Many entrepreneurs prefer to own and operate one or several franchises instead of transferring the ownership to a corporation. Franchising is a type of agreement that allows the replication of a successful business model across multiple locations. As a business owner, one can create a franchise agreement to begin the process and move toward opening a new franchise. The process requires a lot of groundwork and research and entails keeping certain factors in mind.
Franchise types
Those who already run a business usually pursue opening a franchise in the same avenue. The right type of franchise will depend on the size and complexity of one’s business and the industry in which one operates. Business owners are likely to create one of four different types of franchises, including –
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Job franchise
A business that offers a service on behalf of the franchisor, such as travel agencies.
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Distribution franchise
This is a product-centric business that may offer related services like car repair shops.
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Business format franchise
The complete established business models are provided by the franchisor, such as at fast food restaurants.
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Investment franchise
This involves large, service-centric business types, like hotels.
Timeline
Preparation, including securing funding, drawing up the paperwork, and establishing the franchise, takes about three to four months to begin operation successfully. The process moves based on the complexity of the business model.
Franchise business tips for beginners
The idea of running a franchise can feel overwhelming, as there is a lot to consider, from conducting research to securing funds. That said, beginners who are new to the business and who want to expand must try to focus on certain important tips to get started with opening a franchise.
Conduct thorough research
Research is the first step in franchising. One should look for the most relevant information online associated with running a franchise. Typing in search terms like “how to start a franchise business” or “low-cost franchise opportunities” should display a suite of results that one can read and use to their advantage in the long haul.
Secure funding
To get the operation going, one may require enough capital for the initial operational stage. The beginner franchisor will also need to consider the overall net worth of running a franchise. If one doesn’t have pre-existing wealth, one can borrow money by checking with commercial banks or private investors. Such institutions usually fund a range of franchise types. Besides, the individual could also use equity raised by other people. When it comes to the cost, the pricing may vary based on factors like the industry, state of residence, and other related elements. In some instances, it may cost less than $20,000, while other franchises push costs to $100,000 or higher. For beginners, it’s best to consult a franchise attorney, as every state has different rules and regulations in regard to franchise operations.
Create the business plan
A primary requirement of a franchise is to create a business plan, which must be presented to the lender. One must scrutinize all the data offered by a prospective franchisor and other available resources before drawing up the plan. The details should include factors like the estimated investment expenses and projected returns. The business plan must be well written, as it can affect the approval process for the loan.
Learn management skills
For a franchise to be successful, one should possess the right skills and management experience. One must upskill themselves to align with franchise types that suit their business goals. This will ensure the business owner has the skills to run the business chain, which could be a contributing factor when one seeks funding for the franchise.
Protect the business’s intellectual property (IP)
A primary element of franchising a business is granting franchisees access to a wealth of intellectual property. Doing so allows them to brand the franchise according to the one’s guidelines and encourage the growth of the business. But, if it isn’t properly protected, it could expose the entrepreneur to risks like registry issues, IP lawsuits, and others. So, one must conduct a detailed analysis to ensure their intellectual property is secured on all fronts, including legal, to make the business unique and recognizable.
Prepare the franchise disclosure document (FDD)
According to the franchise rule, one can only sell a franchise to a prospective franchisee once they are provided an FDD. This must also comply with Federal Trade Commission (FTC) rules and regulations. The FDD introduces key players, operating terms, and obligations of the franchise agreement. It should contain 23 specific sections, including the franchisor’s name, business experience of the franchise management company, disclosure of any past or present legal proceedings, initial fees, and financing. Other elements in this document outline the details of the initial investment, other associated fees, prior bankruptcies filed, trademarks, and copyrights.
Draft the franchise agreement
This agreement binds the business owner with the franchisee to various expectations that define how the franchise operates. A franchisee is an independent contractor and must sign the contract to align with the franchise. The agreement could include factors like the franchise fees, terms and conditions for renewal of the agreement, conditions for terminating the agreement rules governing the transfer of the franchise to a third party, and minimum sales requirements. Noncompete agreements, dispute resolution methods, equipment, supply and inventory specifications, and the opening timeline for the franchise are other crucial details that are usually present in the documentation.
File or register the FDD
Once the FDD is complete, one must store it securely so that it is accessible and updated when necessary. The FDD is a required document. But the decision to file it with the government will depend on the state one lives in. Each state has its own requirements for the franchisor. For instance, a non-registration state may require the business owner to obtain a registered trademark on the disclosure documents.
Consult with an expert
The information above should help one get started with franchise operations. But it’s always good to speak to an expert to get a more in-depth understanding of how the entire process works. The professional, including a franchise broker or consultant, can help one find the right people to run the franchise and even help aspiring individuals pick the right type to build, operate, and successfully run their business.