$200,000 - $475,000 p.a.
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.
Looking to register your business? A limited liability company (LLC) is the best legal structure for new businesses because it is fast and simple.
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.
Franchise Disclosure Document (FDD) development legal fees
$15,000 - $45,000
Operations manual development
$0 - $30,000
Start a new business entity name registration and entity formation
$150 - $200
Financial statement preparation for FDD
$2,500 - $5,000
Trademark and FDD registration per state
$1,000 - $3,000
$18,650 - $83,200
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
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.
When you find potential franchise buyers, you will need to examine their proposed location for the market feasibility of your business.
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
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: 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 5: Register Your Business
Registering your business is an absolutely crucial step — it’s the prerequisite to paying taxes, raising capital, opening a bank account, and other guideposts on the road to getting a business up and running.
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.
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.
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.
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.
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.
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 website builders. 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.
For your franchise, the marketing strategy should focus on showcasing the brand’s strength, the proven success of your business model, and the support and training you provide to franchisees. Emphasize the profitability potential, the established customer base, and the comprehensive guidance and resources available to franchise owners.
Professional Branding: Your branding should convey reliability, success, and growth potential. This includes everything from your logo and corporate branding to the marketing materials and messaging you provide to franchisees.
Direct Outreach: Network with potential franchisees through business expos, franchise fairs, and online webinars. Building relationships with business consultants and brokers can also be effective.
Digital Presence and Online Marketing
Professional Website and SEO: Develop a website dedicated to your franchise opportunities, featuring success stories, financial performance data, testimonials from current franchisees, and details about the support you offer. Use SEO best practices to rank for searches related to franchise opportunities in your industry.
Social Media Engagement: Utilize platforms like LinkedIn for professional networking and Facebook and Twitter to share franchisee success stories, brand updates, and franchise news.
Content Marketing and Engagement
Franchise Blog: Share articles about the advantages of owning a franchise, industry insights, and tips for prospective franchisees. This content can position your brand as a leader in the franchise sector.
Email Newsletters: Regular newsletters can keep potential franchisees informed about new developments, success stories, and opportunities within your franchise network.
Webinars and Online Workshops: Host informative sessions focusing on the benefits of joining your franchise, the process of becoming a franchisee, and the support provided.
Experiential and In-Person Engagements
Franchise Discovery Days: Organize events where potential franchisees can meet your team, learn about the business, and hear from successful franchise owners.
Participation in Franchise Expos: Attend national and regional franchise expos to showcase your franchise opportunity to a large audience of potential investors.
Collaborations and Community
Partnerships with Industry Leaders: Collaborate with well-known figures in your industry to enhance your franchise’s credibility and attractiveness.
Community Involvement and CSR: Engage in corporate social responsibility initiatives that align with your brand values and resonate with potential franchisees who value community involvement.
Customer (Franchisee) Relationship and Loyalty Programs
Franchisee Support Programs: Highlight the ongoing training, marketing support, and operational assistance you provide to franchisees, underscoring the value of your franchise.
Franchisee Incentive Programs: Implement incentive programs for existing franchisees to expand their operations or refer new franchisees.
Promotions and Advertising
Targeted Advertising: Use online advertising and industry publications to target potential franchisees, emphasizing the benefits and growth potential of your franchise.
Franchise Success Stories: Promote case studies and success stories of current franchisees through various media channels to attract new investors.
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
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.
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!
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.
How to Start a Franchise
Decide if the Business Is Right for You
Hone Your Idea
Brainstorm a Business Name
Create a Business Plan
Register Your Business
Register for Taxes
Fund your Business
Apply for Licenses/Permits
Open a Business Bank Account
Get Business Insurance
Prepare to Launch
Build Your Team
Start Making Money!
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