In the current startup-rich, digital-focused, gig economy, some might view the franchise as an outdated concept, pointing toward unhealthy and failing fast-food chains. However, it's really quite the opposite--franchise businesses have evolved, and the model is alive and well.
Multiple factors contribute to a currently flourishing landscape for franchising. While the recent tax reform bill was politically divisive, the International Franchise Association (IFA) was one of its biggest proponents. Small-franchise businesses expect to grow and increase hiring due to the new tax cuts. Many Millennials have spent the first decade or so of their careers in the corporate sphere and now are at the right financial situation to turn to small-business ownership. Millennials and Gen Z increasingly embrace and support locally owned, value-driven businesses over large corporations, and franchises can provide exactly that.
However, if you are a business owner, when do you know if it's time to take the next (and quite complicated) step to becoming a franchise? Let's dive into some initial questions you should ask prior to franchising your company:
1. Can your business model be duplicated?
Operating multiple locations is a common goal for many small-business owners, and franchising can be a route to accomplishing that. The first step should be to consider, is a second location viable? Is there consumer demand for your product or service? Opening a second location under your ownership provides a solid test to ensure your business model can be duplicated and is scalable. Once you have two successful and profitable locations, and you're sure the business isn't a one-off, then you can branch out to franchising options with greater ease.
2. Do you have the appropriate financial foundation?
All right, so you have one (or two) successful locations, meaning you're familiar with the startup costs of opening a business. When optioning franchise locations, you're taking on a partner with the potential franchisee. However, it is not the same as a traditional business partnership. The expenses related to properly set up the foundation for a franchise-based company are very front-loaded. Andrew A. Caffey, a national franchise expert, summarizes the necessary/required expenses, as well as discretionary costs for starting a franchise:
- Trademark registration ($2,500): If your dream is to create a popular nationwide chain, step one is properly trademarking your brand.
- Legal fees (more on choosing legal representation next.)
- Franchise disclosure document ($20-30,000): Prior to starting your franchise, you are required to have a franchise disclosure document (FDD). This is a complex and extensive legal document that needs to be drawn up by an attorney.
- Franchise registration ($16-21,000): Franchise registrations must comply with federal and state regulations, depending on your current location(s) and expansion plans; this varies state to state.
- Accountant fees, audited financial statements ($4-15,000): This audit should include initial financial statements and disclosures, revenue recognition and other financial policies, and a detailed consideration of the company's capital structure.
- Operations manual: Having an operations manual is not optional--however, depending on your knowledge and experience, you might be able to complete this yourself. If you do not have a strong business background, you may need to outsource this project--i.e., an additional cost. Operations manuals are imperative to establishing your company's practices and values, franchise-wide.
- Hiring franchise "talent": Whether this is a consultant (more on that below) or a team member with specialized franchise acumen, if you need to hire help with this process, that is another expense to factor into your budget.
- Marketing to prospective franchisees: Again, marketing to franchisees isn't an optional process, but it is completely dependent upon your business model. Perhaps you are starting small with one or two franchises, and business owners have already approached you about operating a location, therefore marketing isn't on the radar. If you are trying to branch out with multiple franchises you need to think carefully about marketing costs: print advertising, digital ads, social-media campaigns, etc. Or again, consider outsourcing these duties to another marketing professional.
As with any business plan, you need to have a financial model along with the appropriate startup capital. Just the necessary costs outlined above can run anywhere from $42,000 to $68,000.
Now that you've run some preliminary numbers, we've mentioned a number of professional entities you will need to reach out to. Who's first?
3. Who should I hire and/or consult to help with the franchise process?
This all sounds fairly complicated. Once you've established that your business can be scaled to multiple locations, and you have the appropriate funds, who should you consult to start the process? Again, this question is somewhat dependent on your knowledge base, and how much work you are willing to put in.
There are franchise developers (similar to consultants) who will offer a one-stop shop to begin the process. When hiring a franchise developer, make sure to perform due diligence to ensure you are contracting a reputable company. Here are a few factors to further consider when hiring a developer.
You can, of course, research and hire experienced professionals on your own. The two most important aspects of starting the process are the legal representation and an accountant. If you already have a lawyer, you can ask for a recommendation for a franchise-specific attorney. You likely have an accountant for your business already; depending on the size of the firm, they might be able to refer you to someone in-house.
4. Do I have the right mindset to be a franchise owner?
While all the other questions you need to ask yourself prior to considering franchising are more technical, this question might be the most important: Do you have the correct mindset to be a franchise owner? If you've owned a business and been your own boss, that comes with a certain amount of autonomy and control. Franchising your business is not only about losing that control to a degree, but also serving as a mentor and/or leader to franchisees, who will be representing your brand.
Jyot Singh, CEO of RTS Labs, advises: "Think about scale and ask yourself how much control you want or need over each franchise. Do they need to be cookie-cutter, or can owners have some freedom to regionalize and personalize stores? Then, look into best ways to retain the control you want to have throughout your franchises."
Ready to start the franchise process?
Franchises are a strong economic model and increasingly growing. According to the IFA data in 2017, 733,000 franchise establishments supported nearly 7.6 million jobs, $674.3 billion of economic output for the U.S. economy, and 2.5 percent of the GDP. Do you feel you are ready to start the careful consideration, planning, consulting, and forecasting that is necessary to franchise your business?